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Dissecting ROE of Pintaras Jaya, DuPont Analysis kcchongnz
Dissecting ROE of Pintaras Jaya, DuPont Analysis kcchongnz
"In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite willing to enter businesses that regularly require large capital expenditures. We expect only that these businesses have reasonable expectations of earning decent returns on the incremental sums they invest. If our expectations are met – and we believe that they will be – Berkshire's ever-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead." Warren Buffet, Letter to shareholders, 2009.
Yes, focus on the return on capital, rather than accounting earnings, one of which is the return on equity (ROE). It is one of the most important indicators of a firm’s profitability and potential growth. Companies that boast a high ROE with little or no debt are able to grow without large capital expenditures, allowing the owners of the business to withdrawal cash and reinvest it elsewhere.
However, the return on equity can be achieved in different ways. A company can increase its profit margin by raising price or cutting cost, sell cheaper so that can sell more, or by borrowing more money to do its business.
DuPont equation provides a broader picture of ROE of a company. It tells where a company's strength lies and where there is room for improvement. It is the epic of financial statement analysis of a company. Investopedia has a very good explanation on why is it important to carry our DuPont analysis on a company’s business as shown in the link below:
http://www.investopedia.com/articles/fundamental-analysis/08/dupont-analysis.asp
There are three components in the calculation of ROE using the traditional DuPont model; the net Income margin (NIM), asset turnover (AT), and the financial leverage (FL). By examining each input individually, we can discover the sources of a company's ROE and compare it to its competitors.
ROE = NI/E = NI/S * S/TA * TA/E = NIM * AT * FL
Where NI is net income, E is equity, S is sales or revenue, TA is total assets
Hence the higher the net income margin, the higher the assets turnover, and the higher the financial leverage, the higher the ROE. Company would prefer to achieve higher ROE with relatively higher net profit margin and asset turnover. Increasing financial leverage can improve ROE by a great deal but it can cut both ways; when times are good, leverage amplifies ROE, but in bad times, it can hurt ROE badly, besides too much leverage can make a company risky in bad times.
DuPont analysis of Pintaras Vs Kimlun
Table 1 below shows how the ROE of Pintaras was achieved for its trailing twelve months financial results versus that of another construction company, Kimlun.
Table1: DuPont analysis
|
Company |
Pintaras |
Kimlun |
|
NI |
30.1% |
3.8% |
|
AT |
0.52 |
1.11 |
|
FL |
1.24 |
2.86 |
|
|
|
|
|
ROE |
19.4% |
12.1% |
It is clear from the table above that Pintaras has achieved a much higher ROE of 19.4% compared to that of Kimlun of 12.1%. Not only that, the higher ROE of Pintaras was achieved with a very high net profit margin of 30.1%, the most desirable way to achieve a higher ROE. Few construction companies have their net profit margin in double digits, not to say anywhere close to that of Pintaras. Furthermore the higher ROE was also achieved with much lower financial leverage of just 1.24 compared to 2.86 of Kimlun which has total debts 0.8 time its equity.
Pintaras is a debt free company. In fact it has too much cash in its balance sheet. Hence it hardly leverages itself to do business. In order to increase its financial leverage and improves its ROE, one thing Pintaras can do is to distribute all its cash and cash equivalent of RM1.00 per share to the shareholders, as special dividend! This will have minimal effect on its healthy balance sheet. It can even borrow some money from the bank if requires, further increases its financial leverage, and hence its ROE.
Pintaras’s annual turnover of RM184m is however, pale in comparison with the RM951m of Kimlun. The asset turnover of Kimlun at 1.11 times is twice that of Pintaras of 0.52. However, the ROE of Pintaras is still way above that of Kimlun.
With the recent procurement of two relatively large foundation projects at Warisan Merdeka and Enchanting heights of RM74m and RM71m respectively, Pintaras’s order book is at an unprecedented amount of about RM300m now. Its asset turnover will rise to another level which would greatly improve its ROE further.
KC Chong (10/4/14)
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Discussions
4 people like this. Showing 21 of 21 comments
Boilermech's ROE is 32%. Has net cash position of 35sen per share. PER of 18x looks attractive.
2014-04-11 02:24
Boilermech certainly is great company with its efficiencies and growth, much better than its competitors.
However, as an ordinary person, would you pay RM1m for a new BMW 5-Series 535i, which is retailed at about RM600,000; or RM50,000 for a new Honda Accord 2.4 which is retailed at about RM170k?
Also check how you get a PE ratio of 18 with a share price of BoilerMech at RM3.05 a piece.
2014-04-11 06:06
Warren comments that return for capital intensive company is not going to be spectacular but if well managed is to be above average. This is pulling down his overall portfolio return in recent years. After study Icap portfolio, conclusion is the same which is those capital intensive company are not doing well But those with Strong brand name with less capital intensive are phenomenal.
