The return on equity is a simple financial metric that helps determine how effective a company is in earning money from every dollar invested in the company. It is calculated by dividing a company’s profit by its shareholder equity. The higher the return on equity, the more efficient it is.
That said, the return on equity should not be used in isolation. It is important also to assess how much debt a company has employed. Ideally, we should look out for companies that have a high return on equity and manageable debt levels.
Recently, I screened for companies that had high return on equities, low debt loads and reasonable three-year earnings growth. Here are three companies that fit the bill.
AEM Holdings Ltd. (SGX: AWX) sells test handler systems that are used in the production of semiconductors. The group co-developed a new test handler system a few years back and has seen sales soar since then. In 2017, its sales and profit spiked 216% and 576% respectively. Management has also anticipated operating profits of S$42 million for 2018, which is around 10% higher than in 2017.
AEM has a return on equity of 62% and a debt-to-equity ratio of just 0.41. From these numbers, we can see that the company has been able to generate a substantial amount of profit from every dollar invested in the company without employing much debt. However, shares of the company slid recently due to fears that its major client has completed the upgrading cycle of its test handlers and come 2019, the group will mostly rely on sales of reusable parts for its test handlers.
As of today, shares of AEM Holdings trade at S$0.75 per piece. This translates to a trailing price-to-earnings ratio of 5.3, price-to-book of 2.5 and a dividend yield of 5.3%.
Ban Leong Technologies Ltd (SGX: B26) is a technology products distributor, which primarily distributes audio and visual products. It has partnerships with leading brands such as Belkin, Alienware, Samsung and Nokia.
In the last three years, revenue and earnings grew by a total of 14.4% and 166% respectively. Management cited that the disposal of its Australian operations and focus on its core markets in South East Asia as reasons for the improved performance.
The rising standard of living and higher demand for technology products also enabled Ban Leong to deliver strong growth in its latest financial year, which ended on 31 March. It achieved a return on equity of 20.4% and had a debt to equity ratio of 12.8% in that year.
At the time of writing, shares of Ban Leong are changing hands at S$0.22 per share. This equates to a price-to-earnings multiple of 4.8, a price-to-book ratio of 0.87 and a dividend yield of 7.95%.
Best World International Limited (SGX: CGN) is a direct selling company that sells healthcare products.
In its short three-year history as a listed company, Best World has shown impressive growth as revenue and profit have both soared, resulting in a 1,400% increase in its share price. As of 30 June 2018, the group had 97,892 members in its network. Most of its business comes from China and Taiwan, which make up around 90% of total revenues.
The company has a return on equity of 42% and debt-to-equity of just 2.6%. Its shares trade at S$1.34 each. The price translates to a price-to-book ratio of 5.7, a price-to-earnings multiple of 14.7 and a dividend yield of 2.8%.
Meanwhile, there are 28 surprising and important things we think every Singaporean investor should know--and we've laid them all out in The Motley Fool Singapore's new e-book. Packed with information and insights, we believe this book will help you be a better, smarter investor. You can download the full e-book FREE of charge--simply click here now to claim your copy.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on AEM Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in AEM Holdings Ltd.