ISEC Healthcare Ltd Is Trading Close To Its 52-Week Low Price: Is It A Good Business?

Lawrence Nga

ISEC Healthcare Ltd (SGX: 40T), where ISEC stands for “International Specialist Eye Centre”, provides specialist medical eye care services in Singapore and Malaysia. The company was listed on the Singapore stock exchange in October 2014.

At the closing price of S$0.305 yesterday, the company’s stock is trading very close to its 52-week low price of S$0.26. This captured my attention and got me interested in finding out more about the company. In particular, I wanted to understand: Does ISEC Healthcare have a high-quality business?

This question is important. If ISEC Healthcare has a high quality business, its low stock price could be an investment opportunity. Unfortunately, there’s no easy answer to that question. However, a simple metric, which is the return on invested capital (ROIC), can help shed some light.

A brief introduction of ROIC

In a previous article, I had explained how to use the return on invested capital (or ROIC) to evaluate the quality of a business. For convenience, the formula needed to calculate ROIC is given below:

Generally speaking, a high ROIC will mean a high-quality business while a low ROIC will point to a business of low quality. This is important for investors as a stock’s performance is often tied to the performance of its underlying business over the long-term.

The simple idea behind the ROIC is that a business with a higher ROIC requires lesser capital to generate a profit, and it thus gives investors a higher return per dollar that is invested in the business.

Here’s a table showing how ISEC Healthcare’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2017):

 Source: ISEC Healthcare Financial Results

For its fiscal year ended 31 December 2017 (FY2017), ISEC Healthcare generated a ROIC of 273%. This means that for every S$1 of capital invested in the business, ISEC Healthcare earned S$2.73 in profit. The company’s ROIC of 273% is at the top quartile, based on the ROICs of many other companies I have studied in the past. This suggests that ISEC Healthcare has a high quality business.

Yet, the high ROIC is due to the exclusion of intangible assets of S$38.8 million in the calculation of tangible capital employed. In this case, it would be useful to include the intangible assets since such assets represent the bulk of ISEC Healthcare’s capital investment (in the form of goodwill which arose from the acquisitions of eye care centres).

In all, after adjusting for the intangible assets, the adjusted ROIC would be 23.8%.

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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.