DBS Group Holdings Ltd (SGX: D05), or DBS Group, is one of the three major banks based out of Singapore, along with United Overseas Bank Ltd and Oversea-Chinese Banking Corp Limited.
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 ROE.
With that, let’s turn our attention to the ROE of DBS Group.
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. DBS Group had total revenue of S$13.2 billion and total assets of S$550.8 billion in its fiscal year ended 31 December 2018 (FY2018). This gives it an asset turnover of 0.024.
Net profit margin measures the percentage of revenue that is left as a profit after deducting all expenses. In FY2018, DBS Group had a net profit margin of 43.2%, given its net profit of S$5.7 billion and revenue of S$13.2 billion.
Lastly, we have the leverage ratio, which shows the relationship of a company’s total assets to its equity. It’s calculated by dividing total assets by equity. A higher ratio means a company is funding its assets with more liabilities, hence resulting in higher risk. In FY2018, DBS Group had total assets and total equity of S$550.8 billion and S$49.9 billion, respectively. This gives it a leverage ratio of 11.04 (a high leverage ratio is common for banks).
When we put all of the numbers together, we arrive at a ROE of 11% for DBS Group.
Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
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. The Motley Fool Singapore recommends DBS Group Holdings Ltd, United Overseas Bank Ltd, and Oversea-Chinese Banking Corp Limited.