ComfortDelgro Corporation Limited (SGX: C52) is a transport company with operations mainly in Singapore, Australia, the United Kingdom, and China. It’s also the majority owner of vehicle and non-vehicle testing and inspection outfit Vicom Limited (SGX: V01) and bus and rail services operator SBS Transit Ltd (SGX: S61).
In this article, I want to dig deep into Comfortdelgro’s return on equity, or ROE.
The choice of ROE
We’re using one metric — the return on equity, or ROE — to understand Comfortdelgro’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. You can learn more about this formula for ROE.
With that, let’s turn our attention to the ROE of Comfortdelgro.
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.
Comfortdelgro had total revenue of S$3.81 billion and total assets of S$5.14 billion in its fiscal year ended 31 December 2018 (FY2018). This gives it an asset turnover of 0.74.
The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2018, Comfortdelgro had a net profit margin of 9.4%, given its net profit of S$358.8 million and revenue of S$3.81 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, hence resulting in higher risk. In FY2018, Comfortdelgro had total assets and total equity of S$5.14 billion and S$3.03 billion, respectively. This gives it a leverage ratio of 1.70.
When we put all the numbers together, we arrive at a ROE of 12%.
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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. The Motley Fool Singapore recommends SBS Transit Ltd.