Southern Cable Group Dupont ROE Analysis (2020 - 2024)

The DuPont analysis is an excellent way to break down the drivers of Return on Equity (ROE). We will use the 3-step DuPont model:

Formula: ROE = (Net Profit Margin) × (Asset Turnover) × (Equity Multiplier)

Where:

• Net Profit Margin (NPM) = Net Income / Revenue

• Asset Turnover (AT) = Revenue / Average Total Assets

• Equity Multiplier (EM) = Average Total Assets / Average Shareholders' Equity

Using the data you've provided, here is the DuPont analysis for SCG from 2020 to 2024.

Interpretation and Key Takeaways

The DuPont analysis reveals the fascinating story of SCG's transformation, showing how the ROE changed so dramatically.

1. The Struggling Years (2020-2022):

• Low ROE was primarily due to very weak Net Profit Margins (2.15%-5.33%). The company was not very profitable on each ringgit of sales.

• Asset Turnover was decent and improving, showing they were efficient at generating sales from their assets.

• The Equity Multiplier was rising, meaning they were starting to use more debt (leverage).

2. The Breakout Year (2023):

• This was the "perfect storm" for high ROE, driven by improvements in all three components:

  • Massive Margin Expansion: NPM more than tripled to 6.72%. This was the single biggest driver, reflecting the shift to higher-margin products (e.g., for data centers).

  • High Efficiency: Asset Turnover peaked at 1.39, indicating peak utilization of their asset base to generate revenue.

  • High Leverage: The Equity Multiplier jumped to 3.49, meaning assets were 3.49x equity, signaling a heavy reliance on debt financing.

3. The Mature Growth Year (2024):

• The story in 2024 is different. ROE remained very high, but the drivers shifted:

  • Margin Compression: NPM decreased from 6.72% to 5.70%. This could be due to increased competition, higher raw material costs, or a different sales mix.

  • Lower Efficiency: Asset Turnover fell significantly to 1.09. This is a direct result of the massive capital expenditure (CAPEX) in 2024. New assets were added to the balance sheet but had not yet contributed fully to revenue generation for the full year.

  • Sky-High Leverage: The Equity Multiplier soared to 4.73. To compensate for lower margins and efficiency, SCG took on even more debt to maintain its high ROE.

Overall Conclusion

The DuPont analysis uncovers a crucial evolution in SCG's strategy:

• From 2020-2022: The company was an inefficient, low-margin business.

• In 2023: It became a highly efficient, high-margin, leveraged powerhouse.

• In 2024: It has transitioned further into a capital-intensive, highly leveraged enterprise. The high ROE is now being sustained primarily by financial leverage rather than superior operational performance (margins and efficiency).

This is a critical insight for an investor. While the ROE remains high, the quality of that ROE has changed. The company is now more dependent on debt, and the decline in Asset Turnover must be watched closely to ensure the new investments start generating their expected returns.

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Of course. This is a crucial distinction in financial analysis—the difference between a high ROE driven by operational excellence versus one driven by financial engineering. Let's break this down for clarity and education.

The Two Types of High ROE: A Tale of Two Companies

Imagine two companies, both with a 25% ROE.

• Company A (The Operator): Achieves this with a strong profit margin and efficient use of assets. It has little debt.

• Company B (The Leverager): Achieves this with mediocre margins and low asset efficiency, but uses a massive amount of debt.

While the ROE is identical, Company A is fundamentally healthier and less risky than Company B. SCG's journey from 2023 to 2024 is a real-world example of shifting from "Operator" tendencies towards "Leverager" characteristics.

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Breaking Down SCG's ROE Shift (2023 vs. 2024)

Let's visualize what changed. The area of each circle represents the ROE.

This chart clearly shows the dramatic transition. In 2023, SCG's ROE was powered by strong operational performance (high profit margins and asset efficiency). By 2024, the driver had decisively shifted to financial leverage.

Deconstructing the Drivers in Detail

Here’s a deeper look at what each DuPont component reveals:

1. Net Profit Margin (The "Quality" of Sales)

• What it is: How much profit a company keeps from each ringgit of revenue.

• SCG's Story: The margin peaked in 2023 (6.72%) but dipped in 2024 (5.70%). This could be due to:

  • Increased competition eroding pricing power.

  • Rising input costs (copper, energy) that couldn't be fully passed to customers.

  • Product mix shift, possibly to slightly lower-margin contracts to secure volume.

• Investor Implication: Stagnant or declining margins suggest a company's competitive moat (pricing power) may be under pressure.

