UOL Group Limited (SGX: U14) is a property company involved in property development and management, property investments, and hotel businesses.
Let’s examine the conglomerate using one simple metric: the return on investment, or ROE.
But why should we use the ROE?
This financial metric gives investors important insight on a company’s ability to generate a profit using the shareholders’ capital it has. An ROE of 20% means a company generates S$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.
Calculating the ROE
The ROE can be calculated using the following commonly used formula:
ROE = net profit / shareholder’s equity
The ROE can also be calculated using a different approach, as 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. Click here for more information about using this formula to calculate the ROE.
Let’s turn our attention to the ROE of UOL Group.
The acid test
Asset turnover measures a company’s efficiency in using its assets to generate revenue. It is calculated by dividing a company’s total revenue by its assets.
UOL Group had total revenue of S$2.1 billion and total assets of S$19.6 billion in its fiscal year ended 31 December 2017 (FY2017). These two figures give us an asset turnover of 0.107.
The net profit margin measures the percentage of revenue that is left as a profit after deducting all expenses. For FY2017, UOL Group had a net profit margin of 47%, based its net profit of S$987 million and revenue of S$2.1 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 a company is funding its assets with more liabilities, resulting in higher risk. In FY2017, UOL Group had total assets and total equity of S$19.6 billion and S$14.1 billion, respectively. The two numbers combine to gives it a leverage ratio of 1.4.
When we put all the numbers together, we arrive at an ROE of 7% for UOL Group.
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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.