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Top Glove – 1 Simple Number To Help Investors Understand 3 Aspects Of The Company

Top Glove (SGX: BVA) is the largest gloves maker in the world with about 25% market share that is based in Malaysia. Up to its recent debut in Singapore stock exchange, it has always listed on the KLSE Malaysia as TOP GLOVE CORPORATION BHD (KLSE: TOPGLOV).

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, 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 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 Top Glove.

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 assets.

For Top Glove, the asset turnover for the 2016 is RM 2, 889 million / RM 2, 649 million = 1.09 times.

This means that for every RM1 of asset employed in the business in 2016, the company generates a sales of RM1.09.

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 Top Glove is RM 362 million / RM 2, 889 million = 12.5%

To put this in perspective, the company receives 12.5 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, Top Glove‘s gearing ratio is RM 2, 649 million / RM 1, 826 million = 1.45

Here, for every RM1 of equity invested in the business, Top Glove is employing 0.45 times in liability.

Conclusion:

Putting all three numbers together, the ROE for Top Glove for 2016 is 19.8%.

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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.