# 1 Simple Number To Help Investors Understand 3 Aspects Of Bumitama Agri Ltd

Bumitama Agri Ltd  (SGX: P8Z) is a palm oil plantation company.

Its primary business activities are cultivating oil palm trees, as well as harvesting and processing fresh palm fruit bunches (“FFB”) into palm oil and palm kernel. Its operation are located in three provinces in Indonesia, namely Central Kalimantan, West Kalimantan and Riau. As of December 2016, the company had planted 175,243 hectares of land.

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

With that, let’s calculate the ROE for Bumitama Agri.

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 Bumitama Agri, the asset turnover for 2016 was IDR6,630 billion/IDR14,767 million = 0.45 times.

This means that for every IDR1 of asset employed in the business in 2016, the company generates sales of IDR 0.45

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 Bumitama Agri was IDR1,188 billion/IDR6,630 billion = 17.92%

To put this into perspective, the company received 17.92 cents in net profit from every IDR1 in sales, after deducting all the expenses.

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, Bumitama Agri‘s ratio was IDR14,767 billion/IDR7,522 billion = 1.96

Here, for every IDR 1 of equity invested in the business, Bumitama Agri is employing 0.96 times in liability.

Conclusion

Putting all three numbers together, the ROE for Bumitama Agri for 2016 is 15.8%.

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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.