The Hidden Quality Of ARA Asset Management Limited’s Business

ARA Asset Management Limited (SGX: D1R) is a company that manages real estate funds. These funds take the form of private investment funds, private real estate investment trusts, and publicly-listed real estate investment trusts.

These funds are invested in properties in the Asia Pacific region across a wide range of sectors such as office, retail, logistics/industrial, hospitality and even residential.

Estimating ARA Asset Management’s quality

There are many financial metrics that can help investors gauge the quality of a business. One such metric is called the return on invested capital (ROIC). For ARA Asset Management, its ROIC in 2015 is 22.7%. For more information about this number, you can head here.

This ROIC number is useful – but it also does not tell the whole story with ARA Asset Management.

The real quality of the business

It’s important to clarify that ARA Asset Management’s ROIC of 22.7% is higher than those of most other listed companies in Singapore.

But, investors might get a better grasp on the quality of ARA Asset Management’s business if they had broken the business down into two separate parts: REIT management and others.

In 2015, the REIT management business had operating profit of S$69.97 million, which is around three-quarters of the company’s total operating profit. Yet, the reported assets of the segment is only S$79.8 million, which is only 14% of ARA Asset Management’s total assets of S$564 million. In other words, the company used only 14% of its assets to generate three-quarters of its total operating profit.

So, if we use the tangible asset employed number of S$416.1 million (calculated here), and assuming 14% of it is used in the REIT management business, the ROIC of that business is 120% (69.97/ (416.1 x 14%)).

A Foolish takeaway

The above calculation is not precise as I had to estimate certain numbers. But it reveals an important message: ARA Asset Management has different businesses that are of vastly different quality.

This could apply to other companies. Figuring out the quality of a company’s different businesses could yield useful investing insights, such as whether the company is worth more as a whole or with each business as standalone entities.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.