1 Simple Number To Help Investors Understand 3 Important Aspects Of ComfortDelGro Corporation Ltd’s Business

ComfortDelGro Corporation Ltd (SGX: C52) is one of the largest land transport companies in the world. The company, which has a total fleet of over 44,700 buses, taxis, and rental vehicles, counts Singapore, Australia, the United Kingdom, and China as its main geographical markets.

In this article I want to dig deep into ComfortDelGro’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 turn our attention back to the ROE of ComfortDelGro.

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. In 2016, ComfortDelGro had total assets of S$5.122 billion and total revenue of S$4.06 billion; these give rise to an asset turnover of 0.79. In other words, for every dollar of asset employed by ComfortDelGro, it generated 79 cents in revenue in 2016.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In 2016, ComfortDelGro recorded a net profit of S$378.4 million. This gives a net profit margin of 9.31% given the company’s revenue, which we already know.

Lastly, we have the leverage ratio, which shows the relationship of a company’s total assets to its equity. It is calculated by dividing total assets by equity. A higher ratio means that a company is funding its assets with more liabilities, hence resulting in higher risk. ComfortDelGro had total assets and equity of S$5.122 billion and S$3.192 billion, respectively, giving rise to a leverage ratio of 1.6.

When we put all the three numbers together, we arrive at a ROE of 11.8% for ComfortDelGro.

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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.