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The Three Numbers That Nourish Prudential

PrudentialSingaporeYou may not be aware of this but Prudential (SGX: K6S) is in fact one of Singapore’s largest quoted financial institutions.

With a market capitalisation of around S$59b, the insurance company, whose main listing is in London, is 50% larger than DBS Group (SGX: D05). It is also some seven times bigger than Great Eastern Holdings (SGX: G07), which is a subsidiary of Oversea-Chinese Banking Corporation (SGX: O39).

Prudential isn’t just big, it is also quite good at delivering decent returns for shareholders. Its Return on Equity (RoE) has been consistently above the average for Singapore’s 30 blue chip companies that comprise the Straits Times Index (SGX: ^STI). At around 20%, its RoE is nearly twice the market average.

Interestingly, Prudential’s Net Income Margin is not that impressive. Over the last three years, its profitability has been around 4%, which is less than half that of Great Eastern Holdings. Its profitability is also some four times lower than Singapore’s blue-chip average.

The company’s Asset Turnover, which is a measure of the amount of sales it generates for every dollar of asset used in the business, is noticeably low too. It only generates $19 for every $100 of asset employed, which some 50% lower than the wider market average.

However, what Prudential lacks in profitability and asset turnover it more than makes up for in leverage. Its high level of borrowings enables it to use other people’s money rather than rely on shareholder funds. That said, the company generates more than enough operating income to cover its interest payments.

Prudential is an example of how a company can generate high returns for shareholders by making use of debt. Its above average Return on Equity of 22% is the product of a low Net Income Margin of 3.9%; a small Asset Turnover of 0.19 but a high Leverage Ratio of 29.

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