Parkson - Return on Retained Earnings

Parkson
Year		DPS		EPS		Retained EPS
2002
2003
2004
2005
2006
2007
2008		14.7		25		10.3
2009		5		25.1		20.1
2010		16		28.8		12.8
2011		15		31.9		16.9
Total		50.7		110.8		60.1
2008-2011
EPS increase (sen)				6.9
DPO				46%
Return on retained earnings				11%
(Figures are in sens)

Genting Bhd - Return on Retained Earnings

Genting Bhd
Year		DPS		EPS		Retained EPS
2002		2.8		20.7		17.9
2003		3		20.3		17.3
2004		3.2		26.3		23.1
2005		3.7		28.3		24.6
2006		4.5		36.1		31.6
2007		26.8		43.1		16.3
2008		5.4		46		40.6
2009		5.3		31.5		26.2
2010		5.6		80.5		74.9
2011		6		63.7	P	57.7
Total		66.3		396.5		330.2
2002-2011
EPS increase (sen)				43.0
DPO				17%
Return on retained earnings				13%
(Figures are in sens)

KPJ - Return on Retained Earnings

KPJ
Year		DPS		EPS		Retained EPS
2002		2.2		2.5		0.3
2003		1.6		4.6		3
2004		1.4		5		3.6
2005		1.6		5.5		3.9
2006		2.5		5.6		3.1
2007		5.5		11.5		6
2008		4		12.4		8.4
2009		5.2		17.6		12.4
2010		4.9		21.2		16.3
2011		11.2		22.5	P	11.3
Total		40.1		108.4		68.3
2002-2011
EPS increase (sen)				20.0
DPO				37%
Return on retained earnings				29%
(Figures are in sens)

APM - Return on Retained Earnings

APM
Year		DPS		EPS		Retained EPS
2002		11.2		35.5		24.3
2003		9.2		24.2		15
2004		7.9		29.1		21.2
2005		12.2		34.8		22.6
2006		9.4		27.5		18.1
2007		10.8		26.7		15.9
2008		11.8		25.4		13.6
2009		11.3		36		24.7
2010		13.5		60.1		46.6
2011		16.5		59.5	P	43
Total		113.8		358.8		245
2002-2011
EPS increase (sen)				24.0
DPO				32%
Return on retained earnings				10%
(Figures are in sens)

United Plantations - Return on Retained Earnings

United Plantations
Year		DPS		EPS		Retained EPS
2002		21.1		37.2		16.1
2003		19.8		45.4		25.6
2004		21.6		57.9		36.3
2005		21.6		63.9		42.3
2006		26.8		72.1		45.3
2007		25.8		86.2		60.4
2008		29.8		151		121.2
2009		37.5		129		91.5
2010		63.8		133		69.2
2011		71.2		182	P	110.8
Total		339		957.7		618.7
2002-2011
EPS increase (sen)				144.8
DPO				35%
Return on retained earnings				23%
(Figures are in sens)

KLK - Return on Retained Earnings

Kuala Lumpur Kepong
Year		DPS		EPS		Retained EPS
2002		7.2		24.5		17.3
2003		9.6		33.7		24.1
2004		13.1		39.7		26.6
2005		15.5		36.1		20.6
2006		21.1		33.7		12.6
2007		26.8		57.7		30.9
2008		40.7		103		62.3
2009		53.8		60.6		6.8
2010		45		85.8		40.8
2011		60		127		67
Total		292.8		601.8		309
2002-2011
EPS increase (sen)				102.5
DPO				49%
Return on retained earnings				33%
(Figures are in sens)

Boustead - Return on Retained Earnings

Boustead
Year		DPS		EPS		Retained EPS
2002		3.2		11.1		7.9
2003		3.7		16.7		13
2004		8		22		14
2005		9.3		14.4		5.1
2006		9.3		7.8		-1.5
2007		10.9		49.1		38.2
2008		18		59.7		41.7
2009		18.2		26.7		8.5
2010		20.8		38.3		17.5
2011		35.9		34.2		-1.7
Total		137.3		280		142.7
2002-2011
EPS increase (sen)				23.1
DPO				49%
Return on retained earnings				16%
(Figures are in sens)

