1 Important Number Investors Should Know About Kimly Ltd
Kimly Ltd (SGX: 1D0) is one of the newest entrants to Singapore’s stock market, having been listed only in March this year.
The company is the largest traditional coffee shop operator in Singapore and currently has a chain of 64 food outlets and 121 food stalls under various brands island wide.
Since the company is newly listed, I was curious to know the quality of its business. To do so, I’m turning to Kimly’s 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.
Here’s a table showing how Kimly’s ROIC looks like (I had used numbers from the company’s financial year ended 30 September 2016):
Source: Kimly’s IPO prospectus
We can see that Kimly has an unusual ROIC – a negative number. This is not due to lousy profits from Kimly, but instead, due to a negative figure for the company’s tangible capital employed.
Kimly is funding a significant portion of its capital investments using trade payables. Thus, the capital employed in the business through the use of either equity or debt funding is low.
The attractiveness of such a business model is that Kimly does not need to incur interest expenses since most of its capital requirements are funded by its suppliers. But, investors need to consider whether this is a condition that can be sustained by the company over the long term.