# Karex Bhd – 1 Simple Number To Help Investors Understand 3 Aspects Of The Company

Karex Bhd (KLSE: KAREX) is a Malaysian based company that produces condoms, latex probe covers, sterile catheters and other rubber products. The company is one of largest condom makers in the world in terms of volume, accounting for about 11% of global market share.

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 when invested in a business.

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 Karex.

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/Asset.

For Karex, the asset turnover for the 2016 was RM 343.6 million/RM 558.1 million = 0.616 times.

This means that for every RM1 of asset employed in the business in 2016, the company generated a sales of 61.6 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 margin for Karex was RM 66.4 million/RM 343.6 million = 19.32%

To put this in perspective, the company receives 19.32 cents in net profit from every RM1 in sales, after deducting all the expenses.

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, Karex‘s gearing ratio was RM 558.1 million/RM 479.7 million = 1.16

Here, for every RM1 of equity invested in the business, Karex is employing 0.16 times in liability.

Conclusion

Putting all 3 numbers together, the ROE for Karex for 2016 was 13.8%.

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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.