The Three Numbers That Keep Dairy Farm Fresh

dairy farm logoDairy Farm International (SGX: D01) is one of Singapore’s largest listed companies. It operates supermarkets and hypermarkets across many parts of Asia and South-East Asia under different banners. Here in Singapore, we know it best for its Cold Storage and Market Place outlets that pepper the many streets and shopping malls in the Garden City.

Dairy Farm has, over the years, delivered one of the highest Return on Equity (RoE) in the Singapore market. At 37%, its RoE is around three times higher than the average for the 30 companies that make up the Straits Times Index (SGX: ^STI). But that’s not all. Its RoE is also twice that of the UK’s leading supermarket Tesco and nearly three times higher than the French supermarket giant Carrefour.

Dairy Farm’s Net Income Margin is not too dissimilar from its peers, though. It makes around $4.50 in profit for every $100 of sales it rings up on its tills. By comparison Tesco’s Net Income Margin is 4.4% and Wal-Mart’s is 3.5%. Supermarkets, it should be noted, tend to have significantly lower Net Income Margins than most other industries. For example, Singapore’s largest companies on average make around $19 on every $100 of revenue generated.

Whilst grocers have a notoriously low profit margin, they are quite efficient at shifting goods through their stores very quickly. Hence most supermarkets tend to be great proponents of the “pile them high and sell them cheap” school of retailing. After all, no one wants to buy tomatoes that have been sitting on a supermarket shelf for weeks on end.

In that respect, Dairy Farm is ultra-efficient. Its Asset Turnover of 2.6 implies that it generates $2.60 worth of sales for every dollar of asset employed in the business. The market average is $0.50 of sales for every dollar of asset employed.

Dairy Farm also uses a fair bit of financial leverage. This has helped it to boost its Return on Equity. Interestingly, Dairy Farm’s Leverage Ratio has fallen from 4.3 in 2010 to just 3.1 last year. Could the supermarket be positioning its balance sheet in readiness for interest rate hikes?

Dairy Farm’s Return on Equity has provided a good insight into how the company keeps things fresh. The return on equity that shareholders enjoy is the product of a low Net Income Margin of 4.5%, a fast Asset Turnover rate of 2.6 and a generous helping of leverage of 3.1.

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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.