Civmec Ltd (SGX: P9D) is an integrated heavy engineering and construction provider to the Oil & Gas, Metals & Minerals, Infrastructure, and Marine & Defence sectors.
At its current price of S$0.40, the company’s stock is trading S$0.02 above its 52-week low price of S$0.38. If Civmec 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).
A brief introduction to the ROIC metric
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.
The table below shows Civmec’s ROIC using numbers from its fiscal year ended 30 June 2018 (FY2018).
Source: Civmec’s Annual Report
In FY2018, Civmec generated a ROIC of 16.2%. This means for every dollar of capital invested in the business, Civmec earned 16.2 cents in profit. The company’s ROIC of 16.2% is above average, based on the ROICs of many other companies I have studied in the past. That suggests Civmec has an above-average-quality business.
Investors should note that Civmec has significant short-term borrowings goodwill (around S$43.7 million) on its balance sheet. This is excluded from the above calculation of tangible capital employed, but it’s relevant to include it here since such borrowing is likely used to fund the company’s ongoing business activities.
Including short-term borrowings, the company’s adjusted ROIC would have been around 13.7%.
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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.