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1 Simple Number for Understanding 3 Important Aspects of Fraser and Neave Limited

Fraser and Neave Limited (SGX: F99), or F&N, is a consumer group with expertise in the food and beverage (F&B) and publishing and printing sectors. As of 12 December 2016, Thai Beverage Public Company Limited (SGX: Y92) had a 28.53% stake in F&N.

The choice of ROE

We’re using one metric — the return on equity, or ROE — to understand F&N’s business. This financial metric gives investors important insight into a company’s ability to generate a profit using the shareholders’ capital it has.

A ROE of 20% means a company generates $0.20 in profit for every dollar of shareholders’ capital invested. In general, the higher a company’s ROE, the more profitable it is. A high ROE can also be a sign that a company has a high-quality business.

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

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

ROE = Net Profit / Shareholder’s Equity

ROE can also be calculated using a different approach, as shown below:

ROE = Asset Turnover x Net Profit Margin x Leverage Ratio

Calculating a company’s ROE will reveal three important things: How well a company 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 this formula for the ROE.

With that, let’s turn our attention to Fraser and Neave’s ROE.

The actual numbers

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.

Fraser and Neave had total revenue of S$1,926.5 million and total assets of S$4,490.7 million in its fiscal year ended 30 September 2018 (FY2018). This works out to an asset turnover of 0.429.

Net profit margin measures the percentage of revenue that is left as a profit after deducting all expenses. In FY2018, Fraser and Neave had a net profit margin of 9.3% given its net profit of S$179.1 million and revenue of S$1,926.5 million.

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 FY2018, Fraser and Neave had total assets and total equity of S$4,490.7 million and S$3,169.8 million, respectively. This gives a leverage ratio of 1.42.

When we put all the numbers together, we arrive at an ROE of 6% for Fraser and Neave.

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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.