The Three Numbers That Starve Indofood Agri Resources

Having control of a supply chain can be a boon to any business.

In the case of Indofood Agri Resources (SGX: 5JS), the company controls a large part of its supply chain. It cultivates palm trees, it harvest Fresh Fruit Bunches (FFB) and it processes Crude Palm Oil (CPO). It even has a division that breeds higher-yielding seeds.

In theory, Indofood Agri Resources should be highly profitable. But whilst it can control many parts of its business, there is one thing it cannot control, namely, the price of palm oil. Consequently, it is at the mercy of market forces.

That could help explain the company’s disappointing Return on Equity of 3.3%. It implies that Indofood Agri Resources only generates S$3.30 for every $100 of shareholder equity.

The impact of falling palm oil prices can be seen in Indofood’s declining Net Income Margin. Two years ago, the farmer generated as much as S$14.80 on every S$100 of sales. Last year’s Net Income Margin was an uninspiring 5.1%.

The company is moderately efficient, though. Its Asset Turnover was a respectable 0.38. It means that Indofood Agri Resources generated S$38 of revenues for every $100 of assets employed in the business. The median for the 30 companies that make up the Straits Times Index (SGX: ^STI) is 0.47.

Indofood Agri Resources does not borrow heavily. It has Total Liabilities of S$17.3b and Total Assets of S$41.4b. That equates to a Leverage Ratio of 1.72.

By harvesting the Indofood Agri Resource’s Return on Equity, it is easy to see why shareholders might be starved. Its Return on Equity of 3.3% is the product of a depressed net Income Margin of 5.1%; a respectable Asset Turnover of 0.38 and a modest Leverage Ratio of 1.72.

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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.