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Is Dali Foods a Good Business to Own For The Long Term?

Dali Foods Group Company Limited (SEHK: 3799) is a food and beverage manufacturer in Mainland China. It offers a variety of products such as cakes, chips, biscuits, herbal tea, plant-based and milk beverages, energy drinks, and more.

After reaching its peak in January 2018, Dali Foods’ share price fell more than 30% to its current price of HK$5.20. 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 Dali Foods has a high-quality business, this could be an investment opportunity. Unfortunately, there’s no easy answer to the question. But, a simple metric can help shed some light on the question: The return on invested capital (ROIC).

A brief introduction to ROIC

In a previous article, I had explained how to use the return on invested capital (or ROIC) to evaluate the quality of a business. For convenience’s sake, the math needed to calculate the 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 the ROIC is that, as a business with a higher ROIC requires less capital to generate a profit, it thus gives investors a higher return per dollar that is invested in the business.

Here’s a table showing how Dali Foods’ ROIC looks like (I have used numbers from its fiscal year ended 31 December 2018):

Source: Dali Foods Financial Results

In its fiscal year ended 31 December 2018 (FY2018), Dali Foods generated an ROIC of 77.2%. This means that for every RMB 1 of capital invested in the business, Dali Foods earned RMB 0.772 in profit.

The company’s ROIC of 77.2% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Dali Foods has a high-quality business.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.