The Three Numbers That Sweeten Nestle (Malaysia) Berhad

A high Return on Equity means that a company is generating a good return on the money that shareholders have invested in the business.

In the case of Nestle (Malaysia) Berhad (KLSE: 4707.KL; NESTLE) the return is not just high, it is extraordinarily high. Last year, the food producer delivered a Return on Equity (RoE) of 85.4%. It means that the maker of Nescafe, made MYR85.40 on every MYR100 invested by shareholders. That is nearly nine time higher than the market average.

Nestle Malaysia’s Net Income Margin is not especially high, though. At 12.2%, it is lower than the market average. It implies that the company made a bottom-line profit of MYR12.20 on every MYR100 of sales.

But Nestle Malaysia is ultra-efficient. It generated MYR2.10 of sales on every ringgit of asset at its disposal. By comparison, the 30 companies that make up the Kuala Lumpur Stock Composite Index (KLSE; ^KLCI) achieved a median Asset Turnover of 0.26.

Nestle makes use of leverage. It had Net Assets of MYR2.45 billion and Net Liabilities of MYR1.61 billion. That equates to a Leverage Ratio of 3.51, which is 75% higher than the market average.

By deconstructing the Return on Equity for Nestle (Malaysia), it is easy to see why it is sweet. Its RoE of 85.4% is the product of an acceptable Net Income Margin of 12.2%; an exceptional Asset Turnover of 2.0 and a hefty dollop of Leverage Ratio of 3.5.

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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.