SBS Transit Ltd (SGX: S61) operates public bus and rail services in Singapore, operating mainly in two segments: public transport services (the bus and rail services) and other commercial services (advertising and rental income). SBS Transit is a subsidiary of local land transport giant ComfortDelGro Corporation Ltd (SGX: C52).
At the current price of S$3.60 (at time of writing), the company’s stock is up about 37% in the last 12 months. If SBS Transit has a high-quality business, its current low stock price could be an investment opportunity. There’s no easy way to know if SBS Transit’s business is of high-quality, but a simple metric can help shed some light: return on invested capital (ROIC).
A brief introduction to the 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.
SBS Transit’s ROIC
The table below shows SBS Transit’s ROIC using numbers from its fiscal year ended 31 December 2018 (FY2018).
Source: SBS Transit’s Financial Statements
In FY2018, SBS Transit generated a ROIC of 14.7%. This means for every dollar of capital invested in the business, SBS Transit earned 14.7 Singapore cents in profit. The company’s ROIC of 14.7% is above the average based on the ROICs of many other companies I have studied in the past. This suggests that SBS Transit has an above-average business.
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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 SBS Transit Ltd.