JUMBO Group Ltd Is Trading Close To Its 52-Week Low: Is It A Good Business?
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.