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1 Simple Number To Help Investors Understand 3 Aspects Of Singapore Post Limited

Singapore Post Limited (SGX: S08) is a mail and logistics company, which is organised into three major segments of Mail, Logistics, and Retail & eCommerce.

The company has been in the news a lot in the past few years, mainly due to the attention given to it as one of the a main players in the fast growing e-commerce industry.

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 put into a business.

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

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 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 Singapore Post.

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 Singapore Post, the asset turnover for 2016 is S$ 1151.5 million / S$ 2415.8 million = 0.477 times.

This means that for every S$1 asset employed in the business in 2016, the company generates a sales of 47.7 cents.

Net profit margin:

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

In 2016, the net margins for Singapore Post is S$ 253.0 million / S$ 1151.5 million = 21.97 %

To put this in perspective, the company received 21.97 cents in net profit from every S$1 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, Singapore Post‘s gearing ratio was S$ 2415.8 million / S$ 1561.5 million = 1.55

Here, for every dollar of equity invested in the business, Singapore Post employed 0.55 times in liability.

Conclusion:

Putting all three numbers together, the ROE for Singapore Post is 16%.

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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.