The first reaction to the extraordinarily high Return on Equity at DiGi.com (KLSE: 6947.KL; KLSE: DIGI) is disbelief. The second is to try and figure out why.
DiGi.com, which is Malaysia’s second-largest mobile operator by subscriber numbers, generated a Return on Equity (RoE) of 342% last year. It implies that the telecom company with 12.3 million subscribers generated MYR342 of profit on every MYR100 of shareholder investment in the company. Its investors include a 49% by Norway’s Telenor.
DiGi.com is quite profitable. It produced MYR24.80 of profit on every MYR100 rung up at its tills. By comparison, the Net Income Margin of peers, Axiata Group Berhad (KLSE: AXIATA; KLSE: 6888.KL) and Telecom Malaysia Berhad (KLSE: TM; KLSE: 4863.KL), were 12.9% and 5.9%, respectively.
That said, the company’s profitability is only comparable to Singapore Telecommunications (SGX: Z74), which delivered a Net Income Margin of 21.9% in 2015. But it is, nevertheless, higher than Singapore’s StarHub (SGX: CC3) and M1 (SGX: B2F) Net Income Margins of 15.2% and 15.4%, respectively.
DiGi.com is also quite efficient in the use of its assets. It delivered MYR1.55 of revenues on every ringgit of assets at its disposal. The median Asset Turnover for the Malaysia market is around 0.56.
Whilst DiGi.com is a notable standout in terms of profitability and efficiency, it is its use of leverage that is primarily responsible for its extraordinary Return on Equity.
The telecom operator had Total Liabilities of MYR4.38 billion and Total Assets of MYR4.92 billion. That equates to a Leverage Ratio of 8.9, which is high by any measure.
By deconstructing the Return on Equity for DiGi.com, it is easy to see how it dials up its astonishing returns. The amazing RoE of 342% is the product of a high Net Income Margin of 24.8%; an efficient Asset Turnover of 1.55 and a substantial Leverage Ratio of 8.9.
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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.