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What Do ARA’s Numbers Say?
Corporate Digest | 09 October 2014
By: Shane Goh
Articles (99) Profile

In our past two articles, we’ve discussed ARA Asset Management’s business and management aspects. Personally, I am pleased with the qualitative information I’ve uncovered thus far, but do the numbers back the story?

We will look into key consideration for all three financial statements and certain methods of measurements which are unique to ARA.

Strong Revenue Growth; Resilient Margins

Over the past 10 fiscal years, ARA has grown its turnover almost 25-fold from $5.7 million in FY04 to $140.4 million in FY13. During this period, net profit registered an exponential growth from $0.8 million in FY04 to $74.3 million in FY13.

Operating income margin has ranged from 61.6 percent to 65.7 percent in the previous five years while net margin has declined from a high of 56.7 percent in FY10 to 52.9 percent. Despite the fall, ARA still boasts one of the highest net profit margins among stocks on the Singapore Exchange.

I view these figures favourably as it shows an uptrend in top line while margins have remained fairly consistent.

Source: Company

Negative Net-Debt Position

Moving onto its balance sheet, the first thing most investors would look for is the cash figure. Taking a step further, we should calculate its net debt position.

This means, if the company were to use its cash to pay off its debt, would it have end up with surplus cash, or remain indebted?

ARA has produced five consecutive years of being in a negative net debt position. This is a strong position to be in as the company would not fear a quicker-than-expected recall of its outstanding loans as it has adequate cash to meet its debt obligations.

Yearly Cash Generator

Other than holding onto sufficient cash, a company should continue to build its reserves. However, we must not confuse the income statement and cash flow statement.

The net income item shown at the bottom of the income statement shows how much the company has earned. But this figure is affected by fair value gains and sale of assets. The former is merely paper gain while the latter is not part of the company’s ordinary business, thus, not likely to occur regularly.

On the other hand, the cash item we see on the balance sheet is obtained after subtracting any capital expenditures, dividend payments and debt drawdown. These activities are seen in the cash flow statement. You will notice that the ending cash and cash equivalent number shown at the bottom of the cash flow statement is identical to its counterpart in the balance sheet.

In the past five years, ARA has generated positive cash flow from its operating activities. This is important for investors as we like to know that the company is able to build cash through its business, and not through non-core activities (such as fair value gains or sale of assets).

AUM: Uniquely ARA

Other than a ballooning top line figure, ARA has diversified its revenue sources from purely management fees to include acquisition, divestment and performance fees as well as finance and other income.

Nonetheless, management fees remain the largest contributor to the firm’s top line. This is supported by a surge in assets under management (AUM) to $26.8 billion as of 30 June.

This is the key figure for asset managers such as ARA. The larger their asset base, the higher their potential management fees, both in base and performance fees terms.

SI Research Takeaway

With a growing top line, relatively stable margins and strong financial position, ARA meets the criteria of investors looking for a stable company that is able to consistently generate cash through its core business.

One word of caution would be ARA’s falling net margin. We should pay attention to the firm’s future financial results to evaluate if the decline persists.

In our final piece, we will explore ARA’s valuations. No matter how good a business is, if you overpay for it, it may not turn out to be a positive investment.

Disclaimer: The author owns a stake in ARA.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.


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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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