1 Important Formula Investors Should Know For Sheng Siong Group Ltd

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:

ROE = Profit Margin x Asset Turnover x Equity Multiplier

The formula above may be familiar to some of you. It is actually the Dupont formula, created nearly a 100 years ago in the 1920s by the Dupont Corporation to measure the company’s internal efficiency.

In this piece, let’s use the formula on Sheng Shiong Group Ltd (SGX: OV8) to see what it can reveal about the changes in the firm’s ROE over the last five years:

Sheng Siong's ROE chart
Source: Sheng Shiong Group’s Annual Report

As you can see from the chart above, Sheng Shiong has historically been performing well for its shareholders by keeping its ROE above 18% over the past five years. The metric had peaked at 27% in 2012 and came in at 23% in 2015.

As a quick background on Sheng Siong, the company operates a network of 41 supermarket stores in Singapore. These stores are primarily located in the heartlands of the island. Sheng Siong is also working on the launch of its first-ever supermarket in China which is expected to open for business in the fourth-quarter this year.

Let’s now turn to the Dupont formula for Sheng Siong. This is shown in the following chart:.

Sheng Siong's Dupont analysis chart
Source: Sheng Shiong Group’s Annual Report

From 2013 to 2015, Sheng Shiong Group’s profit margin has been expanding steadily. The profit margins had improved in part due to supply chain improvements via its distribution centre. It’s worth noting that Sheng Siong has had to contend with a competitive landscape and the rise of e-Commerce for the timeframe under study.

The second component of the Dupont formula, the asset turnover, is a measure of how good Sheng Shiong 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.

You can observe from the chart that Sheng Siong’s asset turnover has remained relatively stable between 2 and 2.7 over the last five years, even with an increase of assets from S$241 million to S$368 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 – and thus financial risk –  Sheng Shiong is taking on.

From the chart above, we can see that the equity multiplier has remained fairly constant over the time frame we’re looking at. So, the company has not been propping up its ROE through the use of higher leverage. Sheng Siong has also been debt-free since at least 2011.

A Fool’s take

To sum up what the DuPont formula has showed us, Sheng Shiong is a company that has been producing ROEs of over 18% in the last five years. It has achieved that mainly by improving its profit margin while maintaining its leverage. These could be some of the reasons why Sheng Siong’s share price has climbed by over 190% over the last five years.

In any case, it should be noted that more work needs to be done before any firm investing conclusions can be made on Sheng Shiong. 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. Motley Fool Singapore contributor Wilson Ong doesn’t own shares in any companies mentioned.