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

Source: Fool Editorial

Sheng Siong Group Ltd (SGX: OV8) is one of the largest supermarket chains in Singapore. The company has a network of 42 stores in the island right now and they are primarily located in the heartlands.

Sheng Siong was established in 1985 and it was only in August 2011 when it listed. Since its listing, the company has been a solid winner. From the close of its trading debut to today, Sheng Siong’s stock price has climbed by 175%.

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 Sheng Siong.

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, Sheng Siong had total assets of S$387.8 million and revenue of S$796.7 million; this gives us a good asset turnover of 2.05.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In 2016, the net profit margin for Sheng Siong is a reasonable 7.87%, given its revenue and net profit of S$796.7 million and S$62.7 million, respectively. For further perspective, Sheng Siong earned 7.87 cents in profit for every dollar of sales it made in 2016.

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. The supermarket operator had total assets of S$387.8 million, and total equity of S$254.9 million, which results in a leverage ratio of a very acceptable 1.52.

When we put all the three numbers together, we arrive at a healthy ROE of 24.6% for Sheng Siong.

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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.