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The Three Numbers That Weaken Far East Hospitality Trust

With S$2-1/2 billion worth of assets at its disposal Far East Hospitality Trust (SGX: Q5T), has the potential to be a powerhouse in the hotel sector. But its Return on Equity (RoE) of 4.1% lags the market average of about 10% by a wide margin.

The low Return on Equity is in part due to its comparatively-low Net Income Margin (NIM) of 58.6%. By market standards, its NIM is high. It generates S$58.60 on every S$100 of revenues. But it is low compared to other REITs. For instance, CDL Hospitality Trust’s (SGX: J85) Net Income Margin is 73.4%.

FEHT’s Asset Turnover of 0.048 is quite low too. It implies that the owner of Rendezvous Hotel and Orchard Parade Hotel only generates S$4.80 of revenues o every S$100 of assets at its disposal.

Interestingly, another factor that contributes to FEHT’s low Return on Equity is its conservative use of debt. The Trust only has S$813m of liabilities compared to some S£2.5b of assets. That equates to a Leverage Ratio of 1.47, which is below the 30 companies that make up the Straits Times Index (SGX: ^STI).

By checking out the Return on Equity for Far East Hospitality Trust, it is easy to see why it might be considered weak. Its RoE of 4.1% is the product of a comparatively low Net Income Margin of 58.6%; a soft Asset Turnover of 0.048 and a conservative Leverage Ratio of 1.47.

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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.