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1 Simple Number To Help Investors Understand 3 Aspects Of RHB Bank Bhd

RHB Bank Bhd (RHBC.KL) is the fifth biggest financial institution in Malaysia in terms of market capitalization.

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 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

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 RHB 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 RHB Bank, the asset turnover for the 2016 (year ended December 2016) was RM 6.2 billion / RM 236.7 billion = 0.0262 times.

This means that for every RM 1 of asset employed in the business in 2016, the company generated a sales of 2.62 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 RHB Bank was RM 1.7 billion / RM 6.2 billion = 27.4%

To put this in perspective, the company received 27.4 cents in net profit from every RM 1 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, RHB Bank’s gearing ratio was RM 236.7 billion / RM 21.8 billion = 10.85

Here, for every RM1 of equity invested in the business, RHB Bank employed 9.85 times in liability.

Conclusion

Putting all three numbers together, the ROE for RHB Bank for 2016 was 7.8%.

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Editor's note: An error in the sales figure under asset turnover was corrected after publication.

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.