Does iFAST Corporation Ltd Have a High Quality Business?
iFAST Corporation Ltd (SGX: AIY) is an Internet-based investment products distribution platform that has a presence in Singapore, Hong Kong, Malaysia, China and India. It has two main business divisions – one that caters to consumers (B2C) and the other that caters to businesses (B2B).
Recently, I got interested in finding out more about the company. I wanted to understand if iFAST has a high-quality business. 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 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 iFAST’s ROIC looks like (I had used numbers from its fiscal year ended 31 December 2017):
Source: iFAST’s Financial Results
In 2017, iFAST generated a ROIC of 27%. This means that for every S$1 of capital invested in the business, iFAST earned S$0.27 in profit. The company’s ROIC of 27% places it in the top quartile, based on the ROICs of many other companies I have studied in the past. This suggests that iFAST has a high-quality business.
However, how did the company manage to achieve such a high ROIC?
Firstly, the company is an internet platform business, which requires little investment in tangible assets. Without any surprise, iFAST has significant intangible assets on its balance sheet. Secondly, it has low working capital needs since it holds no inventory. Moreover, its S$37 million in trade receivables at the end of 2017 was almost fully offset by trade payables of S$33.2 million. Thirdly, iFAST’s highly scalable business model, which is internet-based, allows it to grow its revenue at a faster pace than its fixed costs and capital investments.
In all, iFAST can earn a high ROIC because it is not a capital intensive business.