1 Simple Number For Understanding 3 Important Areas Of Singapore Telecommunications Limited’s Business
Singapore Telecommunications Limited (SGX: Z74) is Singapore’s largest operational telco.
In this article, I want to dig deep into Singtel’s 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. A high ROE can also be a sign that a company has a high quality business.
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 to the ROE of Singtel.
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.
For Singtel, it had total revenue of S$16.711 billion, and total assets of S$48.294 billion, in its fiscal year ended 31 March 2017 (FY2017). This gives a low asset turnover of 0.346.
The net profit margin measures the percentage of revenue that is left as a profit after deduction of all expenses. In FY2017, Singtel had an impressive net profit margin of 22.9%, given its net profit of S$3.831 billion, and revenue of S$16.711 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 that a company is funding its assets with more liabilities, hence resulting in higher risk. In FY2017, Singtel had total assets and total equity of S$48.294 billion and S$28.214 billion, respectively. This gives an acceptable leverage ratio of 1.71.
When we put all the numbers together, we arrive at a respectable ROE of 13.5%.