Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore, and was listed here in 2011.
At Sheng Siong’s current share price of S$1.09 (as of the time of writing), the company’s shares are up about 17% in the last 12 months. Comparatively, the Straits Times Index (SGX: ^STI) was down by about 10% during this period. This captured my attention and got me interested in finding out more about the company. In particular, I wanted to understand: Does Sheng Siong have a high-quality business?
This question is important. If Sheng Siong 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 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.
Sheng Siong’s ROIC
The table below shows how Sheng Siong’s ROIC looks like. I had used numbers from its fiscal year ended 31 December 2017 (FY2017).
Source: Sheng Siong’s Annual Report
In FY2017, Sheng Siong generated a ROIC of 40.5%. This means that for every dollar of capital invested in the business, Sheng Siong earned 40.5 cent in profit. The company’s ROIC of 40.5% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Sheng Siong has a high quality business.
One main reason for Sheng Siong to achieve such high ROIC is that it finances its business with trade payables. To illustrate my point, total inventories and receivables was about S$75 million in 2017 while trade payables was $111 million. Going forward, it will be useful to monitor whether Sheng Siong can maintain its current working capital policy as this will determine the return on invested capital in the future.
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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. Motley Fool has a recommendation for Sheng Siong Group Ltd.