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1 Simple Number To Understand 3 Important Areas Of Jardine Cycle & Carriage Ltd

Jardine Cycle & Carriage Ltd (SGX: C07), or Jardine C&C, is a conglomerate with a diverse set of businesses, with segments such as automotive, financial services, heavy equipment and mining, agribusiness, information technology and others. These businesses are grouped into three segments, namely, Astra International, Direct Motor, and Others.

In this article, I want to find out more about Jardine C&C’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 insight on a company’s ability to generate a profit using the shareholders’ capital it has.

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

The ROE can be calculated using the following formula, which is what many investors follow:

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

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

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 C&C, it had total revenue of US$17.7 billion, and total assets of US$25.5 billion in its fiscal year ended 31 December 2017 (FY2017). This gives an asset turnover of 0.69.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2017, Jardine C&C had a net profit margin of 10.2%, given its net profit of S$1.8 billion and revenue of US$17.7 billion.

Lastly, we have the leverage ratio, which shows the relationship between a company’s total assets and 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, Jardine C&C had total assets and total equity of US$25.5 billion and US$13.4 billion respectively. This gives a leverage ratio of 1.90.

When we put all the numbers together, we arrive at an ROE of 13.4%.

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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.