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1 Simple Number To Help Investors Understand 3 Aspects Of Axiata Group Bhd

Axiata Group Bhd (KLSE: AXIATA) is one of the main telecoms player in Malaysia. The other players are MAXIS BERHAD (KLSE: MAXIS), DiGi.Com Bhd (KLSE: DIGI) and Telekom Malaysia Berhad (KLSE: TM).

For investors who are interested in telecom companies like Singapore Telecommunications Limited (SGX: ZY4), M1 Ltd (SGX: B2F) and StarHub Ltd (SGX: CC3), it might be useful to include Axiata on your watch list.

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 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 Axiata.

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 Axiata, the asset turnover for the year ending December 2016 was RM21,565 million / RM70,489 million = 0.306.

This means that for every RM1 of asset employed in the business, the company generated a sales of 30.6 sen.

Net profit margin

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

In the year ending December 2016, the net margins for Axiata was RM657 million / RM21,565 million = 3%.

To put this in perspective, the company received 3 sen 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 the year ending December 2016, Axiata‘ gearing ratio was RM70,489 million / RM28,620 million = 2.46

Here, for every RM1 of equity invested in the business, Axiata employed 1.46 times in liability.

Conclusion

Putting all the three numbers together, the ROE for Axiata for 2016 was 2.3%, which is quite low.

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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.