The Three Numbers That Buoy Keppel Corporation

ShipbKeppel logouilding, infrastructure and property conglomerate Keppel Corporation (SGX: BN4) has one of the highest Return on Equity (ROE) amongst Singapore’s large caps.

While the average Return on Equity for the 30 constituent of the Straits Times Index (SGX: ^STI) is a respectable 9%, Keppel Corporation’s is a mouth-watering 17%.

Most investors will appreciate the importance of Return on Equity. It is the returns that we get on the capital we have invested in the business. The higher the return the more bangs investors get for their buck.

Keppel Corporation’s high ROE has been not achieved through its acceptable profit margin. Nor has it been attained through its respectable Asset Turnover.

Its profit margin or the profit it makes on every dollar of sales of 16% is roughly on par with the market average of 19%. Meanwhile, its Asset Turnover, which is a measure of the sales it achieves for every dollar of asset used in the business is 0.5. It is approximately the same as the average for the 30 Straits Times Index constituents.

However, Keppel’s modest level of gearing of 2.1 has allowed it to achieve a higher Return on Equity. It highlights how borrowing can benefit shareholders given that it is effectively using other people’s money to finance the business.

However, gearing can be double-edged.

In times of low interest rates, gearing can be a useful form of financing. But when interest rates are high, a company must still continue to service its debts. Additionally, a company must also continue to service its debt even if sales should fall.

By taking apart Keppel Corporation’s Return on Equity, it is easy to see what buoys the company. It is the product of a healthy profit margin of 16%, a solid asset turnover rate of 0.5% and a manageable level of gearing of 2.1. Put those three numbers together and Keppel’s ROE is a buoyant 17%.

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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.