2014-04-11 13:04
Advantage of Individual investor is that we are Not buying in bulks/or choose to take control of the company.
2014-04-11 13:09
If you are going to be capital intensive, Buy more into plantation as the yield/cash flow is good for well managed company. And the land will appreciate in Long term Unlike other Capital Intensive expenditure into machine or equipment.
2014-04-11 13:19
Mr Chong. You are indeed right on the PER of 18x for Boilermech. HLG in its recent report has PER of 24x for FY15F.
The business moat that Boilermech has is that its biomass boilers are in high demand that customers to have pay a percentage deposit upfront before Boilermech commences manufacturing. Boilermech will bill the customer progressively.
2014-04-12 00:55
Posted by RonnieKimLondon > Apr 12, 2014 12:55 AM | Report Abuse
Mr Chong. You are indeed right on the PER of 18x for Boilermech. HLG in its recent report has PER of 24x for FY15F.
Ronnie, in order to have a better chance of earning higher return from the market, one needs to learn some basics in investments. Things like PE ratio and ROE are some of the most important things he should know.
If you don't, I don't expect you to know as you must in another profession, try to learn slowly, step by step, preferably with some guidance. It is not that hard at all.
Just my thought.
2014-04-13 05:16
mr. kcchongnz i would like to ask if you wanna value a company normally you will start from where....for an example hupseng
2014-04-17 22:33
btw mr. kcchongnz i saw your post, ppl said you got investment course is it true?
2014-04-17 22:35
Posted by Elwin Kai Kai > Apr 17, 2014 10:35 PM | Report Abuse
btw mr. kcchongnz i saw your post, ppl said you got investment course is it true?
Yes. Since finance and investment is my passion, why don't I do something like that? This is in the planning and design stage. This is what I am going to do:
1) Write articles on fundamentals about stocks in Bursa with business analysis, financial statements interpretations, various valuation methods, all on stocks in Bursa.
2) Discuss it in a forum. Everyone in the group can participate, or just absorb what is discussed.
3) Answer all questions on the analysis and valuations, in the forum, or individual questions.
4) Learn at your own pace
5) Answer questions about your stock choice, according to what I am able to.
6) Provide individual a second opinion about certain stocks.
7) Also discuss and answer questions about derivatives such as loan stocks and warrants.
8) Sharing of knowledge and information among forumers here.
No, this is not a forum about stock tips, but about continuous learning how to fish, with the real examples of stocks from Bursa. I have got enough people who have expressed keen interest already. So this will go on, hopefully. The more the merrier.
2014-04-18 13:12
mr. kcchongnz i really want to salute u for ur dedication and passion towards finance and investment, really hope to have and opportunity to meet up with u if possible to learn more from you about this never ending quest of learning
2014-04-18 22:17
Mr Kcchongz,
About KFIMA, any worries about it giving 52% of its earning to the minority interest?
What is biological expenses in the cash flow? why it has been so high every year
2014-04-18 22:47
Posted by miketyu > Apr 18, 2014 10:47 PM | Report Abuse
Mr Kcchongz,
About KFIMA, any worries about it giving 52% of its earning to the minority interest?
What is biological expenses in the cash flow? why it has been so high every year
Fima corp is a subsidiary company of Kumpulan Fima. In accordance to the rules of accounting, Kfima can "consolidate" Fima's financial statements into its own. This means every items of both these companies are added up and appears in Kfima's FS.
So you can see not all assets and income belongs to Kfima in its FS. At the end, those belong to the "minority interest", ie other shareholders of Fima Corp has to be netted out from Kfima' FS. The amount is not 52%, but 26% for last FY.
So the important thing is if you are a shareholder of Kfima, you should be concern of the assets and profit attributed to the common shareholders of Kfima. No worries about the minority interest.
One of the major business of Kfima is palm oil plantation. All expenses on palm oil trees are biological expenses. Expenses on animals are also biological expenses. It is high because huge amount is required for this major business.
2014-04-19 05:06
Hi KC, have you started your "finance course" yet, I have not received any correspondence yet. Any fee to pay?
2014-04-19 09:10
nokenzo, I won't leave you out from my course. I am still in the planning and design stage.
I intend to make it a comprehensive course with full support. Yes, there will be fees.
2014-04-19 10:51
Dear Mr Kcchongnz,
Please include me in your soon to begin "finance course" thank you.
cctee5959@gmail
2014-04-19 13:57
Hi KC, thanks for remembering me. I am your staunch supporter and believer.
2014-04-19 21:43
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Thanks kcchongnz!
2014-04-10 14:17