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Health Management International Ltd Is Trading Close To Its 52-Week Low Share Price. Is It A Good Business?

Health Management International Ltd (SGX: 588) or HMI is a healthcare provider with presence in Singapore, Malaysia and Indonesia.

It owns and operates the Mahkota Medical Centre in Malacca and Regency Specialist Hospital in Iskandar Malaysia. Together, they have a bed capacity of over 500. HMI also owns and operates HMI Institute of Health Sciences in Singapore.

At the current price of S$0.56, the company’s stock is trading at just four cents above its 52-weeks low price of S$0.52. 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 HMI has a high quality business, its current low stock 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 the ROIC

In a previous article of mine, I explained how the ROIC can be used to evaluate the quality of a business.

The simple idea behind the 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 the ROIC in the formula above.

HMI’s ROIC

The table below shows how HMI’s ROIC looks like. I had used numbers from its fiscal year ended 30 June 2018 (FY2018).

Source: HMI’s Annual Report

In FY2018, HMI generated a ROIC of 28.7%. This means that for every ringgit of capital invested in the business, HMI earned 28.7 sen in profit. The company’s ROIC of 28.7% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that HMI has a high-quality business.

One thing that investors should note here is that HMI has significant short term borrowings (around RM89.2 million) on its balance sheet. This is excluded from the above calculation of tangible capital employed figure. I feel 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 adjusted ROIC would be around 22.5%.

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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.