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Dairy Farm International Holding Ltd – 1 Simple Number To Help Investors Understand 3 Aspects Of The Company

Dairy Farm International Holdings Ltd (SGX: D01) is a conglomerate with four main business segments: Food, Health and Beauty, Home Furnishings, and Restaurants.

In Singapore, Dairy Farm is the owner of stores such as GuardianCold StorageGiant Hypermarket, and 7-Eleven.

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

Doing so will reveal to us three pillars of the company – asset management, profitability and financial leverage. For more information about this breakdown, you can head here.

With that, let’s calculate the ROE for Dairy Farm.

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 Dairy Farm, the asset turnover for 2016 was US$11,201 million / US$5,129 million = 2.18 times.

This means that for every US$1 of asset employed in the business in 2016, the company generated sales of US$2.18.

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 Dairy Farm was US$470 million / US$11,201 million = 4.20%.

To put this into perspective, the company received 4.2 cents in net profit from every US$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, Dairy Farm’s gearing ratio was US$5,129 million / US$1,579 million = 3.2.

Here, for every US$1 of equity invested in the business, Dairy Farm employed 2.2 times in liability.

Conclusion

Putting all three numbers together, the ROE for Dairy Farm for 2016 was 29%.

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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. Motley Fool Singapore has a recommendation for Dairy Farm International.