The 3 Numbers That Weigh Down Neptune Orient Lines

logo_nolThere is something quite romantic about sailing into the sunset. There is also something quite romantic about soaring through the skies. But romance and finance don’t make for comfortable bedfellows, especially when it comes to investing in boats and planes.

The issue is high operational gearing. Airlines, such as Singapore Airlines (SGX: C6L)  have notoriously high operational gearing, and so too do shipping companies such as Neptune Orient Lines (SGX: N03). In other words, these businesses have to recover high overheads before they can start making a profit.

High operational gearing has seen Neptune Orient Lines report losses in three out of the last four years. Consequently, its Return on Equity (RoE) has been less than stellar. At minus 20%, Neptune’s RoE in 2012 is, at best, disappointing.

The problem lies with its negative Net Income Margin of 4.4%. Things were not that much better in 2011, when Neptune reported a Net Income Margin of minus 5.2%. A negative Net Income Margin implies that the company is losing money on every dollar of sales it makes.

That said, Neptune, which can trace its roots back to 1801, is ultra-efficient. Its Asset Turnover of 1.2 is significantly better than the 30 companies that make up the Straits Times Index (SGX: ^STI). In 2012, the Asset Turnover for Singapore’s blue chips was just 0.5. In other words, they generated 50 cents of sales for every dollar of asset employed. Neptune managed to generate $1.30 of revenue for every dollar of asset employed.

Neptune, however, requires a hefty dollop of debt to keep it afloat. Its Leverage Ratio of 3.6 is more than three times higher than the market average.

By unloading Neptune’s Return on Equity, it is easy to see what is weighing it down. Its minus RoE of 20% is the product of a negative Net Income Margin of 4.4%; an ultra-efficient Asset Turnover of 1.3 and a good blob of Leverage Ratio of 3.6.

However, Neptune showed what it is capable of delivering when conditions are favourable. In 2010, it delivered a Return on Equity of 15% simply because Net Income Margin improved. That is the attractive flipside of high operational gearing.

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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.