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Hongkong Land Holdings Limited: 1 Simple Number To Help Investors Understand 3 Aspects Of The Company

Hongkong Land Holdings Limited (SGX: H78) is one of the companies connected to a web of Jardines companies that includes Jardine Strategic Holdings Limited (SGX: J37), Jardine Cycle & Carriage Ltd (SGX: C07) , Dairy Farm International Holdings Ltd (SGX: D01), Mandarin Oriental Limited (SGX: M04) and Jardine Matheson Holdings Limited (SGX: J336).

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

Why ROE?

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

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 each dollar of invested capital.

The simplified calculation that most investors use is as follow:

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 three pillars 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 Hongkong Land.

Asset Turnover:

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

For Hongkong Land, the asset turnover for 2016 is US$ 1, 994 million / US$ 36, 955 million = 0.054 times.

This means that for every US$1 of asset employed in the business in 2016, the company generated sales of 5.4 cents.

Net profit margin:

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

In 2016, the net margins for Hongkong Land was US$ 3, 345 million / US$ 1, 994 million = 167.7%

To put this in perspective, the company receives 167.7 cents in net profit from every US$1 in sales, after deducting all expenses. Here, it is important to note that net profit is higher than sales due to the recognition of gain in fair value of investment properties.

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, Hongkong Land‘s gearing ratio was US$ 36, 955 / US$ 31, 314 million = 1.18

Here, for every US$1 of equity invested in the business, Hongkong Land employed 0.18 times in liability.

Conclusion:

Putting all 3 numbers together, the ROE for Hongkong Land for 2016 is 10.7%.

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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. Motley Fool has a buy recommendation for Hongkong Land Holdings and Dairy Farm International.