This is where Return on Equity can be useful a number to examine. I like to see it as a one-duck-eat-three-ways-meal because the yardstick can be broken down into three other useful ratios. These in turn could provide useful insights into what makes the company tick.
Thai Beverage Company (SGX: Y92), a S$13b brewer, has an unusually high Return on Equity of 45%. By contrast, the average for the 30 companies in the Straits Times Index (SGX: ^STI) is around 10%. So, the brewer is some four times more effective at turning every investor-dollar into dollars of profit.
Interestingly, its net income margin of 18% is more or less on par with the market average. In other words it makes $18 of profit on every $100 dollars of sales. The market average is 19%. So there is nothing to crack open a bottle of its Chang beer to toast over with those numbers.
Thai Beverage’s asset turnover, which is the amount of sales it generates from every dollar of asset employed in the business, is not especially remarkable either. The turnover rate of 1 might be double the market average but it is not outstandingly high.
Where Thai Beverage does shine, though, is through its leverage ratio. This is the amount of liabilities it has taken on compared to its assets. At 2.4, it is some 40% higher than the market median of 1.7. What’s more, the leveraging has been crept up over the years. In 2010, it was 1.4; in 2011 it was 1.6, and now it’s 2.4.
Putting the three pieces of the jigsaw together, we have a better idea about what makes Thai Beverage fizz. Its exceptional Return on Equity of around 45% has been achieve through the product of an 18% Net Profit margin, Asset Turnover of 1 and a Leverage Ratio of 2.4. It might be a good idea to keep a close eye on that last number.
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