A Look at 1 Key Investing Formula for Singapore Post 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’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 Singapore Post Limited (SGX: S08). Most Singaporeans are likely to be familiar with the company’s namesake postal services. But, Singapore Post also provides logistics services to support the eCommerce industry.

Let’s first take a look at Singapore Post’s ROE over its last five fiscal years:

Singapore Post ROE chart
Source: S&P Global Market Intelligence

As you can see, Singapore Post’s ROE has been experiencing a steady decline over the timeframe under study, moving from 29% to 16.7%. Let’s now see what the Dupont formula can tell us about the phenomenon.

Singapore Post Profit Margin chart
Source: S&P Global Market Intelligence

The first element in the Dupont formula is the profit margin. From FY2012 to FY2016, Singapore Post’s profit margin has stepped down from nearly 23% to 19.5%. That said, a 19.5% profit margin is not far off from the average profit margin of 21% for the constituents of the Straits Times Index  (SGX: ^STI) (banks, real estate investment trusts, and business trusts are not included).

The second component, the asset turnover, is a measure of how good Singapore Post is at utilizing its assets to generate revenue. The math behind the asset turnover is simple: You divide a company’s revenue with its total assets. Generally, a higher asset turnover translates to a better performance.

Singapore Post Asset Turnover and Equity Multiplier Chart 2
Source: S&P Global Market Intelligence

As shown in the chart just above, Singapore Post’s asset turnover has increased slightly. Even as the company’s total assets increased from S$1.43 billion in FY2012 to S$2.42 billion in FY2016, revenue growth had more than managed to keep up.

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 – or financial risk – a company is taking on.

We can see from the above that Singapore Post’s equity multiplier has declined significantly. So while the firm has been reducing its leverage, it has been doing so at the expense of its ROE.

A Fool’s take

To sum up what the DuPont formula has showed us, Singapore Post continues to enjoy high profit margins (albeit with a slight decline) and is still adept at generating revenue with its assets. But, the firm’s lower leverage has caused its ROE to fall.

This breakdown of Singapore Post’s ROE may have provided us with some useful insight, but it should only be seen as a 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. Motley Fool Singapore contributor Wilson Ong doesn’t own shares in any companies mentioned.