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The Three Numbers That Help SIA Engineering Fly

OLYMPUS DIGITAL CAMERA SIA Engineering (SGX: S59) is a provider of aircraft maintenance, repair, and overhaul (MRO) services and is a subsidiary of one of Singapore’s corporate flag-bearers, Singapore Airlines (SGX: C6L).

As a support-company within the entire airline industry, SIA Engineering is a lot more immune to the notoriously cyclicality of the airlines itself.

SIA’s profits have swung from S$850m for the financial year (FY) ended March 2004 to S$2.05b for the FY ended March 2008 and then back down to S$379m for the FY ended March 2013. Meanwhile, SIA Engineering’s profits have actually marched steadily upwards, in small increments, from S$140m to S$270m in the same period.

That dichotomy in performance is somewhat logical, given that even planes that are grounded with no passengers because of unwillingness to spend to fly still have to be maintained, repaired, and overhauled.

And it is the cyclical-proof nature of SIA Engineering’s business that might be a likely reason for it to be able to earn high returns on its shareholder capital, as exemplified by its Return on Equity of 21%.

That’s almost twice as high as the average of around 10% for the 30 companies that make up the Straits Times Index (SGX: ^STI).

The Return on Equity is a useful yardstick for investors to look at in figuring out how efficient a company is in making a profit on each shareholder dollar invested in it. And interestingly, the yardstick can be broken down into three individual components that provide us with yet more useful insights into what makes a company tick.

So, SIA Engineering is almost twice as good as the average company in turning its shareholder capital into profits. But what’s giving the company that extra oomph compared to others?

The company’s Leverage Ratio, which measures the amount of assets a company has acquired in relation to its equity, stands at 1.25, lower than the market average of 1.7. It seems that SIA Engineering is more prudent than most of its corporate peers in taking on liabilities to acquire income-producing assets.

SIA Engineering’s Asset Turnover Ratio is where it does slightly better. It is at 0.73 while the market average is around 0.5. The Asset Turnover Ratio is where we look at the amount of sales that a company can generate per dollar of assets. While not significantly higher than average, it seems that the company does have a better grasp at it than most.

We’re now left with the Net Profit Margin, which tells us the amount of profit made per dollar of sales. And in this area, SIA Engineering also comes out ahead. It’s able to turn every $100 of sale into $23 of profit with a Net Profit Margin of 23%. The market average is only around 19%.

When we put these numbers together, we can have a better picture of what makes SIA Engineering’s Return on Equity fly. It has been achieved by multiplying a Leverage Ratio of 1.2 with an Asset Turnover Ratio of 0.73 and a Net Profit Margin of 23%.

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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 contributor Chong Ser Jing doesn’t own shares in any companies mentioned.