1 Important Investing Formula Investors Should See For Genting Singapore PLC

Genting Singapore PLC (SGX: G13) has seen its return on equity (ROE) fall severely and consistently over its last five fiscal years, from a respectable 16.4% in 2011 to just 1.7% in 2015.

Genting Singapore's ROE chart
Source: Genting Singapore’s annual report

The 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.

Given this, it probably comes as no surprise that Genting Singapore’s share price has also taken a massive hit in the five years ended 22 August 2016, crashing by over 50% to S$0.76.

The ROE can also be broken down into separate components:

ROE = Profit Margin x Asset Turnover x Equity Multiplier

Some of you may recognise the breakdown as the DuPont formula, created by the DuPont Corporation over 90 years ago in the 1920s to measure its own internal efficiency. Let’s apply the formula to Genting Singapore to see what it can tell us about the company’s collapsing ROE.

But first, here’s a quick word on Genting Singapore’s business for some context: The company’s main operating asset at the moment is Singapore’s famous Resorts World Sentosa, which contains a bevy of attractions such as one of the Garden City’s two casinos and the Universal Studios Singapore theme park.

The first component of the DuPont analysis is the profit margin. In the chart below,  you can see that Genting Singapore’s profit margin has rapidly fallen from 31% in 2011 to just 8% in 2015. A glimpse into the annual report reveals that the company’s revenue has tumbled too by 25% from S$3.2 billion to S$2.4 billion.

The Gaming segment was behind much of the total revenue decline. Genting Singapore has been facing headwinds in the gaming market, largely due to rising competition and a slowdown in China.

Genting Singapore's profit margin chart
Source: Genting Singapore’s annual report

Let’s now focus on the next two components within the DuPont formula:

Genting Singapore's asset turnover and equity multiplier chart
Source: Genting Singapore’s annual report

The second component, the asset turnover, is a measure of how good Genting Singapore 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.

With Genting Singapore’s aforementioned falling revenue, it’s no real surprise to find that the metric has trended downward over the past five years.

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 – Genting Singapore is taking on.

The lower equity multiplier is another contributor to the declining ROE. Genting Singapore had issued S$2.3 billion worth of perpetual securities in 2012 which were recognised as equity instead of liabilities. Genting Singapore has the option to redeem these securities in 2017. If the company chooses to do so using borrowings, it could boost its return on equity (assuming all other things stay equal).

A Fool’s take

To sum up what the DuPont formula has showed us, Genting Singapore’s falling ROE is a result of its declining profit margin, lower asset turnover, and falling leverage. These in turn stem from its lower revenues and earnings, and higher equity base.

It should be noted that more work needs to be done beyond the DuPont analysis before any firm investing conclusion can be made on Genting Singapore. 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.