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1 Simple Number to Help Investors Understand 3 Aspects of QL Resources Berhad

QL Resources Berhad (KLSE: QL) is a Malaysian based agriculture company that is quite different from the other listed agriculture companies in Singapore like First Resources Ltd (SGX: EB5), Bumitama Agri Ltd. (SGX: P8Z) or Wilmar International Limited (SGX: F34).

The companies listed in Singapore focus mainly on plantation-related agriculture, primarily palm oil. QL Resources, however, focuses largely on marine live stocks and poultries. The firm is among the largest egg producers in Asia.

Despite its “boring” businesses, QL Resources has been one of the best-performing stocks in Malaysia, growing its share price almost six folds in the last 10 years.

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 QL Resources.

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 QL Resources, the asset turnover for financial period ended 31 March 2017 (FY2017) was RM3,012 million / RM3,180 million = 0.95.

This means that for every RM1 of asset employed in the business in FY2017, the company generated a sales of 95 sen.

Net profit margin

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

In FY2017, the net margins for QL Resources was RM207 million / RM3,012 million = 6.9%

To put this in perspective, the company received 6.9 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 FY2017, QL Resources’ gearing ratio was RM3,180 million / RM1,842 million = 1.73

Here, for every RM1 of equity invested in the business, QL Resources employed 73 sen in liability.

Conclusion

Putting all three numbers together, the ROE for QL Resources for FY2017 was 11.3%.

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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.