Issue #7 - The right ROE
Shareholder's equity is amount of ownership shareholders have in a company. It represents the net worth of shareholders. This is another definition of shareholder's equity here. Shareholder's equity is stated in the balanced sheet of a company. Since most of the public listed company in Malaysia has many subsidiaries, we are interested in the shareholder's equity found in the consolidated balance sheet of the company instead.
Shareholder's Equity = Total Assets - Total Liabilities OR
Shareholders's Equity = Share Capital + Retained Earnings** - Treasury Shares
**Retained Earnings == Unappropriated profits
Net earnings are profit generated from sales (revenue) minus operational (& other) expenses, interest, tax, depreciation & amortization.
Net Earnings = Revenue - Operational (& other) Expenses - Interest - Tax - Depreciation - Amortization
Rate of return on shareholders's equity is more commonly known was return on equity (ROE) which is the net earnings of the company per shareholder's equity. In order words, ROE represents the rate of return the company generates for its owner.
ROE = Net Earnings / Shareholder's Equity
Key points from "The New Buffettology" (Buffet & Clark, 2002):
1 - Companies that benefit from some kind of durable competitive advantage have high returns on shareholder's equity - typically above 12%
2 - Price-competitive commodity-type businesses historically has low returns on shareholder's equity - typically under 12%
3. Consistency is everything.
We should be interested in companies that generate high ROE consistently for passed years, 10 years preferrably.
Below are ROE and NPM (net profit margin) for SP Setia Bhd and Island & Peninsular (I&P) Bhd for the passed 11 and 8 years:
SP Setia Bhd recorded a more consistent ROE of above 12% while I&P Bhd recorded a lower than 12% ROE for passed 6 years. In this case, I&P is not an attractive business as far as buffettology is concerned. Hence, we shall not pursue I&P Bhd further.
In previous issue, I&P Bhd recorded a high gross profit margin (GPM). Previous numbers were extracted from quarterly reports published online which were subjected to audits. They were used for quick comparison and filtering only. Listed below are GPM numbers from I&P Bhd annual reports. Year 2005 saw I&P Bhd receiving an exceptional payment from selling off its plantation business segment. If the exceptional items were excluded from the GPM calculation, the number was within range of passed 2 years'.
Shareholder's Equity = Total Assets - Total Liabilities OR
Shareholders's Equity = Share Capital + Retained Earnings** - Treasury Shares
**Retained Earnings == Unappropriated profits
Net earnings are profit generated from sales (revenue) minus operational (& other) expenses, interest, tax, depreciation & amortization.
Net Earnings = Revenue - Operational (& other) Expenses - Interest - Tax - Depreciation - Amortization
Rate of return on shareholders's equity is more commonly known was return on equity (ROE) which is the net earnings of the company per shareholder's equity. In order words, ROE represents the rate of return the company generates for its owner.
ROE = Net Earnings / Shareholder's Equity
Key points from "The New Buffettology" (Buffet & Clark, 2002):
1 - Companies that benefit from some kind of durable competitive advantage have high returns on shareholder's equity - typically above 12%
2 - Price-competitive commodity-type businesses historically has low returns on shareholder's equity - typically under 12%
3. Consistency is everything.
We should be interested in companies that generate high ROE consistently for passed years, 10 years preferrably.
Below are ROE and NPM (net profit margin) for SP Setia Bhd and Island & Peninsular (I&P) Bhd for the passed 11 and 8 years:
SP Setia
Years ROE(%) NPM(%)
2005 12.92 16.11
2004 11.58 15.73
2003 9.94 15.34
2002 11.11 12.24
2001 12.24 16.15
2000 11.99 14.78
1999 19.71 17.19
1998 8.94 9.80
1997 16.87 14.64
1996 22.72 10.81
1995 43.52 7.28
Ave 16.50 13.97
Island & Peninsular
Years ROE(%) NPM(%)
2005 2.13 13.17
2004 9.39 19.06
2003 4.95 8.08
2002 3.47 7.07
2001 3.47 7.23
2000 7.70 15.10
1999 13.97 23.56
1998 14.45 17.51
Ave 8.00 14.08
SP Setia Bhd recorded a more consistent ROE of above 12% while I&P Bhd recorded a lower than 12% ROE for passed 6 years. In this case, I&P is not an attractive business as far as buffettology is concerned. Hence, we shall not pursue I&P Bhd further.
In previous issue, I&P Bhd recorded a high gross profit margin (GPM). Previous numbers were extracted from quarterly reports published online which were subjected to audits. They were used for quick comparison and filtering only. Listed below are GPM numbers from I&P Bhd annual reports. Year 2005 saw I&P Bhd receiving an exceptional payment from selling off its plantation business segment. If the exceptional items were excluded from the GPM calculation, the number was within range of passed 2 years'.
Island & Peninsular
Years GPM(%)
2005 147.93 (26.30)*
2004 28.09 (31.59)
2003 28.61 (24.29)
posted by yitping at 8:48 PM
1 Comments:
Below are ROE and NPM (net profit margin) for Sunway City Bhd and IOI Property Bhd for the passed 9 and 10 years respectively:
Sunway City Bhd:
Years ROE (%) NPM (%)
2004 7.97% 6.74%
2003 3.34% 3.50%
2002 16.11% 17.96%
2001 1.04% 1.07%
2000 NIL NIL
1999 3.44% 3.09%
1998 NIL NIL
1997 NIL NIL
1996 13.34% 26.97%
Note:NIL refers to negative in profit or lose.
IOI Property Bhd:
Years ROE (%) NPM (%)
2005 13.54% 40.18%
2004 13.72% 33.65%
2003 11.59% 35.88%
2002 11.55% 30.94%
2001 10.04% 31.45%
2000 7.71% 17.18%
1999 15.78% 32.79%
1998 8.54% 20.55%
1997 11.28% 25.86%
1996 11.51% 27.69%
IOI Property Bhd recorded a more consistent average of ROE close to 12% while Sunway City Bhd recorded a lower than 12% ROE for passed 9 years. In this case, Sunway City Bhd is not an attractive business as far as buffettology is concerned. Hence, we shall not pursue Sunway City Bhd further.
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