The Three Numbers That Tarnish Golden Agri-Resources

One of the main bugbears of commodity companies is that they have little control over the selling prices of their products. They are price-takers rather than price-makers. And palm-oil producer Golden Agri-Resources (SGX: E5H) is a good example of that.

Through no fault of its own the company’s Net Income Margin (NIM) has fluctuated from a high of 62% to a low of minus 17.3%. Over the last 12 months, the Net Income Margin has been a disappointing 3.4%.

The low NIM means that the company has only generated S$3.40 on every $100 of sales. By comparison, the 30 companies that make up the Straits Times Index (SGX: ^STI) has generated S$14.80 for every $100 of revenues.

Golden Agri-Resource’s low margin puts it firmly on the back foot in terms of its Return on Equity. In the last 12 months, it has only delivered a return of $3 for every S$100 of shareholder equity. The median for Singapore’s 30 biggest companies is 8.7%.

Interestingly, Golden Agri-Resources is quite efficient. It generated $0.54 of sales for every dollar of asset employed in the business. That is marginally higher than the Asset Turnover for the market, which stands at 0.47.

The palm-oil company does not borrow heavily. Its Leverage Ratio of 1.63 is in line with the level of borrowings for Singapore’s blue chips.

By dismantling Golden Agri-Resources’ Return on Equity, it is easy to see why it has been tarnished. Its RoE of 3% is the product of a lowly Net Income Margin of 3.4%; a respectable Asset Turnover of 0.54 and modest Leverage Ratio of 1.63.

Its fortunes could change. But probably not until palm oil prices start to harden.

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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.