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3 Simple Metrics That Shed Light on China Aviation Oil’s Business

China Aviation Oil (Singapore) Corporation Ltd (SGX: G92), or CAO, is the largest physical jet fuel trader in the Asia Pacific region and the key supplier of imported jet fuel to the civil aviation industry of China. The group engages in international trading of jet fuel and other oil products and also owns investments in various oil-related businesses.

Here are three simple metrics investors can use to gain a better understanding of CAO’s business.

1. Gross margin

Gross margin is calculated by taking the gross profit of the business and dividing it by its revenue. A higher gross margin signifies that a company has strong pricing power and is able to raise prices of its products without it negatively affecting demand.

For Q1 2019, CAO’s gross margin was a mere 0.3%, and for the same period last year (Q1 2018), gross margin was the same (also at 0.3%). This extremely low gross margin is a reminder to investors that CAO is a jet fuel trader and is essentially fulfilling a middleman role, therefore margins are razor-thin, and CAO has no pricing power over the commodity.

2. Return on equity

Return on equity, or ROE, measures the profit per dollar of equity capital injected into the business. A higher ROE signifies a stronger business as it generates a higher net profit per dollar of capital.

CAO’s annualised ROE (using Q1 2019’s net profit and multiplying it by 4) was around 13.2%, which is a respectable level considering the group has no debt on its balance sheet.

3. Dividend yield

CAO pays an annual dividend of 4.5 Singapore cents per share. Based on its last traded price of S$1.27, this translates to a trailing dividend yield of 3.5%. This is a respectable level of dividend yield considering the group is still in growth mode and intends to expand its business operations along with China’s “One Belt, One Road” policy.

Building an understanding of the business

From these three simple ratios, investors can get a better understanding of CAO. As a jet fuel trader, it has razor-thin gross margins, which means the group is susceptible to higher fixed costs that may tip it into a loss, and it also does not have control over its pricing. Investors should take note of this key risk before buying shares.

However, despite the gross margin concern, ROE is respectable at 13.2%, likely due to its monopoly position in the Chinese jet fuel trading industry. Investors should be pleased to know that the group pays a dividend, and a dividend yield of 3.5% would handily beat the interest rates provided by most banks’ savings and fixed deposit accounts.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.