There are seven large telecom players in Singapore and Malaysia.
Across the causeway, Telekom Malaysia Berhad (KLSE: 4863.KL), Axiata Group Berhad (KLSE: 6888.KL), MAXIS BERHAD (KLSE: MAXIS) and DiGi.Com Bhd (KLSE: DIGI) are listed on the Kuala Lumpur Composite Index (KLCI).
In this article, our focus will be Digi.com and StarHub only. Both are significant players in their respective markets with about $2 billion to $2.5 billion of revenues.
Here, we will use a simple number – return on equity (ROE) to better investors get a simple overview of both companies.
The ROE is a measure of the profitability of each dollar of investor capital.
An ROE of 20% means that a company generates $0.20 of profit on every dollar of shareholders’ capital. The higher the ROE, the more profitable each dollar of investor’s capital is.
The simplified calculation that most investors use is:
ROE = net profit / shareholder’s equity
Here, we will take a slightly different approach to calculate the ROE:
ROE = asset turnover x net profit margin x asset/equity
Doing so will reveal three separate parts of the company, namely, asset management, profitability and financial leverage. For more information about this breakdown, click here.
Asset turnover measures the efficiency of a company’s use of its assets in generating sales revenue. The calculation of asset turnover is Sales / Asset.
For StarHub, the asset turnover for 2015 is $2.44 billion / $1.91 billion = 1.28 times
For DiGi.com, the asset turnover for 2015 is RM 6.91 billion / $4.66 billion = 1.48 times
Here, we see that DiGi.com is more efficient in utilising its assets to generate sales.
Net profit margin:
Net profit margin measures the percentage of sales that is left over to shareholders after deducting all the expenses.
In 2015, the net margins for StarHub and DiGi.com are 15.23% and 24.91%.
Again, DiGi appears to perform better at converting sales into net profit.
The asset/equity ratio shows the relationship of the total assets of the firm to the portion funded by shareholders’ equity. A higher ratio means that the company makes use of more borrowings.
In 2015, the ratios for StarHub and DiGi.com were 10.18 and 8.98 respectively.
Here, both companies have very high ratios of between nine and 10 times. In other words, for every dollar of asset funded with shareholder equity, StarHub is employing 9.18 times of liability.
Putting all 3 numbers together, the ROE for StarHub and DiGi.com are 198% and 331%.
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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 Lawrence Nga doesn’t own shares in any companies mentioned.