The Three Numbers That Underpin Sime Darby Berhad

At a time when the West was busy dismantling its conglomerates, Asia never lost faith in its business behemoths.

Consequently, conglomerate can be found in Japan, where they are called keiretsus and in Korea where they are knows as chaebols. In Hong Kong they are referred to as hongs.

Malaysia’s answer to these enormous business empires is Sime Darby (KLSE: SIME; KLSE:4197.KL), which was founded in 1910 by British businessmen William Sime and Henry Darby.

Sime Darby, whose business interests include oil-palm plantations, property and healthcare, generated a Return on Equity of 8.1% last year. It implies that the MYR50 billion company delivered a profit of MYR8.10 on every MYR100 of shareholder money invested in the company. By comparison, Singapore-listed conglomerate Jardine Matheson (SGX: J36) delivered a return of 8.8%.

Sime Darby’s Net Income Margin is not especially high. At 5.3% it is similar to that of Jardine Matheson and Sembcorp Industries (SGX: U96). It suggests that the Malaysia conglomerate, which also assembles cars, generated MYR5.30 on every MYR100 of sales.

While Sime Darby’s Net Income Margin might be low, it is quite efficient. Its Asset Turnover of 0.78 means that it generated MYR77 of sales on every MYR100 of assets employed in the business. The median Asset Turnover for the Malaysian market is about a quarter lower at around MYR55 for every MYR100 of assets employed.

Sime Darby does make use of debt, though. It had Total Liabilities of MYR30.2 billion and Total Assets of MYR61.8 billion. That equates to a Leverage Ratio 1.96, which is slightly higher than the market average.

By deconstructing the Sime Darby’s Return on Equity, it is possible to work out how the conglomerate is underpinned. Its RoE of 8% is the product of a low Net Income Margin of 5.3%; an efficient Asset Turnover of 0.78 and an above market average Leverage Ratio of 1.96.

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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.