1 Important Investing Formula Investors Should See For ComfortDelGro Corporation Ltd

Over the past five years from 2011 to 2015, land transport giant ComfortDelGro Corporation Ltd (SGX: C52) has generated a steady return on equity (ROE) of between 11.7% and 12.1%, as you can see in the chart below:

ComfortDelGro's ROE chart - Wilson
Source: ComfortDelGro’s Annual Report

The ROE metric measures a company’s ability to generate a profit with the shareholders’ capital it has. And generally speaking, a high ROE is preferred over a low one, all things being equal.

But, it is also important to breakdown the ROE into greater detail to see just how a company is sustaining its ROE. The breakdown is given in the formula (the titular ‘important investing formula’) below:

ROE = Profit Margin x Asset Turnover x Equity Multiplier

Some of you may recognise the formula as the DuPont analysis. It was created nearly a century ago in the 1920s by the DuPont Corporation to measure the company’s own internal efficiency.

Before we show the individual components of the DuPont formula for ComfortDelGro, let’s have a few words about the company. It is one of the largest companies in Singapore’s stock market, given that it is one of the 30 constituents of the Straits Times Index (SGX: ^STI).

As I mentioned, ComfortDelGro is in the business of land transport. It provides a wide variety of land transport-related services, such as public bus, rail, taxi, car rental and leasing, automotive engineering, inspection and testing, and driving centres. The company also has a wide geographical reach, with businesses in seven countries, including Singapore, China, and the United Kingdom.

With that, let’s see what the DuPont analysis can tell us about ComfortDelGro’s ROE.

ComfortDelGro's Dupont Analysis chart - Wilson
Source: ComfortDelgro’s Annual Report

ComfortDelGro’s profit margin from 2011 to 2015 has barely changed. Apart from a minor dip in 2014, the company’s profit margin has been maintained above 8.7% consistently.

The second component of the DuPont analysis, the asset turnover, is a measure of how good ComfortDelGro 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.

In a similar manner to its profit margin, ComfortDelGro’s asset turnover has also been consistently kept at around 0.7 for the time frame under study.

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 – ComfortDelGro is taking on.

From the chart above, the equity multiplier has again, hardly budged over the past five years. It comes as no surprise because the company has not embarked on any massive expansion project or acquisition which requires more borrowings.

A Fool’s take

To sum up what the DuPont formula has showed us, ComfortDelGro has displayed a very stable performance over its last five fiscal years.

Having said so, historical performance is not a perfect indicator of the future. It should be noted that more work needs to be done beyond the DuPont analysis before any firm investing conclusion can be made on ComfortDelGro. This breakdown of 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.