Petronas Gas

Petronas Gas
Year		DPS		EPS		Retained EPS
2003		30		33.2		3.2
2004		18.6		32.4		13.8
2005		30.8		41.6		10.8
2006		35.8		49.1		13.3
2007		38.3		63		24.7
2008		42.5		55.2		12.7
2009		48.7		48.7		0
2010		50		47		-3
2011		50		72		22
Total		344.7		442.2		97.5
2003-2011
EPS increase (sen)				38.8
DPO				78%
Return on retained earnings				40%
(Figures are in sens)

Poh Kong - Return on Retained Earnings

Poh Kong
Year		DPS		EPS		Retained EPS
2004		1		8.5		7.5
2005		1.2		2.9		1.7
2006		1.2		5.3		4.1
2007		1.3		4.5		3.2
2008		1.4		7		5.6
2009		1.4		6.9		5.5
2010		1.4		8		6.6
2011		1.4		10		8.6
Total		10.3		53.1		42.8
2003-2011
EPS increase (sen)				1.5
DPO				19%
Return on retained earnings				4%
(Figures are in sens)

Tongher - Return on Retained Earnings

Tong Herr
Year		DPS		EPS		Retained EPS
2002		5.3		9.8		4.5
2003		5.3		16.2		10.9
2004		14		35.4		21.4
2005		12.1		23.4		11.3
2006		13		43.7		30.7
2007		10.2		51		40.8
2008		13.9		14.4		0.5
2009		5		6.6		1.6
2010		5		14.4		9.4
2011		6		29		23
Total		89.8		243.9		154.1
2002-2011
EPS increase (sen)				19.2
DPO				37%
Return on retained earnings				12%
(All figures are in sens)

TSM Global - Return on Retained Earnings

TSM Global (formerly Juan Kuang)

(Figures are in sens)

Year		DPS		EPS		Retained EPS
2002		0		-1.3		-1.3
2003		0		-12.9		-12.9
2004		0		-4.7		-4.7
2005		0		14.6		14.6
2006		0		11.5		11.5
2007		0		10.9		10.9
2008		2.5		18.6		16.1
2009		2.5		20		17.5
2010		2.5		22.3		19.8
2011		5		24.9		19.9
Total		12.5		103.9		91.4
2002-2011
DPO				12%
EPS increase (sen)				26.2
Return on retained earnings				29%

Warren Buffett's Test for Retained Earnings

WARREN BUFFETT’S TEST FOR RETAINED EARNINGS

The test for Warren Buffett is whether company management can transform each dollar of earnings retained into no less than a dollar of market value. The period he implies that he uses is 5 years (on a rolling basis).

Using the retained earnings profitably is not enough for Warren Buffett. The retained earnings must increase earnings substantially. After all, just leaving the earnings in a savings account will increase earnings without any effort.

Warren Buffett has suggested to investors that they need to predict, after reasoned analysis, what rate of return a company will average over the near future. The rest is simple.

‘You should wish your earnings to be re-invested [by the company] if they can be expected to earn high returns, and you should wish them paid to you if low returns are the likely outcome of re-investment.’

AN ALTERNATE TEST FOR WARREN BUFFETT?

Mary Buffett and David Clark see Warren Buffett’s test from an additional perspective. They take the total value of the profits retained and use them to calculate the rate at which profits have increased by the use of that money.

Take for example, Canon Inc. Using figures available from Value Line, we can calculate that, in the period from 1993 to 2002, 

• Alcoa earned a total of $9.56 per share. It paid a total of $ 1.55 to shareholders by way of dividends. 
• This means it retained profits over that period amounting to $8.01.
• In that period, earnings per share grew from .24 to 1.79. 
• That is, all the profits retained by the company ($8.01 per share) resulted in the earnings per share rising 1.55 (1.79-.24). 
• To show the return percentage, the calculation is

1.55 x 100 = 19.35
          8.01

A return of 19.35% would be acceptable to most investors but, in the end, shareholders would have to consider whether, had they received all the profits by way of dividends, they could have put the money to better use.

