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.
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.
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:
Revenue Growth: Does it accelerate to "fill" the new capacity and improve Asset Turnover?
Net Profit Margin: Does it stabilize or re-expand, confirming the company's pricing power and cost control?
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.