2. Asset Turnover (The "Efficiency" of Assets)

• What it is: How many ringgit in sales a company generates for each ringgit of assets it owns. A higher number is better.

• SCG's Story: This is the most telling metric. It collapsed from 1.39 to 1.09. This is a direct result of the RM49.2 million in Capex in 2024.

  • The company built new factories, bought new machinery, and expanded its capacity.

  • These new assets are now on the balance sheet but are not yet fully utilized, meaning they are dragging down efficiency until they produce at full capacity.

• Investor Implication: A sharp drop in asset turnover is a yellow flag. It asks the critical question: "Will these new assets actually generate the expected sales in the future?" If sales don't materialize, the company is left with expensive, idle assets and the debt used to pay for them.

3. Equity Multiplier (The "Leverage" or "Risk")

• What it is: A measure of financial leverage. It shows how much of the assets are funded by debt vs. equity. A higher multiplier means more debt.

• SCG's Story: The multiplier skyrocketed to 4.73. This means for every RM1 of shareholder equity, SCG has RM4.73 in assets, with the difference funded by debt.

• Investor Implication: This is a double-edged sword.

  • The Upside (Gearing): Debt amplifies returns. When profits are high, shareholders get a larger return on their equity because they used less of their own money.

  • The Downside (Risk): Debt is a fixed cost. Interest must be paid regardless of profitability. In an economic downturn or if the data center boom slows, high debt can lead to financial distress or even bankruptcy. It makes the company riskier.

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Synthesizing the Story for an Investor

The Bull Case (Why this is okay):
A SCG bull would argue this is the natural cycle for a capital-intensive business seizing a golden opportunity. You have to invest ahead of demand. The drop in asset turnover is temporary. The massive Capex and working capital buildup are for fulfilling a huge, multi-year data center order book. Once these new assets ramp up and the projects are completed, sales will catch up, asset turnover will recover, and the company will be a larger, more profitable leader in its field. The leverage was a necessary tool to fund this once-in-a-lifetime growth spurt.

The Bear Case (Why this is risky):
A skeptic would argue that the quality of earnings has deteriorated. The company is becoming reliant on debt to prop up its ROE. The decline in margins and efficiency are early warning signs that the hyper-growth phase is maturing and competition is intensifying. If the data center cycle peaks sooner than expected, SCG could be left with overcapacity, high interest payments, and a painful process of de-leveraging, which would crush the stock price.

Your Job as an Investor

Your task is to monitor which narrative plays out. The key metrics to watch are:

1. Revenue Growth: Does it accelerate to "fill" the new capacity and improve Asset Turnover?

2. Net Profit Margin: Does it stabilize or re-expand, confirming the company's pricing power and cost control?

3. Operating Cash Flow: Does it finally turn consistently positive, proving that the accounting profits are translating into real cash?

In conclusion, the high ROE is still a positive sign, but its foundation has become riskier. SCG has made a big bet on the future by taking on debt and building capacity. The story is no longer about the discovery of this opportunity (the 2023 story), but about the execution and delivery on that promise (the 2024-2025 story). The stock's future performance hinges entirely on whether that execution is successful.

Understanding how a company makes its profits. How a company generates its ROCE?

DuPont analysis

Return on Capital Employed or ROCE
= EBIT / Capital Employed
= (EBIT/Sales) x (Sales/Capital Employed)


ROCE is determined by two elements:

1.  What is happening with profit margins.
2.  Sales generated per $1 of money invested (capital turnover)


1.  Profit Margins

Profit margins are determined by many different factors.

The key influences on profit margins are:

Prices

• Higher prices can boost margins.

Costs

• Particularly important is the split between fixed costs (cost that have to be paid regardless of the level of sales, such as rent and most wages) and variable costs (costs which vary with sales, such as raw materials).  
• Companies with a high proportion of fixed costs can see their margins change rapidly in response to small changes in turnover via a process known as operational gearing.

Mix of products

• Some sales are more profitable than others.
• A car dealer will make little profit on selling a new car but will make lots of profit on selling services and spare parts.
• A company can sell more sophisticated products at a higher price for its most profitable sales.

Volume sold

• Selling more products can boost margins where the company has a high proportion of fixed costs (i.e high operational gearing).
• This process can also work in reverse and is clearly seen in manufacturing companies.
• For example, an industrial plant will have costs related to buildings and machinery, energy, raw materials and wages.  
• Most of these costs are fixed and the company needs to sell a large amount of goods to cover them and break even.
• Once past break even, the fixed costs are spread over a larger amount of sales, which allows profits to increase rapidly.
• However, a sharp fall in sales pushes the company back towards break even and possibly into a loss if income cannot cover all the fixed costs.

