ComfortDelGro Corporation Ltd Is Close To A 52-Week Low Now: Is It A Quality Business?
ComfortDelGro Corporation Ltd (SGX: C52) is a land transport company with operations in seven countries, including Singapore, Australia, the United Kingdom, and China. It is also the majority owner of two other Singapore-listed companies, the vehicle and non-vehicle testing and inspection outfit Vicom Limited (SGX: V01), and bus and rail services operator SBS Transit Ltd (SGX: S61).
At its current price, the company is just 7% higher than its 52-week low. This captured my attention. As part of my study of ComfortDelGro, I want to find out if it has a high or low quality business. It’s not an easy question to answer, but we can get some clues from the company’s return on invested capital (ROIC).
An overview of the ROIC
The ROIC is a metric that can help investors gauge 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.
The table below shows the ROIC for ComfortDelGro in 2016:
Source: ComfortDelGro 2016 full year results
We can see that ComfortDelGro has a high ROIC of 18.0%. In fact, the land transport company’s ROIC is higher than average, based on the ROICs of many other companies I have studied in the past.
But, investors should pay attention to ComfortDelGro’s taxi business, given the increase in competition from ride hailing apps such as Grab and Uber. The company’s taxi business has already been feeling the heat, with revenue falling by 10.7% in the second quarter of 2017.
Last week, ComfortDelGro announced that it is in exclusive discussions with Uber in relation to a potential strategic alliance. Only time will tell if any collaboration between ComfortDelGro and Uber will be a success.