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The Three Numbers That Drive ComfortDelGro

ComfortSingaporeFrom an investors point of view, ComfortDelGro (SGX: C52), Singapore’s S$4b transport company, is unlikely to win any race that requires speed. The company’s earnings growth borders on being pedestrian, which for a transport business, is somewhat ironic.

But what ComfortDelGro lacks in high earnings growth, it more than makes up for in Return on Equity. The RoE is the returns that a company makes on the money that shareholders have invested in it. Consequently, the higher the return, the more bangs that investors get for their buck.

Over the last three years, ComfortDelGro has delivered a return of around 10% on the equity employed in the business. The dependable returns have been thanks to a good use of the assets at its disposal rather than a high margin or excessive leverage.

The company’s Net Income Margin at 7% is about half the average for the 30 companies that comprise the Straits Times Index (SGX: ^STI). The relatively low margin is a little surprising given that ComfortDelGro controls around two-thirds of the taxi market.

The company is not excessively geared, either. Its leverage ratio of 1.8 is only marginally higher than that for the market average. What’s more its use of leverage has remained largely unchanged over the last three years.

Where ComfortDelGro excels is in its Asset Turnover ratio. The company generates 75 cents of sales for every dollar of asset used, which is significantly higher than the blue-chip benchmark of 50 cents for every dollar of asset employed. The ability to sweat its assets is a testament of the company’s workforce, as this is a labour-intensive industry.

By taking apart ComfortDelGro’s Return on Equity we have a better understanding of how the company drives its business economics. It is the product of a low profit margin of 7%, an average leverage of 1.8 and a high asset turnover of 75%.

By keeping its fares affordable, ComfortDelGro together with other cab firms are able to make taxi travel in the Garden City an envy of other developed countries. It is little wonder then that customers find it difficult to hail a cab when they need one.

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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.