By analysing these factors allows us to understand the business behind the profit margin numbers.

Profit margins which fluctuate over a period of time are a tell-tale indicator of a cyclical business (where sales move up and down in line with the general economy) and possibly one with high operational gearing.

• These businesses are more risky and their shares do not make suitable LONG TERM investments.
• Stable profit margins are a desirable characteristic of a business for long term investments.

Please spend time reading a company's annual report to see if it has anything to say about profit margins.

• Pay particular attention to any mention of changes in prices, sales mix and volume changes.
• High-quality companies grow by selling more (volume) and not just by charging more.
• A company which increases prices but does not increase sales is showing that its customers are responding to the price rise by buying less from them.
• This maybe a sign of trouble ahead and may lead to stagnating or lower profits in the future.

2.  Capital turnover

Capital turnover looks at how effectively a company is spending its money to produce sales.

A company can increase capital turnover by adopting some of these measures:


Boosting sales

• For example, increasing sales with new products.

Reducing money invested.

• Cutting working capital by holding less stock of finished goods, getting customers to pay their bills faster and paying suppliers later.
• Cutting the amount of money invested in new assets (capital expenditure, or capex), reducing spending on new assets or increasing efficiency by getting more sales for less investment.
• Getting rid of under-performing assets that have low capital turnover and low ROCE.

Additional notes:

How do you work out the capital employed or the amount of money a company has invested?

Capital employed 
= Total Asset - non-interest bearing Current Liabilities

Using the Asset side of the Balance Sheet:

#Capital employed 
= Total asset - Current Liabilities + Short-term borrowings


Using the Liability side of the Balance Sheet:

*Capital employed 
= Total Equity + Long-term Liabilities + Short-term borrowings
= Total Equity + other Long-term Liabilities + Long-term borrowings + Short-term borrowings
= Total Equity + other Long-term Liabilities + Total borrowings



How do you work out the ROCE?

ROCE = return on capital employed

Numerator equals earnings produced for all capital providers = normalised EBIT

Denominator includes debt and equity contributed to the business. This is also the money invested into the business.

ROCE is usually calculated using a company's average capital employed over a period of two years. 

ROCE = ( EBIT / average Capital Employed)   x 100%




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The mathematical equations:

Total Asset = Total Liabilities + Total Equity

FA + CA = CL + NCL + Eq

(FA + CA - CL) = (NCL + Eq)

(FA + CA - CL) + STBorrowings = (NCL + Eq) + STBorrowings

(FA + CA - CL) + STBorrowings = (LTBorrowings + Other LTLiabilities + Eq) + STBorrowings

(FA + CA - CL) + STBorrowings = (LTBorrowings + STBorrowings + Other LTLiabilities + Eq)

#Total assets - CL + STBorrowings = Total Borrowings + Other LTLiabilities + Equity

or

*FA + NWC + STBorrowings = Total Borrowings + Other LTLiabilities + Equity



#Capital employed = Fixed asset + Current Asset - Current Liabilities + Short-term borrowings

*Capital employed = Fixed asset + Net Working Capital + Short-term borrowings

How to find Quality Companies? (Checklist)

Here is a useful checklist you can use when you are searching for quality companies:

1.   Company's sales record.

• You want to see high and growing sales, year after year.
• A ten-year period of increasing sales and profits is a good sign.

2.  Company's profits.

• You want to see high and growing profits, as measured by normalised EBIT, year after year.
• A ten-year period of increasing sales and profits is a good sign.

3. EBIT and normalised EBIT 

• Check that these are roughly the same in most of the last ten years.

4.  EBIT margin.  

• The EBIT margin must be of at least 10% almost every year for the last ten years.

5,  ROCE

• The company must have a ROCE that is consistently above 15% over the last ten years.
• ROCE = (EBIT / average capital employed ) x 100%

6.  DuPont analysis

• Carry out a DuPont analysis to find out what is driving a company's ROCE.
• ROCE = EBIT/Capital Employed = (EBIT/Sales) x (Sales/Capital Employed)
• ROCE = {Profit margin x Capital turnover)

7.  Annual report

• Read a company's annual report to provide context for the numbers.

8.  FCFF and FCF

• Look for a growing free cash flow to the firm (FCFF) and free cash flow for shareholders (FCF), over a period of ten years.
• FCFF and FCF should also be roughly the same in most years.
• That is, little debt.

