# 1 Simple Number To Help Investors Understand 3 Aspects Of Public Bank Berhad

Public Bank Berhad (1295.KL) is the second largest financial institutions in Malaysia in terms of market capitalisation. It is also the third largest in terms of asset size, behind Malayan Banking Berhad (1155.KL) and CIMB Group Holdings Bhd (1023.KL).

In this article, we will try to understand the attractiveness of Public Bank Berhad 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 the ROE:

ROE = asset turnover x net profit margin x asset/equity

With that, let’s calculate the ROE for Public Bank.

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 Public Bank, the asset turnover for the 2016 was RM20.1 billion / RM380.1 million = 0.0529 times.

This means that for every RM1 of asset employed in the business in 2016, the company generated sales of 5.29 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 margin for Public Bank was RM5.3 billion / RM20.1 billion = 26.4%

To put this in perspective, the company received 26.4 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 a company has taken on substantial debt just to maintain its business.

In 2016, Public Bank’s gearing ratio was RM380.1 billion / RM35.4 billion = 10.74

Here, for every RM1 of equity invested in the business, Public Bank employed 9.74 times in liability.

Conclusion

Putting all the three numbers together, the ROE for Public Bank in 2016 was 15%.

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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.