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.
Here?s a chart showing how Venture Corporation Ltd?s (SGX: V03) ROE has changed over its last five fiscal years:
Source: Venture Corp?s annual reports
As a quick background, Venture Corp is an electronics manufacturing services provider and it has expertise in a wide range of activities, including printing & imaging, networking & communications, retail store…
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.
Here’s a chart showing how Venture Corporation Ltd’s (SGX: V03) ROE has changed over its last five fiscal years:
Source: Venture Corp’s annual reports
As a quick background, Venture Corp is an electronics manufacturing services provider and it has expertise in a wide range of activities, including printing & imaging, networking & communications, retail store solutions & industrial and more. The firm sources its revenue primarily from the Asia Pacific region.
From the ROE chart above, we can see that apart from a big drop in 2014, Venture Corp has managed to maintain its ROE around the range of 7%-8%.
But, how did the company do it? Let’s look at a breakdown of the ROE for some answers:
ROE = Profit Margin x Asset Turnover x Equity Multiplier
Some of you may find the formula familiar: It is actually the DuPont formula, created nearly a century ago in the 1920s by the DuPont corporation to measure its own internal efficiency.
What can the DuPont analysis tell us about Venture Corp’s ROE from 2011 to 2015? Let’s see.
Source: Venture Corp’s annual reports
In similar manner to its ROE, the profit margin for Venture Corp had remained in a tight range of between 5.6% and 6.4%, with the exception of 2014 when the company suffered an impairment loss of S$64 million which pressured the margin for the year.
The second component of the DuPont formula, the asset turnover, is a measure of how good Venture Corp 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.
As you can see from the chart above, the company’s asset turnover has barely moved in the period from 2011 to 2015, hovering between 0.95 and 1. Revenue has inched up slightly over the last five years (S$2.432 billion in 2011 vs. S$2.657 billion in 2015) while its asset base has remained pretty much unchanged, shrinking ever so slightly from S$2.555 billion to S$2.528 billion.
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 – Venture Corp is taking on.
The equity multiplier has again, hardly budged over the past five years. Venture Corp ended 2015 with a balance sheet that had S$459 million in cash and just S$135 million in debt.
A Fool’s take
To sum up what the DuPont formula has showed us, Venture Corp’s steady ROE over the past five years (taking 2014 out of the picture) has been the result of its equally steady profit margin, asset turnover, and equity multiplier.
It should be noted that more work needs to be done beyond the DuPont analysis before any firm investing conclusion can be made on Venture Corp. 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.