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The Three Numbers That Overload Cosco Corp. (Singapore) Ltd.

What can possibly be more romantic than watching a ship being launched? It is enough to give anyone goose bumps.  But we should never allow our hearts to rule our portfolio.

What matters are the hard numbers. And in the case of Cosco Corp. (Singapore) Ltd. (SGX: F83), the numbers could be seen as a little heart-breaking.

The China State Owned Enterprise (SOE), which is worth S$1.1b, has only delivered a return of 1% on shareholder equity. The RoE is about an-eighth of the return that Singapore’s blue chips delivered last year. It implies that Cosco only generated S$1 of bottom-line profit for every $100 of shareholder money invested in the business.

Cosco’s disappointing RoE can be traced back to its discouragingly-low Net Income Margin (NIM) of 0.5%. Over the last ten years, Cosco’s NIM has fallen steadily from a high of around 18% in 2005. But at 0.5%, it implies that the shipbuilder has made less than a dollar of profit on every $100 of sales.

Interestingly, Cosco is moderately efficient. Its Asset Turnover of 0.5 suggests that it has generated S$0.50 of revenues on every dollar of asset employed in the business. That is impressive for an asset-heavy business. The median Asset Turnover for the 30 companies that make up the Straits Times Index (SGX: ^STI) is also 0.5.

Worryingly though, Cosco has assumed a big chunk of leverage. Its Leverage Ratio of 4.4 is some 2-1/2 times bigger than the market average.

By unpacking Cosco’s Return on Equity, it is easy to see how the shipbuilder has been overloaded. Its RoE of 1% is the product of a disappointing Net Income Margin of 0.5%; an average Asset Turnover of 0.5 and a big chunk of Leverage of 4.4.

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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.