Challenger Technologies Limited Is Trading Near A 52-Week Low: Does It Have A Quality Business?
Challenger Technologies Limited (SGX: 573) is primarily a retailer of IT (information technology) products, such as personal computers, tablets, printers, and more.
Besides running 43 bricks-and-mortar stores located around Singapore, Challenger Technologies also has an online market place for IT products called hachi.tech that was launched in April 2016.
When I recently ran a screen to find stocks in Singapore’s market that are trading near 52-week lows, Challenger Technologies appeared.
This got me interested in finding out more about the company. What I want to do here is to understand the quality of Challenger Technologies’ business: Does it have a good or poor quality business?
There’s no easy answer, but a simple metric can help shed some light on the question: The 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.
Challenger Technologies’ ROIC
The table below shows how Challenger Technologies’ ROIC looks like (I had used figures from the company’s year ended 31 December 2016):
Source: Company 2016 annual report
In 2016, Challenger Technologies achieved a ROIC of 47.0%. This means that for every dollar of capital invested in the business, the company earns 47.0 cents in profit.
The company’s ROIC of 47.0% is higher than average, based on the ROICs of many other companies that I have studied in the past. This suggests that Challenger Technologies has a high quality business.
The reason for the company’s high ROIC is its low requirement for capital investment (for fixed assets) since it has a significant amount of operating leases. Moreover, though Challenger Technologies has a relatively high level of inventory, this is significantly funded by its trade payables.
In sum, Challenger Technologies looks to possess a rather profitable business model due to its low reliance on capital investment. Yet, given that it leases most of its stores, any increase in lease payments in the future will impact its profitability.