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The Three Numbers That Define SapuraKencana Petroleum Berhad

Oil services companies can sometimes be a better play on the commodity we call black gold. Whilst they are, undoubtedly, still at the mercy of prevailing oil prices, they can be seen as the picks and shovels of the industry, rather than companies that take on the risk of drilling.

SapuraKencana Petroleum Berhad (KLSE: 5218.KL; KLSE: SKPETRO.KL) has by and large borne this out. Its Return on Equity has consistently been in the high double-digits except for last year, when it turned negative.

The company, which provides engineering solutions to the oil industry, reported a Return on Equity of -6.7% last year. It means that SKPetro made a loss of MYR6.70 on every MYR100 invested by shareholders. The average for the Kuala Lumpur market was a profit of MYR11 for every MYR100 of shareholder equity.

SKPetro’s disappointing return can be traced to a negative Net Income Margin of 7.77%. Before last year, the company had regularly delivered a margin in the mid-teens. But in 2016, an asset write-down of MYR604 million dragged the company into the red.

The company is still generating consistent revenues on the assets at its disposal. An Asset Turnover of 0.29 would imply that SKPetro is able to generate MYR29 on every MYR100 employed in the business. That is not too far removed from its long-term average. But it is slightly lower than the market median.

The company makes use of debt. It had Total Assets of MYR36.5 billion and Total Liabilities of MYR24.2 billion. Of those liabilities, MYR16.2 billion was made up of long-term debt. The upshot is that SKPetro had a Leverage Ratio of 2.99, which is about a third more than the market average.

2016 wasn’t a great year for SKPetro. But by deconstructing its Return on Equity, we can see how its disappointment has been defined. Its Return on Equity of -6.7% was the product of a negative Net Income Margin of 7.77%; a modest Asset Turnover of 0.29 and a lump of Leverage Ratio of 2.99.

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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 Director David Kuo doesn’t own shares in any companies mentioned.