1 Simple Number To Understand 3 Important Areas Of SBS Transit Ltd’s Business

SBS Transit Ltd (SGX: S61) operates public bus and rail services in Singapore. It operates mainly in two segments: Public Transport Services (consisting of bus and rail services) and Other Commercial Services (advertising and rental). SBS Transit is a subsidiary of local land transport giant, ComfortDelGro Corporation Ltd (SGX: C52).

In this article, I want to dig deep into SBS Transit’s return on equity (ROE).

Why ROE?

ROE is a measure of the profitability of each dollar of investor’s capital.

For example, a 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

Doing so will reveal to us three pillars of the company – asset management, profitability and financial leverage. For more information about this breakdown, please head here.

With that, let’s calculate the ROE of SBS Transit.

The actual numbers

Asset turnover measures the efficiency of a company’s use of its assets in generating sales. The calculation of asset turnover is sales divided by asset.

For SBS Transit, it had total revenue of S$1, 191.7 million and total assets of S$1, 087.8 million for its fiscal year ended 31 December 2017 (FY2017). This gives an asset turnover of 1.1.

Net profit margin measures the percentage of sales that is left over for shareholders after deducting all the expenses. In FY2017, SBS Transit had a net profit margin of 4.0%, given its net profit of S$47.1 million and revenue of S$1, 191.7 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 FY2017, SBS Transit had total assets and total equity of S$1, 087.8 million and S$449.2 million respectively. This gives a leverage ratio of 2.4.

When we put all the numbers together, we arrive at a ROE of 10.6%.

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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 a recommendation for SBS Transit Ltd.