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1 Simple Number To Help Investors Understand 3 Aspects Of Sembcorp Industries Limited

SembCorp Industries Limited (SGX: U96), is a conglomerate with three major business segments: Utilities; Marine; and Urban Development & Others. The Marine segment’s contribution mainly comes from SembCorp Industries’ 61% ownership stake in SembCorp Marine Ltd (SGX: S51).

In this article, we will try to understand the attractiveness of this 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, a 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 investor’s capital is.

The simplified calculation that most investors use is as follows:

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 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 Sembcorp Industries.

Asset turnover

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

For Sembcorp Industries, the asset turnover for 2016 was S$7,907 million/S$22,290 million = 0.35 times.

This means that for every S$1 of asset employed in the business in 2016, the company generated sales of 35 cents.

Net profit margin

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

In 2016, the net margins for Sembcorp Industries was SS$395 million/S$7,907 million = 5.0%

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

Asset/equity ratio

The asset/equity ratio shows the relationship of the total assets of the firm to the portion funded by shareholders’ equity.  A high ratio means that a company has taken on substantial debt just to maintain its business.

In 2016, Sembcorp Industries‘ ratio was S$22,290 million/S$8,163 million = 2.73

Here, for every S$1 of equity invested in the business, Sembcorp Industries is employing 1.73 times in liability.

Conclusion

Putting all three numbers together, the ROE for Sembcorp Industries for 2016 was 4.8%.

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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.