1 Simple Number To Help Investors Understand 3 Important Aspects Of Global Logistic Properties Ltd’s Business
Global Logistic Properties Ltd (SGX: MC0) is an owner and developer of modern logistics facilities. It has operations in four countries, namely, China, Brazil, Japan, and the US. The company’s the largest provider of modern logistics facilities in the first three countries and the second largest in the fourth.
In recent months, Global Logistic Properties has been a hot topic in the financial media due to the possibility that it could be acquired. In late March, the company announced that it has received non-binding proposals from several parties and is in discussions with them. Only time will tell if a deal would eventually go through.
But whatever happens, investors who are interested in the company today would still need to understand the financial characteristics of its business. In here, I’m going to take a deep look at Global Logistic Properties’ return on equity, or ROE.
The choice of ROE
Why the ROE some of you might be asking? That’s because the financial metric gives investors important insight on a company’s ability to generate a profit using the shareholders’ capital it has.
A ROE of 20% means that a company generates $0.20 in profit for every dollar of shareholders’ capital invested. In general, the higher the ROE, the more profitable a company is.
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. So, that’s something to observe.
Calculating the ROE
The ROE can be calculated using the following formula, which is the way many investors do it:
ROE = Net Profit / Shareholder’s Equity
But, the ROE can also be calculated using a different approach 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. For more information about this formula for the ROE, you can check out here.
With that, let’s turn our attention back to the ROE of Global Logistic Properties.
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. In its financial year ended 31 March 2016 (FY2016), Global Logistic Properties had total assets of US$23.13 billion and total revenue of US$777.5 million. These result in a low asset turnover of 0.034.
The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2016, the net profit margin for Global Logistic Properties was a fat 133% (a profit of US$1.033 billion and revenue of US$777.5 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 that a company is funding its assets with more liabilities, hence resulting in higher risk. Global Logistic Properties has a pretty healthy leverage ratio of 1.76 given its total assets and equity of US$23.13 billion and US$13.16 billion, respectively.
When we put all the three numbers together, we arrive at a ROE of just 7.9% for Global Logistic Properties in FY2016.