# 1 Simple Number To Help Investors Understand 3 Aspects Of Malayan Banking Berhad

Malayan Banking Berhad (KLSE: MAYBANK), or Maybank, is the biggest financial institutions in Malaysia in terms of market capitalisation and asset size. It is ahead of other companies like CIMB Group Holdings Bhd (KLSE: CIMB) and Public Bank Berhad (KLSE: PBBANK).

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 investors’ 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

With that, let’s calculate the ROE for Maybank.

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 Maybank, the asset turnover for the 2016 was RM44.7 billion / RM736.0 million = 0.0607 times.

This means that for every RM1 of asset employed in the business in 2016, the company generated a sales of 6.07 sen.

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 margins for Maybank was RM7.0 billion / RM44.7 billion = 15.7%

To put this in perspective, the company received 15.7 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 2016, Maybank’s gearing ratio was RM736.0 billion / RM70.5 billion = 10.44

Here, for every RM1 of equity invested in the business, Maybank employed 9.44 times in liability.

Conclusion

Putting all three numbers together, the ROE for Maybank for 2016 was 9.51%.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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.