Top Glove (SGX: BVA) is the largest rubber gloves maker in the world with about 25% market share. The company is based in Malaysia. Until its recent debut on the Singapore stock exchange, it has always listed on the KLSE Malaysia as TOP Glove Corporation Bhd (KLSE: 7113.KL).
At the current price of S$1.59 (at time of writing), the company’s stock is trading at S$0.06 above its 52-week low of S$1.53. If Top Glove has a high-quality business, its current low stock price could be an investment opportunity. There’s no easy answer to that question, but one simple metric can help shed some light: return on invested capital (ROIC).
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A brief introduction to ROIC
In a previous article, I explained how ROIC can be used to evaluate the quality of a business.
The simple idea behind the metric is that a business with a higher ROIC requires less capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business. High-quality businesses tend to have high ROICs, while the reverse is also true — a low ROIC is often associated with a low-quality business.
You can see how the math works for ROIC in the formula above.
Top Glove’s ROIC
The table below shows Top Glove’s ROIC using numbers from its fiscal year ended 31 August 2018 (FY2018).
Source: Top Glove’s Annual Report
In FY2018, Top Glove generated a ROIC of 25.5%. This means for every ringgit of capital invested in the business, Top Glove earned 25.5 sen in profit. The company’s ROIC of 25.5% is in the top quartile, based on the ROICs of many other companies I have studied in the past. This suggests that Top Glove has a high-quality business.
One thing to note here is that Top Glove has about RM 883 million in short-term borrowing on its balance sheet, which was excluded from the above calculation. Here, it will be useful to include that into our calculation of ROIC since such debt is used in financing Top Glove’s operating activities.
In sum, adjusting for the RM 883 million in short-term debt will give Top Glove an adjusted ROIC of 18.1%.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore recommends Top Glove.