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Raffles Medical Group Ltd’s Share Price Is Down 35% Since 2015. Is It a Good Business?

Raffles Medical Group Ltd (SGX: BSL) runs hospital and healthcare services in Singapore. It also has a network of clinics in five countries and 13 cities in addition to two hospitals (one under development) in China.

At a current price of S$1.07, the company’s stock is down 35% from its peak in 2015 of S$1.65. This piqued my interest and inspired me to find out more about the company. Specifically, I want to understand if Raffles Medical has a high-quality business.

If it does, its current low stock price could be an investment opportunity. Unfortunately, there’s no easy answer to the question. However, 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, 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.

Raffles Medical’s ROIC

The table below shows Raffles Medical’s ROIC using numbers from its fiscal year ended 31 December 2018 (FY2018).

Source: Raffles Medical’s financial statement

In FY2018, Raffles Medical generated a ROIC of 10.7%. This means for every dollar of capital invested in the business, Raffles Medical earned 10.7 Singapore cents in profit. The company’s ROIC of 10.7% is average based on the ROICs of many other companies I’ve studied in the past. This suggests that Raffles Medical has an average-quality business.

Investors should be reminded that the ROIC is only one of the many aspects investors can use to assess the quality of a company’s business. It’s important to also take into account other qualitative factors when analyzing a company.

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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 shares of Raffles Medical Group.