The Three Numbers That Sustain Wilmar

Wilmar_logoWilmar International (SGX: F34) may not exactly be a household name, but chances are you have used the company’s product in one form or another.

Wilmar is one of the world’s largest processor and merchandiser of palm and lauric oils. These oils can be found in foodstuffs, detergents and also used in the manufacture of bio-fuels.

Generally, you would not expect an agricultural company to deliver a high Return on Equity (RoE), which is the amount of bangs that the company generates for every dollar of shareholder equity employed in the business. But Wilmar does.

Its RoE of 8.5% is only a smidgen lower than the average return for the 30 companies that comprise the Straits Times Index (SGX: ^STI). Interestingly, it manages to achieve this even though its Net Income Margin, which is the profit on every dollar of sales, is just 2.8%. By comparison, the average for Singapore’s blue-chip is almost 19%.

But what Wilmar misses out in Net Income Margin, it more than makes up for in spades through its efficiency. Its Asset Turnover, which is the amount of sales it generates from every dollar of asset employed, is more than twice the market average. Wilmar generates over a dollar of sales for every dollar of asset used in the business,

Wilmar also uses debt to help improve its return for shareholders. Its leverage ratio of 2.8 is a good bit higher than most other blue chips.

By piecing together the various bits of Wilmar’s business, it is easy to see how it delivers value to shareholders. The 8.5% return that shareholders enjoy is the product of a low Net Interest Margin, an efficient use of available assets and a bit of debt.

Borrowings can be a double-edged sword that cuts both ways. When interest rates are low, debt can be a useful way to improve performance. But debt could start to look less attractive should interest rates head higher. That said, central bankers are going to great lengths to assure the market that interest rates are unlikely to rise anytime soon. However, the market is taking what it hears with a large pinch of salt.

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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.