It is this ability to use retained earnings of a company to increase earnings at a higher than market rate that attracts successful investors like Warren Buffett.

  

MBMR

MBM Resources Berhad Company

Business Description:
MBM Resources Berhad (MBMR) is an investment holding company. The Company, through its subsidiaries, operates in four segments:

• motor vehicles, which is engaged in marketing and distribution of motor vehicles, spare parts and provision of related services; 
• automotive components, which is engaged in manufacturing of automotive parts and components, interior carpets, steel wheels and discs, and provision of tire assembly services; 
• vehicles body building, which is engaged in manufacturing and fabrication of vehicles body and provision of related services, and 
• others, which include investment holding. 

MBMR's direct subsidiaries are Daihatsu (Malaysia) Sdn Bhd, WSA Capital Corporation Sdn Bhd, Galaxy Waves Sdn Bhd, Summit Vehicles Body Works Sdn Bhd, Oriental Extrusions Sdn Bhd, Summer Gallery Sdn Bhd and Inai Benua Sdn Bhd.

Wright Quality Rating: DAD2 Rating Explanations

Stock Data
Current Price (2/11/2011): 3.19

2009 Sales 1,177,992,000
Employees: 1,528

Market Cap: 773,957,800
Shares Outstanding: 242,620,000
Closely Held Shares: 155,058,852

Recent Financial Results

Announcement Date		Financial Yr. End		Qtr	Period End		Revenue RM '000		Profit/Lost RM'000		EPS		Amended
11-Nov-10		31-Dec-10		3	30-Sep-10		388,704		38,768		14.16		-
17-Aug-10		31-Dec-10		2	30-Jun-10		404,816		43,154		16.02		-
24-May-10		31-Dec-10		1	31-Mar-10		363,835		45,426		16.50		-
11-Feb-10		31-Dec-09		4	31-Dec-09		323,832		25,551		9.31		-

Forecast EPS for next FY = 14.16 x 4 = 56.64 sen
Today's Price (17.2..2011) RM 3.22
Forward PE = 3.22 / 0.5664 = 5.7 x
P/BV = 3.22 / 4.08 = 79%


Historical

5 Yr 
Low PE 5.6
High PE 7.6

10 Yr
Low PE 6.2
High PE 8.9

2005   Revenue   944.82m    Earnings   73.78m    EPS 31.3 sen
2006   Revenue  1132.01m   Earnings   92.09m    EPS 38.6 sen
2007   Revenue 1080.91m    Earnings 110.52m    EPS 45.7 sen
2008   Revenue 1203.04m    Earnings 117.14m    EPS 46.5 sen
2009   Revenue 1177.99m    Earnings   66.53m    EPS 27.5 sen
9M10  Revenue 1157.355m  Earnings 112.787m  EPS 46.66 sen


Balance Sheet

Cash and bank balances 178.559 m
Long term borrowings 14.524m
Short term borrowings 21.598m
Net Cash 142.445m

Current Asset 464.043m  (Cash 178.559m, Acc. Receivables 101.129m, Inventories 178.363m)
Current Liabilities  129.346m
Current Ratio = 464.043 / 129.346 = 3.6 x
Quick Ratio = (178.559 + 101.129) / 129.346 = 2.2 x

Total Assets 1280.493m
Total Equity attributable to owners of the company 989.292m
Net Assets per Share RM 4.08


Cash Flow Statement
Net CFO 1.203m
Capex  -21.179m
FCF  -19.976m


Year  DPS   EPS
2000    8.0   16.2
2001    7.8   37.8
2002  25.9   38.9
2003  15.1   31.9
2004  13.0   19.7
2005  13.0   31.3
2006  13.0   38.6
2007    8.8   45.7
2008  14.1   46.5
2009    6.0   27.5
        124.7  334.1


DPO ratio = 124.7 / 334.1 =  37.3%
Amount of Retained Earnings = 334.1 - 124.7 = 209.4 sen
Earnings Growth = 27.5 - 16.2 = 11.3 sen
Total Return on Retained Earnings (RORE) over 9 years (2000-2009)
= 11.3 / 209.4 = 5.4%

Related:

Return on Retained Capital

A simple mathematical formula measures the capital requirements of maintaining a company's competitive advantage and management's ability to utilize retained earnings to improve shareholders' wealth. In essense this calculation takes theamount of earnings retained by a business for a certain period and measures its effect on the earning capacity of the company.

