Singapore’s stock exchange, Singapore Exchange (SGX: S68), has delivered an exceptionally high Return on Equity (ROE) for investors.
Most investors will know how important the ROE is. It is the returns a company make on the money that we investors have invested in it. So the higher the number, the more bangs for bucks an investor would get.
Singapore Exchange, or SGX as it is popularly known in Singapore, sports a ROE that is three times higher than the market average. While the average for the Straits Times Index (SGX: ^STI) constituents is a respectable 9%, SGX’s has delivered a return of 33% for its shareholders.
Interestingly, the ROE at Singapore Exchange is driven by its exceptionally high profit margin. Its Net Income Margin of some 45% is a reflection of its dominant position in the market. After all, if you want to raise money by floating a company in Singapore, there aren’t that many places to go.
The other components of the ROE are by contrast fairly pedestrian. Its Asset Turnover, which is the amount of revenue it generates from every dollar of asset employed in the business, is on par with the rest of market. An Asset Turnover of 0.36 is nothing to write home about.
Nor is SGX’s level of gearing. The Leverage Ratio, which stands at 2.1, has been fairly consistent over the last three years.
By taking apart the three component of SGX’s Return on Equity, it is easy to see what makes it sing. The mouth-watering high return of 33% has been achieved by multiplying a modest gearing of 2.1 with an acceptable Asset Turnover of 0.36 and a salivating Net Income Margin of 45%.
Whilst it is true that a ROE of 33% is exceptional, it is hard to see that SGX will want to sit on its laurels. There is room for the returns to improve especially if it can produce more sales from its existing assets.
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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 Singapore Director David Kuo doesn’t own shares in any companies mentioned.