Old Chang Kee Ltd (SGX: 5ML) has been around since 1956, growing from a single stall outside Rex Cinema to more than 80 outlets today. Old Chang Kee is best known for its signature Curry’O puff, a popular Singapore snack.
At the current price of S$0.76 (at time of writing), the company’s stock is just 2 cents above its 52-week intraday low share price of S$0.74. This captured my attention and got me interested in finding out more about the company. In particular, I want to understand: does it have a high-quality business?
This question is important. If Old Chang Kee has a high-quality business, its current low share price could be an investment opportunity. Unfortunately, there’s no easy answer to the question. But, a simple metric can help shed some light on the question: the return on invested capital (ROIC).
A brief introduction to ROIC
In a previous article of mine, I explained how ROIC can be used to evaluate the quality of a business.
The simple idea behind ROIC 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 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.
Old Chang Kee’s ROIC
The table below shows how Old Chang Kee’s ROIC looks like. I had used numbers from its fiscal year ended 31 March 2018 (FY2018).
Source: Old Chang Kee’s Annual Report
In FY2018, Old Chang Kee generated a ROIC of 20.8%. This means that for every dollar of capital invested in the business, Old Chang Kee earned 20.8 cents in profit. The company’s ROIC of 20.8% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Old Chang Kee has a high-quality 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.