1 Simple Number To Help Investors Understand 3 Different Aspects Of Capitaland Limited

CapitaLand Limited (SGX: C31) is a real estate developer and owner and is one of the largest companies in Singapore’s stock market. Its real estate portfolio includes integrated developments, shopping malls, serviced residences, offices, and homes.

In this article, I want to dig deep into the company’s return on equity (ROE).

The choice of ROE

Why the ROE some of you might be asking? That’s because 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 CapitaLand.

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 CapitaLand, its asset turnover in 2015 is just 0.10 (S$4.762 billion in revenue divided by  S$47.03 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 margin for CapitaLand is 31.4% (S$1.459 billion in profit divided by S$4.762 billion in revenue).

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 by shareholders’ equity. A higher ratio means that a company is funding its assets with more liabilities, hence resulting in higher risk.

With shareholders’ equity of S$24.94 billion (and we already know the company’s total assets), CapitaLand’s leverage ratio is 1.89.

When we put the three components of the ROE together for CapitaLand, we arrive at a figure of 6%.

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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.