1 Simple Number For Understanding 3 Important Areas Of DBS Group Holdings Ltd In 2017

 DBS Group Holdings Ltd (SGX: D05) or DBS for short, is one of the three major banks based in Singapore, along with United Overseas Bank Ltd (SGX: U11) and Oversea-Chinese Banking Corp Limited (SGX: O39).

In this article, I want to dig into DBS Group’s return on equity, or ROE.

The choice of ROE

Why the ROE, some of you might be asking? That’s because the financial metric gives investors important insights into a company’s ability to generate profits using shareholders’ capital.

A ROE of 20% means that a company generates $0.20 in profit for every dollar of shareholders’ capital. 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 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 watch.

Calculating the ROE

The ROE can be 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 features 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 could be taking on. For more information about this formula for the ROE, you can check out here.

With that, let’s turn our attention to the ROE for DBS Group.

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 total assets.

For DBS Group, it had total revenue of S$ 11.9 billion, and total assets of S$ 517.7 billion, in its fiscal year ended 31 December 2017 (FY2017). This gives an asset turnover of 0.023.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2017, DBS Group had a net profit margin of 37.0%, given its net profit of S$ 4.4 billion and revenue of S$ 11.9 billion.

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, DBS Group had total assets and total equity of S$ 517.7 billion and S$ 47.5 billion, respectively. This gives a leverage ratio of 10.9.

When we put all the numbers together, we arrive at a ROE of 9.3%.

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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 DBS Group Group Ltd and United Overseas Bank Ltd .