DuPont Serial Analysis of Croatian Companies – FY 2023 [Final]

This week, we presented you with a detailed series – decomposition of Return on Equity (ROE) of selected Croatian companies, using 5-Step DuPont Analysis. DuPont analysis breaks down the underlying components of the ROE in order to analyze the contribution of each component. ROE is a measure of the profitability of a company in relation to equity. Today, we put things into perspective and compare the whole picture given by DuPont decomposition.

The difference compared to industry mean – ROE (p.p.)

We can notice all of the selected Croatian blue chips reported deviation in return on equity from industry mean. Looking further ahead at all DuPont components, we will analyze the contribution of each component on return on equity. This way we will see the reasons for deviations in ROE more clearly, instead of just reporting the deviations in ROE are present.

The difference compared to industry mean – Operating Margin (p.p.)

We can notice that Podravka from selected Croatian blue chips in FY 2023 reported a higher operating margin compared to its peer group. To put things into perspective, Podravka also reported a higher ROE than its peers, as a direct result of a higher operating margin. On the other hand, Končar reported ROE lower than its peers, due to a lower operating margin when compared to its peers. However, other fields of business activity partially offset the mentioned op. margin – overall still resulting in a lower return on equity for Končar Group.

The difference compared to industry mean – Assets Turnover

Asset turnover compares a company’s assets to its sales. This ratio helps us to determine how efficiently a company uses its assets to generate revenue. This ratio is crucial as every company has to utilize its assets. The higher the ratio is, the more efficiently the company uses its assets to generate revenues.

As can be seen from the graph above, just as economic theory would indicate, the asset turnover of Croatian blue chips closely follows their industry mean. Asset turnover is closely tied to the nature of a company’s assets. It should not come as a surprise that Atlantic Group and Podravka have the highest asset turnover, due to the nature of their sales and business. Also, conversely looking, on the other end, we have Valamar Riviera whose fixed assets amount to 88.1% of the company’s total assets. Asset-heavy hospitality companies hold a high amount of fixed assets so this also should not come as a surprise that Valamar’s assets amount to EUR 826.2m. Nevertheless, Valamar’s higher asset turnover from its peers indicates that Valamar Riviera operates its assets more efficiently than its peers.

Končar reports interesting decomposed numbers, which DuPont decomposition lets us see clearly. In the graph above, we can clearly see that Končar has an assets turnover higher than its peers, indicating a more efficient use of assets. Yet again, we looked at the return on equity of Končar and it was by 8.3 p.p. lower than its peers. The answer lies in another mentioned DuPont variable – financial leverage. How can Končar have a lower ROE than its peers if the company uses its assets more efficiently? The combination of lower operating margin and lower financial leverage do not let the company amplify its results as much as its competitors do.

The difference compared to industry mean – Financial Leverage

Financial leverage divides a company’s total assets with the company’s equity, giving us information on how leveraged the company is with debt. Financial leverage can be useful as it emphasizes the financial stability of a company. Financial leverage equal to 1 would indicate the company has no debt – that company financed its total assets with equity.

We can clearly see the trend of lower financial leverage of Croatian blue-chips, when compared with its regional comparable peer group. Only Atlantic has more or less the same financial structure in equity and liabilities, as their peer group. The highest deviation from its peer group is reported for Končar and HT. Končar has financial leverage of “only” 1.9x, compared to its median peer of 3x, while HT has financial leverage of 1.2x – vs. it’s peer comparables that have much higher leverage to boost their operations, with median financial leverage amounting to 2.1x. This difference can be attributed to the large cash position of HT. The roots of this correlation between HT’s cash position and lower leverage lies within industry norms and structure. This industry is highly capital intensive, meaning a lot of CAPEX is necessary in order to operate within the industry. Consequentially, if a company does not have a large equity position, it has to finance – via debt. In this case, debt enables a company to even operate and grow further. As HT has mentioned a large cash position, it doesn’t have to finance via debt, thus having much lower financial leverage.

The difference compared to industry mean – Interest burden

Interest burden tells us the extent to which the net financial result of the company together with profit from associates (20-50% shareholding) and investments (<20% share) impacts its profit. If a company pays more interest on its debt than what it receives as interest from its loans or profits from its investments into associates or joint ventures, this ratio will fall below 1, meaning that net financial & investment result have impacted its profit negatively. It is calculated as EBT divided by EBIT.

As can see from the graph above, the interest burden of all Croatian blue chips closely follow the industry mean, which should not come as a surprise. This is just a result of a similar capital structure within the same industry. Within the valuation context, this leads to a similar weighted average cost of capital (WACC), due to more similar capital and debt weights. Also, the reported situation can be partly explained due to companies operating in the same region and generating sales from a similar region. This leads to similar FX gains/losses, which are also affected by the company’s risk management and hedging strategy.

Nevertheless, Končar reported an interest burden of 1.12x as its EBT (EUR 88.8m) was higher than EBIT (EUR 79.3). The reported interest burden higher of 1, by itself, indicates a positive net financial & investment result. Končar reported just a slightly negative net financial result of EUR 385k. However, Končar has a joint venture with Siemens, Končar-Power Transformers Ltd. (Končar – Energetski transformatori d.o.o., Zagreb) where it has a shareholding of 49%. This company was very profitable in this FY and Končar’s share of profit has amounted to EUR 9m. Each other taken blue chip has an interest burden amounting to <1.

The difference compared to industry mean – Tax burden

Tax burden gives us a proportion of profits retained after tax. This indicates how much impact does tax have on company’s bottom line. It is calculated as a company’s bottom line, net profit, divided with EBT, pre-tax income. If a company has to pay in the observed period, this ratio will naturally fall below 1, dragging a company’s profitability downwards.

As can see from the graph above, the tax burden of all Croatian blue chips closely follow the industry mean, which should also not come as a surprise. Tax burden indicates to what extent tax impacts company’s bottom line. If any of the blue chips reported significant deviation from the industry mean, it would probably be due to some “one-offs”, for example, a tax incentive. Valamar Riviera reported exactly the above-stated scenario. Valamar reported income tax in the amount of EUR -227k as a result of the recognition of deferred tax in the amount of EUR -3.1m and current tax of EUR 2.9m, resulting in just a slight deviation in EBT and Net profit. Consequently, the Group’s tax burden amounted to 1x. Finally, Podravka’s tax burden amounted to >1 on the back of the positive income tax amounting to EUR 11.3m due to tax incentives based on the Investment Promotion Act.


To conclude, Podravka reported ROE higher than the industry mean, on the back of lower operating margin. Meanwhile, Valamar Riviera noted just a slightly lower ROE due to lower op. margin. However, Valamar uses its total assets more efficiently in generating revenues – offsetting almost completely lower operating profitability. Atlantic Group noted a lower ROE compared to its peers mainly on the back of lower operating profitability (EBIT level).

Končar reported lower operating profitability than its peer group (-8.3 p.p.), but reported the highest positive difference when compared to industry mean assets turnover, indicating a more efficient use of assets. Another positive offset of lower operating profitability is a high positive deviation from industry mean in Interest burden, which is the result of the above-mentioned positive result of Končar’s joint venture with Siemens. HT, too, noted lower ROE due to lower op. profitability. However, we can see that HT uses its assets with the same efficiency as its peers, but has lower financial leverage, not allowing its operating results to be amplified even further.

Domagoj Grčević
Category : Blog

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