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1 Simple Number For Understanding 3 Important Areas Of Thai Beverage Public Company Limited In 2017

Thai Beverage Public Company Limited (SGX: Y92) is a food and beverage company with four different segments, namely, Spirits, Beer, Food, and Non-Alcoholic Beverages.

In this article, I want to dig deep into Thai Beverage’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 Thai Beverage.

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 Thai Beverage, it had total revenue of THB 190.7 billion, and total assets of THB 194.2 billion, in its fiscal year ended 30 September 2017 (FY2017). The combination gives an asset turnover of 0.98.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2017, Thai Beverage had a net profit margin of 18.2%, given its net profit of THB 34.7 billion and revenue of THB 190.7 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, Thai Beverage had total assets and total equity of THB 194.2 billion and THB 132.5 billion, respectively. This gives a leverage ratio of 1.47.

When we put all the numbers together, we arrive at a ROE of 26.2%.

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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.