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1 Simple Number To Help Investors Understand 3 Important Aspects of Jardine Cycle & Carriage Ltd’s Business

Jardine Cycle & Carriage Ltd (SGX: C07) can be considered to be a conglomerate. That’s because the bulk of its revenue and profit comes from its 50% stake in Indonesia company Astra, which has many business segments such as automotive, financial services, heavy equipment and mining, agribusiness, and more.

In this article, I want to dig deep into Jardine Cycle & Carriage’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 Jardine Cycle & Carriage.

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 total assets.

For Jardine Cycle & Carriage, its asset turnover in 2016 was an anaemic 0.73 given its total revenue of US15.76 billion and total assets of US$21.59 billion.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In 2016, Jardine Cycle & Carriage had a low net profit margin of 4.4%. We already know the company’s revenue – its profit attributable to shareholders was US$701.7 million.

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. Jardine Cycle & Carriage had total shareholders’ equity of US$5.75 billion in 2016. Together with the company’s total assets that we’ve seen, we have a leverage ratio of a high 3.75.

When we put all the three numbers together for Jardine Cycle & Carriage, we arrive at a respectable return on equity of 12%.

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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.