9.  Operating cash conversion ratio 

• Look for companies that turn all of their operating profits (EBIT) into operating cash flow, as represented by an operating cash conversion ratio of 100% or higher.
• Operating cash conversion ratio = (operating cash flow / operating profit) x 100%
• That is, high quality earnings

10.  Capex ratio

• Look for capex ratio less than 30% almost every year over the last ten years.
• That is, low capex requirements.
• Capex ratio = Capex / Operating Cash Fow

11.  Compare Capex to its depreciation and amortisation expenses.

• If the company is spending more on capex than its depreciation and amortisation expenses, it is a sign that it is spending enough but you need to be sure it isn't spending too much.

12.  FCFF/Capital Employed or CROCI

• Check for free cash flow to firm return on capital invested that is higher than 10% almost every year over the last ten years.
• This is also known as cash-flow return on capital invested (CROCI)
• CROCI = adjusted free cash flow tot he firm (FCFF)/average capitl employed

13.  Compare FCFps to EPS

• Look for free cash flow per share to be close to earnings per share in most of the last ten years.
• That is, high quality earnings.

14.  Free cash flow dividend cover

• Free cash flow per share should be a larger number than dividend per share in most years.
• That is, the free cash flow dividend cover should be greater than 1.
• Free cash flow dividend cover = FCFps / DPS
• Occasional years when this is not the case are fine.

15.  Consistent Growth

• Prefer more consistent growth in turnover and profit to more volatile growth.

Comments:


Don't worry if you cannot find a company that meets ALL of the criteria above.

There are some exceptional companies that do.

Typically you will not find hundreds of them.

Companies can improve and the ones that might not have been good ten years ago can be good companies now.

If you can find companies that have a high and improving ROCE and have been good at converting profits into free cash flow over the last five years, you should consider them as well.

The Risks of Debt-Driven Returns on Equity

The three levers of ROE are:
- net profit margin  (achieve through operational efficiency)
- asset turnover (achieve through operational efficiency)
- financial leverage (achieve through employing high debt)

But does it matter if a company's high ROE comes from high debt and not operating efficiency?

If a company has a steady or steadily growing business, it might not matter that much.

For example, companies in the consumer-staples sector, where demand is stable, can handle fairly large debt loads with little problem.  And the judicious use of debt by such companies can be a boon to shareholders, boosting profitability without unduly increasing risk.

If a company's business is cyclical or volatile in some other way, though, watch out.

The problem is that debt comes with fixed costs in the form of interest payments.  The company has to make those interest payments every year, whether business is good or bad.

When a company increases debt, it increases its fixed costs as a percentage of total costs.

In years when business is good, a company with high fixed costs as a percentage of total costs can make for a great profitability because once those costs are covered, any additional sales the company makes fall straight to the bottom line.

When business is bad, however, the fixed costs of debt push earnings even lower.  

That is why debt is sometimes referred to as leverage:  It levers earnings, making strong earnings stronger and weak earnings weaker.

When companies in cyclical or volatile businesses have a lot of leverage, their earnings therefore become even more volatile.  

So the next time you're thinking about profitability, make the distinction between the kind that is internally generated (through operational efficiencies) and the kind that is inflated by debt (through leverage).

You can make a lot of money of stocks of companies structured like the latter, but your return is more assured with stocks of companies like the former.

Financial Leverage - Lever of ROE

The three levers of ROE are net margin, asset turnover and financial leverage.

The third lever of ROE, financial leverage, is a measure of how much debt the company carries.

The way in which raising financial leverage increases ROE is a little less intuitive.

If a company adds debt, its assets increase (because of the cash inflows from the debt issuance) and so does its total debt.

Equity = Assets - Total Liabilities
Assets = Equity + Total Liabilities

Since equity is equal to assets minus total debt, a company can decrease its equity as a percentage of its assets by increasing its debt.

ROE
= Net Profit/Revenue  x  Revenue/ Asset   x   Asset/Equity
=  ROA  x  Asset/Equity

In other words, assets - the numerator of the financial leverage figure - increases, so the overall financial leverage number rises, boosting ROE.

Levers of ROE

Return on equity, or ROE, is the most common measure of a company's profitability.

But ROE is itself the product of 3 ratios, or levers:

• net margin (earnings/revenues, expressed as a percentage),
• asset turnover (revenues/assets), and,
• financial leverage (assets/equity).

ROE 

= Net Profit Margin x Asset Turnover X Financial Leverage

= Net Profit/Revenue  x  Revenue/Total Asset  x   Total Asset/Equity

= Net Profit/Equity

Multiplying the three levers together gives us ROE, and raising any one of these three levers will increase ROE.

