JUMBO Group Ltd (SGX: 42R) is a restaurant operator that is perhaps most famous for the chili crab served in its JUMBO Seafood chain of seafood restaurants.
At the current price of S$0.535, the company’s stock is trading at just above its 52-week low price of S$0.53. 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 Jumbo Group has a high-quality business, its current low stock price could be an investment opportunity. Unfortunately, there’s no easy answer to the question. However, a simple metric, which is the return on invested capital (ROIC), can help shed some light on the question.
A brief introduction of ROIC
In a previous article, I had explained how to use 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 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.
Here’s a table showing how Jumbo’s ROIC looks like (I had used numbers from its fiscal year ended 30 September 2017):
Source: Jumbo Group Financial Results
For its fiscal year ended 30 September 2017 (FY2017), Jumbo generated a ROIC of 110%. This means that for every S$1 of capital invested in the business, it earned S$1.10 in profit. The company’s ROIC of 110% is at the top quartile, based on the ROICs of many other companies I have studied in the past. This suggests that Jumbo is a business of high-quality.
However, how did the company manage to achieve such a high level of ROIC?
Firstly, the company leases most of its restaurants, requiring little capital investment (mostly on renovations and equipment) in setting up and running a restaurant. Next, it has low inventories of S$1.5 million and S$1.9 million in trade receivables, which are fully offset by S$10.1 million in trade payables.
In all, Jumbo’s low capital intensive business model allows it to earn high ROIC.
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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.