1 Simple Number To Help Investors Understand 3 Important Aspects Of DBS Group Holding Ltd’s Business

DBS Group Holdings Ltd (SGX: D05) is Singapore’s largest bank by assets. As of 30 September 2016, the bank has total assets of S$465.5 billon.

In this article I want to dig deep into the bank’s return on equity, or 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.

With that, let’s calculate the ROE for DBS Group.

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 revenue by its assets.

For DBS Group, its asset turnover in 2015 is 0.024. The bank reported S$10.92 billion in revenue and S$457.83 billion in total assets in that year.

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 DBS Group was 41.8% ( the bank had S$4.567 billion in profit and S$10.92 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 total assets of S$457.83 billion and shareholders’ equity of S$42.80 billion in 2015, DBS Group had a gearing ratio of 10.7.

When we put all the three numbers together for DBS Group, we arrive at a ROE of 10.7%.

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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.