The Three Numbers That Lift ARA Asset Management Limited

One of the secrets of delivering a high Return on Equity – a sign of a great business – is to be asset light; have reasonably high margins, be scalable and employ a modicum of leverage. ARA Asset Management (SGX: D1R) uses those attributes to good effect.

The company manages a portfolio of Real Estate Investment Trusts (REITs) in Singapore, Hong Kong, Malaysia and China. They include Fortune REIT (SGX: F25U), Suntec REIT (SGX: T82U) and Cache Logistics Trust (SGX: K2LU).

Perhaps the most eye-catching financial ratio for ARA Asset Management is its consistently-high Return on Equity. Over the last five years, this has average 30%. Last year, it was a market-beating 28%. By comparison, the median Return on Equity for the 30 companies that make up the Straits Times Index (SGX: ^STI) is 14.8%

ARA’s high Return on Equity can be traced to its extraordinary Net Income Margin. The company delivered a bottom-line profit of S$87.5m on revenues of S$170.9m. That equates to a Net Income Margin of 51.2%.

Meanwhile, those revenues are generated from just S$387m of assets. The Asset Turnover of 0.44 compares well with the market. On average, Singapore companies generate about S$47 on S$100 of assets.

ARA Asset Management is not heavily leveraged. Last year, it had Total Liabilities of S$79.5m and Total Assets of S$427.6m. In other words, its Leverage Ratio was an undemanding 1.23.

By dismantling ARA Asset Management’s Return on Equity, it is easing to see why it is uplifting. Its Return on Equity of 28% is the product of an extraordinary Net Income Margin of 51.2%; an Asset Turnover of 0.44 and a Leverage Ratio of 1.23.

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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.