Sarine Technologies Ltd’s Stock Price Is Near A 52-Week Low: Does It Have A Good Business?
Sarine Technologies Ltd (SGX: U77) is an an Israel-based company that develops technological products that are used for the processing of rough diamonds and gemstones into the polished stones you see in jewellery shops.The company has products and solutions that cater to every stage of the diamond manufacturing process.
Sarine Technologies’ stock price is currently near a 52-week low, and this made me pay attention to the company.
As part of my study of Sarine Technologies, 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.
Sarine Technologies’ ROIC
Here’s a table showing the ROIC for Sarine Technologies in 2016:
Source: Sarine Technologies 2016 annual report
We can see that Sarine Technologies generated a high ROIC of 62.4% in 2016. In fact, this is higher than average, based on the ROICs of many other companies I have studied in the past.
The main reason behind Sarine Technologies’ ability to earn a high ROIC is the low capital expenditure requirement in its business. In addition, Sarine Technologies had a gross margin of 69% in 2016, which is really high for an industrial equipment maker. This indicates that the company’s customers are willing to pay up for its technologies.
These two factors together can explain the company’s high ROIC.