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1 Simple Number To Help Investors Understand 3 Important Aspects Of Singapore Airlines Ltd’s Business

Singapore Airlines Ltd (SGX: C6L) is the national airline of Singapore. Besides running its namesake full-service airline, it also has other airlines under its wings, namely, SilkAir and Scoot.

In this article I want to dig deep into Singapore Airline’s return on equity, or ROE.

The choice of ROE

Why the ROE some of you might be asking? That’s because the financial metric gives investors important insight on a company’s ability to generate a profit using the shareholders’ capital it has.

A ROE of 20% means that a company generates $0.20 in profit for every dollar of shareholders’ capital invested. In general, the higher the ROE, the more profitable a company is.

That being said, it’s worth noting that the use of high leverage – which increases the financial risk faced by a company – can also increase a company’s ROE. So, that’s something to observe.

Calculating the ROE

The ROE can be calculated using the following formula, which is the way many investors do it:

ROE = Net Profit / Shareholder’s Equity

But, the ROE can also be calculated using a different approach shown below:

ROE = Asset Turnover x Net Profit Margin x Leverage Ratio

Doing so will reveal three important aspects about a company: How well it is managing its assets, how efficient it is at turning revenue into profit, and how much financial risk it could be taking on. For more information about this formula for the ROE, you can check out here.

With that, let’s turn our attention back to the ROE of Singapore Airlines.

The actual numbers

The asset turnover measures the efficiency of a company in using its assets to generate revenue. It is calculated by dividing a company’s total revenue by its assets.

In its fiscal year ended 31 March 2017 (FY2017), Singapore Airlines had total assets of S$18.43 billion and total revenue of S$14.87 billion; these give rise to an asset turnover of a mediocre 0.81. In other words, for every dollar of asset employed by Singapore Airlines, it generated 81 cents in revenue in FY2017.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2017, the net margins for Singapore Airlines was a really poor 2.97%. The airline operator earned total revenue of S$14.87 billion, and net profit of S$441.9 million.

Lastly, we have the leverage ratio, which shows the relationship of a company’s total assets to its equity. It is calculated by dividing total assets by equity. A higher ratio means that a company is funding its assets with more liabilities, hence resulting in higher risk.

Singapore Airlines had total assets and equity of S$18.43 billion and S$13.47 billion, respectively, in FY2017. These numbers give a leverage ratio of an acceptable 1.37.

When we put all the three numbers together, we arrive at a low ROE of 3.3% for Singapore Airlines.

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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.