1 Simple Number To Help Investors Gain Better Insight On Great Eastern Holding Limited And Allianz Malaysia

Great Eastern Holding Limited (SGX: G07) is the oldest and most established life insurance group in Singapore and Malaysia. It is also a sizeable company, given that it has total assets of over S$65 billion.

Allianz Malaysia Bhd (KLSE: 1163.KL), on other hand, is a Malaysia-based  insurance provider. The company is much smaller though, with total assets of ‘only’ RM14.9 billion (around S$4.90 billion).

What I’d like to do with the two companies is to look at their return on equity (ROE).

The choice of ROE

Why the ROE some of you might be asking? The financial metric gives investors important insight on a company’s ability to generate a profit using the shareholders’ capital it has.

A ROE of 20% means that a company generates $0.20 in profit for every dollar of shareholders’ capital invested. In general, the higher the ROE, the more profitable a company is.

That being said, it’s worth noting that the use of high leverage – which increases the financial risk faced by a company – can also increase a company’s ROE. So, that’s something to observe.

Calculating the ROE

The ROE can be calculated using the following formula, which is the way many investors do it:

ROE = Net Profit / Shareholder’s Equity

But, the ROE can also be calculated using a different approach shown below:

ROE = Asset Turnover x Net Profit Margin x Leverage Ratio

Doing so will reveal three important aspects about a company: How well it is managing its assets, how efficient it is at turning revenue into profit, and how much financial risk it could be taking on. For more information about this formula for the ROE, you can check out here.

So, let’s find out the ROE for both Great Eastern and Allianz Malaysia.

The actual numbers

The asset turnover measures the efficiency of a company in using its assets to generate revenue. It is calculated by dividing a company’s total assets with its revenue.

For Great Eastern, its asset turnover  2015 is 0.13 (S$8.919 billion in revenue divided by S$65.82 billion in total assets). In the case of Allianz Malaysia, it has an asset turnover of 0.33 in 2015 (RM4.52 billion in revenue and RM13.62 billion in total assets).

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In 2015, the net profit margins for Great Eastern and Allianz Malaysia are 8.9% and 6.8%.

Lastly, we have the leverage ratio, which shows the relationship of a company’s total assets to its shareholders’ equity. It is calculated by dividing total assets with shareholders’ equity. A higher ratio means that a company is funding its assets with more liabilities, hence resulting in higher risk.

In 2015, the ratios for Great Eastern and Allianz Malaysia are 10.45 and 5.19, respectively.

When we put the three components of the ROE together for each company, we arrive at a figure of 12.6% for Great Eastern and 11.8% for Allianz Malaysia.

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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.