Updated:  4th quarter results released today.

Recent Financial Results

Announcement Date		Financial Yr. End		Qtr	Period End		Revenue RM '000		Profit/Lost RM'000		EPS		Profit Margin
17-Feb-11		31-Dec-10		4	31-Dec-10		389,879		32,215		11.64		8.26%
11-Nov-10		31-Dec-10		3	30-Sep-10		388,704		38,768		14.16		9.97%
17-Aug-10		31-Dec-10		2	30-Jun-10		404,816		43,154		16.02		10.7%
24-May-10		31-Dec-10		1	31-Mar-10		363,835		45,426		16.50		12.5%

The Mark of a Good Business: High Returns on Capital

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” – Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter


It is useful here to remember Buffett’s reminder that it is not necessarily a cause for celebration if a business grows its earnings year after year. The same thing happens to a savings account if you add more capital each year, which does not make a savings account a good investment. It’s the return on this additional capital that determines whether something is a good investment or not.

To illustrate, let’s look at Johnson & Johnson (JNJ). In 2000, JNJ had shareholders’ equity of $18.8 billion. At the end of 2009, its shareholders’ equity had grown to $50.6 billion. We can calculate that, since 2000, JNJ invested $31.8 billion back into the business.

During that same time, earnings grew $8.1 billion, from $4.8 billion in 2000 to $12.9 billion in 2009.

By dividing the additional earnings of $8.1 billion by the additional $31.8 billion in capital, we can see that JNJ earned a return of 25.5% on its investment, which is very good.

It is also useful to look at what percentage of its total net earnings JNJ reinvested back into the business. The reason is that this is suggestive of how much of its future earnings JNJ is likely to reinvest. By multiplying the rate of reinvestment by the return on that investment, we can then calculate an expected growth rate for earnings.

Since 2000 through 2009, JNJ earned a total net profit of $89.7 billion. Since we already know that JNJ reinvested $31.8 billion over that same time period, we can calculate that JNJ’s rate of reinvestment is 35.5%.

If JNJ can continue to earn 25.5% on equity and reinvest 35.5% of its earnings, earnings should grow at about 9% (.255 x .355).

Keep in mind that this does not include dividends or share repurchases. The latter would cause earnings per share to grow at a faster rate. Also, it does not include an analysis of where JNJ is selling in relation to its intrinsic value which could have a material impact on the expected total return. Finally, this type of analysis works best with a stable business that enjoys durable competitive advantages, such as JNJ.

Another example is Southwest Airlines which is a successful airline that operates in the highly competitive and capital intensive airline industry. Between 2000 and 2009, Southwest’s shareholders’ equity increased by $2 billion. Earnings were $140 million in 2009 compared to $625 million in 2000 and have generally bobbed around over that time period. The return on that additional $2 billion has been relatively poor.

Calculating the return on incremental equity over a long-period of time should prove a useful tool in your analysis of prospective investments. Coupled with the rate of reinvestment, it can also allow you to get an idea of how fast a company can be expected to grow its earnings.

http://gregspeicher.com/?p=1660

The Mark of a Good Business: High Returns on Capital

The Mark of a Good Business: High Returns on Capital
Written by Greg Speicher on October 19, 2010

Categories: Buy Good Businesses, Warren Buffett

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” – Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter

A good business is one that can earn very high returns on capital. Rarely can such a business invest all of its capital back into the business. One way to find companies that can is to look for companies that have grown book value at a high rate on a per share basis.

A business can still be a good investment if it can’t reinvest all of its earnings back into the business. An example is American Express. Prior to the 2008 economic crisis, Amex was earning over 30% on equity but was only reinvesting about a third of its earnings back into the business. The remaining two-thirds were paid out in the form of dividends and share repurchases.

