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Xinyi Glass Shares Have Gained More Than 900% Since Its IPO. Is it a Quality Business?

Xinyi Glass Holdings Ltd (SEHK: 868) is an integrated glass manufacturer making products such as high-quality float glass, automobile glass and energy-saving architectural glass.

The company’s stock price has performed well since its IPO in 2005, up from about HK$1.00 to HK$9.37 (as at the time of writing). Given such strong performance, investors will naturally be interested in the company.

Personally, I’m particularly intrigued to know one thing – does it have a high-quality business?

This question is important. If Xinyi Glass 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 of 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 maths 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 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.

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

Source: Xinyi Glass Financial Results

In its fiscal year ended 31 December 2018 (FY2018), Xinyi Glass generated an ROIC of 26.8%. This means that for every RMB 1 of capital invested in the business, Xinyi Glass earned RMB 0.268 in profit. The company’s ROIC of 26.8% is above average, based on the ROICs of many other companies I have studied in the past. This suggests that Xinyi Glass has a quality business.

Debt consideration

There’s one thing that investors should note about Xinyi Glass’s ROIC. On its balance sheet, the company holds about RMB 3.1 billion in short-term debt, which was excluded from the above calculation of capital employed.

Personally, I would argue that the short-term debt is used to fund the company’s long-term operational needs (most likely on working capital). Thus, we should include that figure into our calculation of ROIC.

To cut a long story short, after adjusting for the short term debt, the adjusted ROIC would have been 22.6% (which is still above average as compared to the rest).

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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.