1 Important Number Investors Should Know About Singapore O&G Ltd
Singapore O&G Ltd (SGX: 41X) is a healthcare services provider that was listed in June 2015. It has three main operating business segments at the moment, namely, Obstetrics and Gynaecology, Cancer-related, and Dermatology; its fourth arm focusing on paediatrics was set up just earlier this month.
Since the close of its trading debut, Singapore O&G’s stock price has increased by 123%. This strong stock market performance drove me to study the business closer. In here, I want to share 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. If we track changes in Hour Glass’s ROIC, we can have a sense of how the quality of the company’s business is evolving.
Singapore O&G’s ROIC
The following table shows the ROIC for Singapore O&G in 2016:
Source: Singapore O&G 2016 annual report
We can see that Singapore O&G has an unusual ROIC – a negative number. This is not due to lousy profits from the company, but instead, a negative figure for its tangible capital employed.
Thing is, Singapore O&G has a significant amount of goodwill on its balance sheet. As of 31 December 2016, the healthcare services provider has S$26.9 million in goodwill. If this is included as part of the capital employed, the company’s ROIC would become 43.2%, which is still pretty high. This suggests that the company has a high quality business.