Return on Equity

http://amgstr.blogspot.com/

Return on Equity (RoE) = Net Income (NI) / Equity

or
Return on Equity = Return on Assets (RoA) x Financial Leverage (FLA)
and
RoA = NI / Assets
and FLA = Assets / Equity

At each stage, the formula can be further decomposed. For instance, Return on Assets can be decomposed to:

RoA = Net profit margin (NPM) x Total Asset Turnover

This formula captures the essence of operational efficiency in terms most lay people can understand. How [efficiently] are we selling (Total Asset Turnover - TAT) [with respect to the assets we use to produce our product - directly related to revenue and number of products sold at a constant price]?

The DuPont model goes on to further decompose NPM as gross product margin, tax burden and effect of 'non-operating items' etc, but even at this stage, this formula gives a good basis for common size comparison with other companies in the industry.

Let's look at each component and see if we can describe them in layman's terms:

• Return on Equity - How much income are we making relative to the equity we put in?
• Financial leverage - How much debt have we applied relative to our equity?
• Return on Assets - How much income are we making relative to all the capital we put it (including debt)?
• Total Asset Turnover - How [efficiently are we using our assets]?
• Net Profit Margin - For each unit of good or service we sell, after the costs, how much do we keep?
• Gross Profit Margin - Before we do accounting and pay tax, how much of each good or service do we keep for each sale?
• Tax burden - After accounting practices, what is the effect of our current tax rate?
• Non-operating items - Can we use depreciation and amortization to affect our tax burden?

It can quickly tell you the status of the leverage, operational efficiency and sales to identify if there are problems from a high level to determine if certain areas warrant a deeper investigation. No calculus required.

ROE - Key Performance Indicator for Company Management

Introduction of ROE

Return on Equity (ROE) is a term important in shares/equity investment. The simple formula for ROE is Net Profit / Shareholdings. In short, it is measured by how strong is the top management to produce profit based on current shareholdings. In DuPont formula, it is calculated as Net Profit Margin * Asset Turnover * Equity Multiplier. I will explain to you the components one by one:


Simple DuPont Formula Explanation  

1. Net Profit Margin (Net Profit / Revenue) - This is one of the very key indicators to measure company performance. A good company with 'Monopoly' status always have a better profit margin as compared to the peer companies. It can be achieved by Economy of Scales or through operation efficiencies. When you notice that the company's profit margin is increasing, perhaps you can check whether it is due to a new product launched or operation efficiencies or due to cost control improvement etc. 
2. Asset Turnover (Revenue / Asset) - It is an indicator to show whether the company is capable to have a better turnover by selling more products with limited asset available. A low non-current asset based company can perform better than a high non-current asset based company due to its bargaining power against customer.
3. Equity Multiplier (Asset / Equity) - Sometimes a good ROE can be due to high equity multiplier. It means that the company has bigger borrowing from bank/payable/bond holders to achieve higher asset. In finance industry, the leverage can be as high as 10 times and above. You must compare the equity multiplier with its peer companies. Normally if company can achieve optimal capital structure, the WACC can be the lowest. Thus, investor can achieve higher returns.

Things to take note



It does not necessary mean that you can achieve a good returns by investing in high ROE company. However, if you can find out a company is having higher and consistent ROE as compared to
its peer company in same sector, it means that this company's management is better to produce better returns as compared to rest. You must also take into considerations the other figures such as Price per Earning ratio, Dividend yield etc.

Conclusion


By comparing ROE with peer companies, you also must take note that whether the company manipulate its annual report.  It is also good that you can do a relative comparison on P/E ratio and Dividend Yield while making investment decisions.  With a good and consistent ROE, the longer you hold the investment the better the profit you can forsee in the long run.


http://www.jackphanginvestment.com/2011/04/roe-key-performance-indicator-for.html

Dupont Return on Equity Model (Graphic)

ROE Components and Strategic Profit Formula ("DuPont formula")

ROE Components and the Strategic Profit Formula ("DuPont formula")

Some years back, the finance department at DuPont originated the "strategic profit formula." In some circles, this is called the "DuPont formula."

Return on equity = [profits/sales] x [sales/assets] x [assets/equity]

It is easy to see the links in this chain: profitability, productivity and capital structure.

These strategic business fundamentals that directly influence ROE are controlled or influenced by management. Management can influence or control these business fundamentals to maintain or increase ROE. Good managers work on each one.

When all three are strong and tight, ROE outcome is destined for success. If there is a "weakest link" (a business fundamental that is poor, failing, or declining), it can weaken the entire chain and hamper ROE indefinitely.

For each of these business fundamentals in the formula, we observe its value,

• in what direction it's going (trend) and
• how it compares to others in the industry.