A Look At 1 Important Investing Formula For Challenger Technologies Limited

The return on equity (ROE) metric measures a company’s ability to generate a profit with the shareholders’ capital it has.

Generally speaking, a high ROE is preferred over a low one, all things being equal.

But, the ROE alone does not tell the whole story with a company. It can actually be broken down into greater detail to provide even more useful insight. Here it is:

ROE = Profit Margin x Asset Turnover x Equity Multiplier

Some of you might quickly recognize this as the DuPont analysis. It was invented in the 1920s by well, the DuPont Corporation. It was originally used to measure the company’s internal efficiency.

In this piece, let’s use the formula on Challenger Technologies Limited (SGX: 573). As a quick background, the company is primarily an IT products retailer with 48 stores around Singapore. It also has tiny businesses providing call centre and electronic signage services.

The following chart shows how the return on equity has been for Challenger Technologies over its last five fiscal years.

Challenger Technologies ROE chart
Source: Challenger Technologies’ annual report

As you can see, Challenger Technologies has managed to keep its ROE above 20% in the past five years. But, the metric has fallen.  We can breakdown the company’s ROE with the Dupont formula to see the drivers for the phenomenon.

Challenger Technologies Dupont Analysis chart
Source: Challenger Technologies’ annual report

From 2011 to 2015, Challenger Technologies has managed to grow its profit margin slightly from 5% to 5.2%. It has also been able to keep its profit margin above 4%.

The company did not perform so well in terms of asset turnover. The asset turnover measures how good Challenger Technologies is at utilizing its assets to generate revenue. Generally, a higher asset turnover translates to a better performance.

Challenger Technologies’ declining asset turnover is an indication that the company is taking a longer time to sell its wares and requires more assets to maintain the same amount of revenue. To the former point, a peep into the financials reveals that Challenger Technologies’ inventory turnover days (a proxy for how long the company’s inventory sits on the shelves before getting sold) has risen from 34 in 2011 to 49 in 2015.

The final element in the Dupont formula is the equity multiplier, which measures how much leverage a company is taking on. We can see that Challenger Technologies’ equity multiplier has fallen over the years. This could be a sign that the company is taking on less financial risks.

A Fool’s take

To sum up what the DuPont formula has showed us, Challenger Technologies is finding it harder to sell its goods as quickly as in the past. The company also appears to be taking on lesser financial risks.

It should be noted that more work needs to be done before any firm investing conclusion can be made on Challenger Technologies.

The bricks-and-mortar retail industry in Singapore has been facing challenging conditions recently, partly as a result of competition from online retail platforms. To combat the online threat, Challenger Technologies had launched its own online market place,, in April 2016. Only time will tell if Challenger Technologies is able to adapt to changing consumer behaviour.

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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 contributor, Wilson Ong, doesn’t own shares in any companies mentioned.