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Jumbo Group Ltd Is Trading Close to Its 52-Week Low Share Price. Is It a Good Business?

JUMBO Group Ltd (SGX: 42R) is famous for its chili crab served by JUMBO Seafood. The company also operates a wide range of different brands such JPOT-Hotpot Singapore Style, NG AH SIO Bak Kut The, Chui Huay Lim Teochew Cuisine, J Cafe-Singapore’s Local Delights, and Singapore Seafood Republic.

At a current price of S$0.38, the company’s stock is trading S$0.02 above its 52-week low price of S$0.36. If Jumbo 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

I’ve previously explained how the 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 at the link above.

Jumbo Group’s ROIC

The table below shows Jumbo Group’s ROIC using numbers from its fiscal year ended 30 September 2018 (FY2018).

Source: Jumbo Group’s Annual Report

In its fiscal year ended 30 September 2018 (FY2018), Jumbo Group generated a ROIC of 66.8%. This means for every S$1 of capital invested in the business, Jumbo Group earned 66.8 Singapore cents in profit. The company’s ROIC of 66.8% is in the top quartile based on the ROICs of many other companies I have studied in the past. This suggests that Jumbo Group has a high-quality business.

How did the company manage to achieve such high ROIC? There are some clues in its financial numbers. Firstly, the company leases most of its restaurants, thus, it requires little capital investment (mostly for renovations and equipment) when setting up and running a restaurant. Next, it has low inventories of S$1.5 million (since mud crabs must be cooked alive) and S$11.7 million in trade receivables, which are fully offset by its S$13.8 million in payables.

Jumbo’s low capital-intensive business model allows it to earn a high return on invested capital.

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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.