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The Three Numbers That Deoxygenate IOI Corp. Berhad

It began life in 1969 as an industrial gas manufacturer called Industrial Oxygen Incorporated. But after venturing into property development and oil palm plantation in the 80s and 90s respectively, it changed its name to IOI Corporation Berhad (KLSE: 1961.KL; KLSE: IOICORP.).

IOI’s fortunes are closely linked to its plantations, which are its largest revenue generator. Last year, IOI only managed to deliver a Return on Equity (RoE) of 3%, which underlines the difficulties faced by palm oil producers.

Its disappointingly-low RoE can be traced to an equally disappointing Net Income Margin of 1.5%, It means that IOI only generated MYR1.50 on every MYR100 of revenues rung up on its tills.

That said, IOI uses the assets at its disposal well. Its Asset Turnover of 0.8 implies that it was able to generate MYR80 on every MYR100 of asset employed in the business. That is not vastly different to the Asset Turnover reported by Sime Darby (KLSE: SIME; 4197.KL).

To generate even a Return on Equity of 3%, IOI has had to make use of leverage. Last year, it had Total Liabilities of MYR9.1 billion and Total Assets of MYR14.5 billion. That equates to a Leverage Ratio of 2.56.

By dismantling the Return on Equity for IOI, it is easy to see why it is suffocating. Its RoE of 3% is the product of a disappointingly-low Net Income Margin of 1.5%; an efficient Asset Turnover of 0.8 and a hefty dollop of Leverage Ratio of 2.56.

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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.