The Three Numbers That Obstruct Hyflux

It takes dirty water, cleans it up to make it fit for use. That is what Hyflux (SGX: 600) does. It is probably a bit more complicated than the way that I have described it. But that should suffice for now.

Last year, Hyflux generated S$4.60 for on every S$100 that shareholders invested in the company. The Return on Equity (RoE) of 4.6% falls short of the average for the Singapore market. The median RoE for the 30 companies that make up the Straits Times Index (SGX: ^STI) is 7.8%.

Hyflux makes a decent bottom-line profit on top-line sales, though. Its Net Income Margin (NIM) of 17.2% is above the market average. Notably, the NIM, which had dipped below 10% after being in the low to mid-teens for years, is the highest it has been for eight years.

However, Hyflux is not very efficient in the use of its assets. It Asset Turnover of 0.13 is some way below the market average. It implies that the water treatment company only generates $13 of sales for every $100 of asset employed in the business.

Interestingly, Hyflux’s Asset Turnover has been on the decline. In 2008, it stood at 0.8 but three years later, the Asset Turnover had more than halved to 0.3. The efficiency slid to 0.2 in 2013.

The company makes use of leverage but not excessively. Its Leverage Ratio of 2 is only a little higher than the market average. What’s more, the Leverage Ratio has moderated substantially from a recent high of 2.7.

By separating out the three components that make up Hyflux’s Return on Equity, it is easy to see why it appears obstructed. Its RoE of 4.5% is the product of a high Net income Margin of 17.2%; a low Asset Turnover of 0.13 and a judicious Leverage Ratio of 2.

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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.