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1 Simple Number To Help Investors Better Understand 3 Aspects Of My E.G. Services Berhad

There are only a handful of companies that can grow their share price more than the market average on a long-term basis.

In the Singapore stock market, we have seen companies like Thai Beverage Public Company Limited (SGX: Y92) and Riverstone Holdings Limited (SGX: AP4) meeting the above description. In the last five years, the former was up by 133% while the latter was up by 400%.

Yet, the company that we will look at today easily beat the above in terms of price appreciation. It is up by 1675% in the past five years.

The company is Malaysia-listed My E.G. Services Berhad (KLSE: MYEG) or MYEG, an electronic service provider to the government of Malaysia.

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 investors’ 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 investors’ 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 MYEG.

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 MYEG, the asset turnover for the 2017 was RM371.2 million / RM863.8 million = 0.43 times.

This means that for every RM1 of asset employed in the business in 2017, the company generated a sales of RM0.43.

Net profit margin

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

In 2017, the net margin for MYEG was RM200.0 million / RM371.2 million = 53.9%

To put this in perspective, the company receives 53.9 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 high ratio means that the company funds the assets with more liability.

In 2017, MYEG’s gearing ratio was RM863.8 million / RM551.9 million = 1.57

Here, for every RM1 of equity invested in the business, MYEF is employing 0.57 times in liability.

Conclusion

Putting all the three numbers together, the ROE for MYEG for 2017 was 36.4%.

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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 Riverstone Holdings Limited.