There are numerous ways to measure return on invested capital. None of them is perfect. Any of the various metrics and ratios investors use to analyze a business are abstractions and, as such, typically tend to oversimplify the economic reality of the business. They are short-cuts we use to point us in the right direction so we can spend our precious time researching businesses that offer the most opportunity.

Return on Incremental Equity

I like to look at the total amount of equity that has been added to a business over the past decade and then calculate the return on that additional investment. This approach also allows me to calculate what percentage of the company’s earnings was reinvested, which in turn is useful in forecasting the future growth in earnings.

I typically use Value Line when I do this because the layout is very conducive to this type of analysis. It is one reason why investors like Buffett, Munger and Li Lu like Value Line.

It is useful here to remember Buffett’s reminder that it is not necessarily a cause for celebration if a business grows its earnings year after year. The same thing happens to a savings account if you add more capital each year, which does not make a savings account a good investment. It’s the return on this additional capital that determines whether something is a good investment or not.

To illustrate, let’s look at Johnson & Johnson (JNJ). In 2000, JNJ had shareholders’ equity of $18.8 billion. At the end of 2009, its shareholders’ equity had grown to $50.6 billion. We can calculate that, since 2000, JNJ invested $31.8 billion back into the business.

During that same time, earnings grew $8.1 billion, from $4.8 billion in 2000 to $12.9 billion in 2009.
By dividing the additional earnings of $8.1 billion by the additional $31.8 billion in capital, we can see that JNJ earned a return of 25.5% on its investment, which is very good.

It is also useful to look at what percentage of its total net earnings JNJ reinvested back into the business. The reason is that this is suggestive of how much of its future earnings JNJ is likely to reinvest. By multiplying the rate of reinvestment by the return on that investment, we can then calculate an expected growth rate for earnings.

Since 2000 through 2009, JNJ earned a total net profit of $89.7 billion. Since we already know that JNJ reinvested $31.8 billion over that same time period, we can calculate that JNJ’s rate of reinvestment is 35.5%.

If JNJ can continue to earn 25.5% on equity and reinvest 35.5% of its earnings, earnings should grow at about 9% (.255 x .355).

Keep in mind that this does not include dividends or share repurchases. The latter would cause earnings per share to grow at a faster rate. Also, it does not include an analysis of where JNJ is selling in relation to its intrinsic value which could have a material impact on the expected total return. Finally, this type of analysis works best with a stable business that enjoys durable competitive advantages, such as JNJ.

Another example is Southwest Airlines which is a successful airline that operates in the highly competitive and capital intensive airline industry. Between 2000 and 2009, Southwest’s shareholders’ equity increased by $2 billion. Earnings were $140 million in 2009 compared to $625 million in 2000 and have generally bobbed around over that time period. The return on that additional $2 billion has been relatively poor.

Calculating the return on incremental equity over a long-period of time should prove a useful tool in your analysis of prospective investments. Coupled with the rate of reinvestment, it can also allow you to get an idea of how fast a company can be expected to grow its earnings.


You can also use this approach to invert an expected rate of earnings growth to examine what combination of ROE and rate of reinvestment will be required to produce it.

In succeeding related posts, I’ll look at Buffett’s use of return on average tangible net worth and Greenblatt’s use of return on tangible capital employed to determine whether a business is good.

http://gregspeicher.com/?p=1660

----

The Mark of a Good Business: High Returns on Capital (Part 2)
Written by Greg Speicher on October 26, 2010 -
Categories: Buy Good Businesses, Warren Buffett

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” – Warren Buffett 1992 Berkshire Hathaway Shareholder Letter

Last week, I wrote a post that looked at return on incremental equity. The post explained a way to measure return on incremental equity over a multi-year period. It also considered how, in a stable business with a durable competitive advantage, the return on incremental equity and can be used, in conjunction with the rate of reinvestment, to predict the growth in earnings.

Today, I am writing about another tool used by Buffett to measure the returns on an investment: return on average tangible net worth.

Beginning with the 2003 Berkshire Hathaway letter to shareholders, Buffett began providing a simplified balance sheet of the manufacturing, service and retailing operations segment, a widely diversified group which includes building products, carpet, apparel, furniture, retail, flight training, fractional jet ownership and distribution.

