The Three Numbers That Enhance CapitaLand Commercial Trust

As one of Singapore’s pre-eminent property companies, it is only to be expected that CapitaLand Commercial Trust (SGX: C61U) delivers a good return to shareholders. And it does.

Apart from a couple of blips over the last decade, CapitaLand Commercial Trust (CCT) has delivered a consistently high Return on Equity (RoE) of around 8.9%. Last year it was 8.6%, which meant that the Real Estate Investment Trust generated profits of S$8.70 on every $100 of shareholder equity.

The decent RoE can be traced back to an extraordinarily high Net Income Margin of 170.9%. Put another way, CCT generated S$170 on every S$100 of revenues. Revenues in this case refer to rental revenues. In 2014, Net Income was S$448m; Total Revenues were S$262m.

Whilst CCT’s Net Income is high, the same cannot be said of its Asset Turnover, which is not too surprising because it is asset-heavy. In 2014, the Asset Turnover was just 0.04. It implies that the company only generated S$4 of revenues on every S$100 of asset employed in the business. By comparison, the Asset Turnover for the 30 companies that make up the Straits Times Index (SGX: ^STI) is some ten times higher.

CapitaLand Commercial Trust makes use of leverage. It had Total Liabilities of S$1.38b and Total Assets of S$6.47b. This equates to a Leverage Ratio of 1.27, which is not excessive.

By dismantling the Return on Equity for CapitaLand Commercial Trust, it is easy to see how it is enhanced. Its RoE of 8.6% is the product of an extraordinary Net Income Margin of 170%; a low Asset Turnover of 0.04 and a modest Leverage Ratio of 1.27.

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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.