Straco Corporation Ltd (SGX: S85) is a tourism asset operator with operations in China and Singapore.
In China, the company owns the Shanghai Ocean Aquarium, Underwater World Xiamen, and Lintong Lixing Cable Car attractions. As for Singapore, Straco had bought a majority stake in the iconic Singapore Flyer – one of the largest observation wheels in the world – in late 2014.
The company recently appeared on my radar as one of the best performing companies in the last five years, with share price appreciation of about 225% during the period.
Thus, as investors or potential investors of this company, we might want to know whether the company is a good business. If the answer is yes, then this might be a good to keep the company on our radar.
Nevertheless, there is no quick and simple answer to the question. To assess the quality of a business, we need to examine both the qualitative factors such as market share and growth potential, and the quantitative factors like margins, return on capital and so on.
In this article, we will look at one important number, the return on invested capital (ROIC), that may shed some light about the quality of this business.
A brief recap 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 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.
Here’s a table showing how Straco’s ROIC looks like (I had used numbers from its fiscal year ended December 2016):
Source: Straco Year Ended December 2016 Financial Statements
Here, we can see that the ROIC of 44.1 % means that for every $1 of capital invested in the business, Straco earned 44.1 cents in profit.
To put the above into perspective, 44.1% falls in the top quartile among the companies that we have looked at in the past. In other words, if ROIC is sole basis used to evaluate the attractiveness of this business, Straco’s business quality would ranked among the best.
As investors, we need to understand how the company generated its high ROIC. Fortunately, it’s not too difficult to understand how Straco did that.
First of all, Straco’s business model requires little investment in working capital like inventories or receivables. Furthermore, as most of its capital investment is in its fixed assets (which remain stable regardless of visitors numbers), any growth in visitor numbers will go straight to the bottom line. In other words, its ROIC will grow as visitor footfall grows over time.
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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 Straco Corporation Ltd.