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A Look At 1 Important Investing Formula For Super Group Ltd

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

In general, a high ROE is preferred over a low one, if all things are held equal.

But, the ROE can’t tell us the whole story about a company. The metric can actually be broken down into greater detail to shed more light on a company’s business. Here’s the breakdown:

ROE = Profit Margin x Asset Turnover x Equity Multiplier

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

In here, let’s use the formula on Super Group Ltd (SGX: S10). The food and beverage manufacturer offers many instant coffee brands, including Super Coffee, OWL, Café Nova and more. Super Group’s business extends beyond Singapore and the company has a presence in many parts of Asia.

The chart below shows the ROE for Super Group over its last five fiscal years:

Super Group ROE chart
Source: Morningstar

You can see that Super Group’s ROE climbed from 18% in 2011 to 23% in 2013, only to fall to less than 10% in 2015. This could perhaps explain why Super Group’s share price had plunged by nearly 70% from an all-time high of S$2.40 in 2013 to S$0.775 currently.

Let’s get down to business and breakdown Super Group’s ROE with the Dupont formula. We can start with the first component, the profit margin:

Super Group profit margin chart
Source: Morningstar

Super Group’s profit margin peaked at 20% in 2013 and has been declining steadily.

The second component, asset turnover, is a measure of how good Super Group is at utilizing its assets to generate revenue. It is calculated by dividing the company’s revenue with its assets. Generally, a higher asset turnover translates to a better performance.

Super Group asset turnover and equity multiplier chart
Source: Morningstar

As shown in the chart just above, Super Group’s asset turnover has been falling in the past two years. Despite revenue declining from S$557 million in 2013 to S$509 million in 2015, Super Group’s assets grew from S$599 million to S$665 million.

The last component of the Dupont formula is the equity multiplier and it is found by dividing a company’s assets with its equity. It is a gauge for how much leverage a company is taking on. Super Group has remained disciplined when it comes to managing its balance sheet, as seen in the marginal decline in the equity multiplier from 2011 to 2015.

A Fool’s take

To sum up what the DuPont formula has showed us, Super Group appears to be facing challenges in its business, given that its profit margin has shrunk and its assets are becoming less efficiently utilized.

Since Super Group’s falling ROE has also been a result of a declining equity multiplier, an argument can be made that Super Group’s ROE could perhaps be improved if it decides to pursue heavier leverage. But, there are also cons that can come with more leverage.

It should be noted that more work needs to be done before any firm investing conclusion can be made on Super Group. This look at the company’s ROE should only be seen as a useful starting point for further research.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Super Group. Motley Fool Singapore contributor Wilson Ong doesn’t own shares in any companies mentioned.