The Three Numbers That Sustain First Resources

In the palm oil industry, a low Return on Equity (RoE) is pretty much par for the course. After all, it is a highly labour intensive industry. What’s more selling prices are dictated largely by market demand.

But try telling that to First Resources (SGX: EB5), which generates almost three times more profit for every dollar of investor equity than the average Singapore farmer.

First Resources’ RoE comes in at 22%. It means that the company generates $22 for every $100 of equity invested in the business. The return is not a one-off, either. Over the last four years, First Resource has consistently delivered returns in excess of 20%.

By comparison, the RoE for Wilmar International (SGX: F34) is 9%. Meanwhile, Golden Agri-Resources (SGX: E5H) sports a RoE of 3.6%.

First Resources’ extraordinary Return on Equity can be traced back to its eye-popping Net Income Margin of 38%, which is nearly ten times higher than the industry average. It is also double that of the 30 companies that make up the Straits Times Index (SGX: ^STI).

The company is also quite efficient in its use of assets. With an Asset Turnover of 0.34, it implies that First Resources is able to generate 34 cents of revenue for every dollar of asset employed in the business. This compares well with Bumitama Agri (SGX: P8Z), whose customers include Wilmar.

As a further boost to its RoE, First Resources also uses debt – but not excessively so. Its Leverage Ratio of 1.7 is about average for Singapore companies.

By harvesting the numbers behind First Resources’ Return on Equity, it is possible to see what lubricates the business. Its RoE of 22% is the product of a high Net Income Margin of 38%; an average Asset Turnover of 0.34 and a modest Leverage Ratio of 1.7.

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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.