# 1 Simple Number For Understanding 3 Important Areas Of Jardine Strategic Holdings Limited’s Business

Jardine Strategic Holdings Limited (SGX: J37) is a conglomerate with interests in the web of Jardines companies such as Jardine Cycle & Carriage Ltd (SGX: C07), Hongkong Land Holdings Limited (SGX: H78), Dairy Farm International Holdings Ltd (SGX: D01), Mandarin Oriental Limited (SGX: M04) and Jardine Matheson Holdings Limited (SGX: J336).

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

The choice of ROE

Some of you might be wondering why use ROE. This financial metric gives investors important insights on a company’s ability to generate a profit using shareholders’ capital.

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. A high ROE can also be a sign that a company has a high quality business.

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

ROE is commonly calculated using the following formula:

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 is taking on. For more information about this version of the ROE formula, you can head here.

With that, let’s turn our attention to the ROE of Jardine Strategic.

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.

For Jardine Strategic, it had total revenue of US\$29,552 million, and total assets of US\$69, 908 million, for its fiscal year ended 31 December 2016 (FY2016). This gives an asset turnover of 0.423.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2016, Jardine Strategic had a net profit margin of 18.62%, given its net profit of US\$5,503 million and revenue of US\$29,552 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. In FY2016, Jardine Strategic had total assets and total equity of US\$69,908 million and US\$50,206 million respectively. This gives a leverage ratio of 1.39.

When we put all the numbers together, we arrive at a ROE of 10.9%.

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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 has recommendations for Dairy Farm and Hongkong Land.