Johannesburg — IN ASSESSING a company's potential, one of my starting points is to look at its return on assets. What, after all, is the point of investing in assets that underperform? I'm using the return on assets managed model to see how well Sasol has been using its assets.

At the end of its financial year to June 30, its assets amounted to R119,07bn. On these assets it generated revenue of R98,12 bn. Its ratio of assets to turnover was 0,82.

Its earnings before interest and tax were R25,6bn. Its return on sales -- the percentage of profit before interest and tax on sales -- was 26,1%. Its return on assets -- the product of ratio of assets to turnover and the return of sales -- was 21,4%.

This was an excellent return, especially as many of its investments were not performing during the year. At the year-end several big capital projects were nearing completion. Cash spent during the year on capital projects was R12bn, of which R6,5bn was in SA.

It is even more noteworthy that the balance sheet value of property, plant and equipment was R50,5bn compared with R39bn a year previously. This figure represents the assets that were already available for a profit return.

The separate item of assets under construction was the value of assets which were not yet providing a return. The balance sheet value of these was R24,61bn, compared with R23,18bn previously.

The changes in these items between the financial year-ends allow us to conclude that about R10bn of assets under construction became operating assets during the year. They also tell us that the speed of investing in new capital equipment has increased. Even while profit-generating capital grew nearly R11bn, assets under construction rose more than R1,5bn.

We can also conclude that as assets become operative, Sasol's return on assets will improve -- provided, as always, we're confident that management won't invest in a new asset if it doesn't believe it won't meet its return criterion.

The return on assets managed model also allows the calculation of the return on equity before interest and tax. The return on equity is the product of the ratio of assets to equity and the return on assets.

At the 2007 financial year-end, Sasol's ratio of assets to equity was 1,93. The product of this ratio to the return of assets shows that Sasol's return on equity (before interest and tax) was 41%.

Sasol's own figure for 2007 for return on assets is 24,2%, higher than mine, no doubt because of timing differences. It reports the return on equity at 29,8%, and this is because this is an after-tax return. The tax rate, according to its income account, was 31,7%.

The key thing in these fundamentals is the massive earnings potential in Sasol's assets. I plan to write more about Sasol tomorrow.