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1 Simple Number To Understand 3 Important Areas Of IHH Healthcare Berhad

IHH Healthcare Berhad (SGX: Q0F) is an international provider of premium healthcare services. It is one of the leading private healthcare players in Singapore, Malaysia and Turkey, and the key markets of the People’s Republic of China, and India. The group operates its hospitals under brands like Mount Elizabeth, Gleneagles, Pantai and Acibadem.

In this article, I want to dig deep into IHH Healthcare’s return on equity, or ROE.

The choice of ROE

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

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

ROE = Net Profit / Shareholder’s Equity

But, 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 the ROE, you can check out the link here.

With that, let’s turn our attention to the ROE of IHH Healthcare.

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 IHH Healthcare, it had total revenue of RM 11.1 billion and total assets of RM 38.9 billion in its fiscal year ended 31 December 2017 (FY2017). This gives an asset turnover of 0.29.

The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2017, IHH Healthcare had a net profit margin of 7.4%, given its net profit of RM 829.8 million and revenue of RM 11.1 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, IHH Healthcare had total assets and total equity of RM 38.9 billion and RM25.9 billion respectively. This gives a leverage ratio of 1.5.

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