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Jardine Matheson Holdings Limited – 1 Simple Number To Help Investors Understand 3 Aspects Of The Company

Jardine Matheson Holdings Limited (SGX: J336) is a conglomerate with interest in a number of Jardines companies that include Jardine Cycle & Carriage Ltd (SGX: C07), Hongkong Land Holdings Limited (SGX: H78), Dairy Farm International Holdings Ltd (SGX: D01), Mandarin Oriental Limited (SGX: M04) and the UK-listed Jardine Lloyd Thompson.

In this article, we will try to understand the attractiveness of the business from the perspective of return on equity – ROE.

Why ROE?

ROE is a measure of the profitability of each dollar of investor’s capital.

For example, an ROE of 20% means that a company generates $0.20 for every dollar of shareholders’ capital invested in the business. The higher the ROE, the more profitable is each dollar of investor’s capital.

The simple calculation that most investors use is:

ROE = net profit / shareholder’s equity

Here, however we will take a different approach to calculate the ROE:

ROE = asset turnover x net profit margin x asset/equity

Doing so will reveal to us three aspects of the company – asset management, profitability and financial leverage. For more information about this breakdown, please read here.

With that, let’s calculate the ROE for Jardine Matheson.

Asset Turnover:

Asset turnover measures the efficiency of a company’s use of its assets in generating sales. The calculation of asset turnover is Sales / Asset.

For Jardine Matheson, the asset turnover for the 2016 was US$ 37, 051 million / US$ 71, 523 million = 0.52 times.

This means that for every US$1 of asset employed in the business, the company generated a sales of 52 cents.

Net profit margin:

Net profit margin measures the percentage of sales that is left over to shareholders after deducting all expenses.

In 2016, the net margins for Jardine Matheson was US$ 5, 687 million / US$ 37, 051 million = 15.3%

To put this in perspective, the company received 15.3 cents in net profit from every US$1 of sales.

Gearing:

The asset/equity ratio shows the relationship of the total assets of the firm to the portion funded by shareholders’ equity.  A higher ratio means that the company funds the assets with more liability.

In 2016, Jardine Matheson ‘s gearing ratio is US$ 71, 523 / US$ 49, 737 million = 1.44

Here, for every US$1 of equity invested in the business, Jardine Matheson employed 0.44 times of liability.

Conclusion:

Putting all 3 numbers together, the ROE for Jardine Matheson for 2016 is 11.5%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Dairy Farm International and Hongkong Land. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.