Buffett breaks out the four broad segments of Berkshire – insurance, utilities, finance, and manufacturing, service and retailing operations – because they each have different economics which are harder to understand if considered as one undifferentiated mass. This is obviously useful to remember when analyzing a business with two or more disparate operating segments.

When he reports on the results of the manufacturing, service and retailing operations segment, Buffett focuses on the return earned on average tangible net worth, which for example in 2003, was in Buffett’s words “a hefty” 20.7%.

To calculate tangible net worth, take the equity on the balance sheet and subtract goodwill and other intangible assets. Buffett averages the tangible net worth that is on the books at the beginning and end of the year so as not to upwardly bias the return if the earnings were in part the result of a large injection of capital into the segment during the year.

On average, the segment enjoys very strong returns on average tangible net worth, typically in the low 20’s. This is highly meaningful because it not only shows the excellent economics of these businesses, but also it shows the returns that can be expected from additional capital that is invested into these businesses.

Here is the simplified balance sheet for the years since Buffett began providing it along with the calculations.
Here are some additional observations.

Buffett also provides the returns on Berkshire’s average carrying value. This is the same calculation as return on average tangible net worth without subtracting goodwill. Berkshire had to pay a substantial premium over book value to purchase these businesses given their excellent economics. Over the long-term, the return on incremental equity will be the major determinant of Berkshire’s returns on these investments as the retained earnings become an ever larger portion on the capital employed. As an investor, you want to pay close attention to both the premium you pay to buy a great business and the returns on incremental capital.

Omitting goodwill and intangible assets from the equation is appropriate because Berkshire will not need to pay a premium on incremental capital employed in the existing businesses. Berkshire does, however, need to pay a premium going forward to acquire businesses to add to this segment. This is evident from the goodwill and intangible assets line item which has grown from $8.4 billion in 2003 to $16.5 billion in 2009. Overall, to put that in context, Buffett invested an additional $15 billion in that segment over the same time period.
In analyzing an investment, you want to consider whether future growth will come from acquisitions, in which case you can expect additional goodwill, or organic investment, in which case the returns on tangible net worth would be a more appropriate metric.


Unfortunately, from the standpoint of providing opportunities for Berkshire to deploy capital going forward, some of Berkshire best businesses, which are found in this segment, are both small in scale as compared to Berkshire as a whole and require very little incremental capital.

Finally, it is fairly clear that this segment’s earning power has been materially impacted by the recession. If it is able to return to pre-recession levels, this group should earn net income of approximately $3 billion.

http://gregspeicher.com/?p=1708

Performance at a Glance: Petronas Dagangan

Performance at a Glance:  Petronas Dagangan
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdFpXVkdlVVlEWVc3dVg0aWJ6bExnNVE&authkey=CJmRvZsI&hl=en&output=html

RORC provides a fast method of determining durable-competitive-advantage business

Return on Retained Capital, RORC is not perfect.

Be careful that the per share earnings figures you employ for this test are not aberrations, but rather are indicative of the company's earning power.

The advantage to this test is that it gives you, the investor, a fast method of determining

• whether it is a durable-competitive-advantage business that lets its management utilize retained earnings to increase shareholders' riches or
• whether it's a price-competitive business that is stuck allocating its retained earnings to maintain its current business.

Remember, this is just one of nine screens that you have at your disposal, so if you find yourself in a gray area, make certain to use the other screens to help you make a clear judgment.

Summary

Durable-competitive-advantage companies wield a one-two punch when it comes to allocating resources. They can better take advantage of retained earnings than price-competitive businesses, which over the long term will make their shareholders a lot richer than those who own stock in price-competitive businesses.

Price-competitive businesses are able to retain earnings, but because of the high costs of maintaining their businesses, they are unable to utilize them in a manner that will cause a significant increase in future earnings. This means that their stock prices end up doing little or nothing.


Also Read:
Return on Retained Capital
Return on Retained Capital Illustrated by Various Companies
Companies that can't profitably deploy retained earnings make lousy investments
RORC provides a fast method of determining durable-competitive-advantage business