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The 3 Numbers That Power Sembcorp Industries

SembcorpIndustriesLogoUtilities, shipbuilding and infrastructure titan Sembcorp Industries (SGX: U96) has its finger in many pies. It is a power generator, it supplies water and it also builds ships. But if that wasn’t enough, it is also a property developer.

From an investor’s perspective, Sembcorp Industries is very good at what it does. It has one of the highest Returns on Equities (ROE) amongst the Straits Times Index (SGX: ^STI) constituents.

Whilst the average for the top 30 companies in Singapore is a respectable 9%, Sembcorp Industries’ ROE is an enviable 14%. It means that Sembcorp investors are earning S$14 for every $100 invested in the business.

Its desirable ROE has been achieved through a good use of its assets to generate sales. The company’s Asset Turnover of 0.8 is significantly higher than the average of 0.49 for the companies that make up Singapore’s benchmark index. The asset turnover can be a measure of a company’s efficiency – the higher the better. And Sembcorp Industries is quite efficient.

Sembcorp Industries has also taken on bit of debt, which means that investors are benefitting from the company using other people’s money to help fund the business. Sembcorp’s leverage factor of 2.3, whilst higher than the market average, is not excessively high.

What’s interesting, though, is Sembcorp’s profitability. Its net profit margin of 7.4% is around half that of the Straits Times Index average of 19%. But that could just be a feature of the business it is involved in. Utilities don’t often have high profit margins.

By taking apart a Return on Equity, it is easy to see how a company with a lower profit margin can still deliver a decent return for shareholders. In the case of Sembcorp Industries, it has achieved a ROE of 14% through the product of a respectable profit margin of 7.4%; an attractive Asset Turnover of 0.83 and a Leverage Ratio of 2.3.

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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.