# 1 Simple Number To Help Investors Understand 3 Important Aspects Of Thai Beverage Public Company Limited’s Business

Thai Beverage Public Company Limited (SGX: Y92) is one of the largest beverage manufacturers and distributors in Thailand. It has four business segments (Spirits, Beer, Food, and Non-Alcoholic Beverages), but derives the bulk of its revenue and profits from just two (Spirits, and Beer).

Thai Beverage has also been a solid long-term winner in Singapore’s stock market over the past five years – its stock price has gained 215%.

In this article, I want to dig deep into Thai Beverage’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 Thai Beverage.

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.

Thai Beverage’s latest financial year ended on 30 September 2016, but there was just nine months in it, to help the company facilitate a change of its fiscal year end. The company had total assets of THB 187.7 billion and total revenue of THB 139.2 billion in FY2016. These give rise to an asset turnover of 0.74.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2016, Thai Beverage recorded net profit of THB 19.0 billion, which gives us a healthy net profit margin of 13.6% given the company’s aforementioned revenue.

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. Thai Beverage had total assets and total equity of THB 187.7 billion and THB 123.7 billion, respectively, giving rsie to a leverage ratio of 1.52, which is reasonable.

When we put all three numbers together, we arrive at an ROE of 15.3% for Thai Beverage for the nine months ended 30 September 2016. At an annualised basis, Thai Beverage’s ROE would be 20.4%. This is high, especially when we consider that the median ROE for the Straits Times Index’s (SGX: ^STI) 30 constituents is less than 10%.

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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.