For today, we decided to present you with a DuPont analysis of Croatian companies, a useful technique used to decompose the different drivers of ROE.
The DuPont analysis is a useful technique used to decompose the different drivers of ROE. This model allows stock analysts and investors to examine the profitability of a company using information from both the income statement as well as the balance sheet. This gives the analyst a thorough view of a company’s financial health and operating efficiency. Note that for this analysis we used (trailing 12m) 9M 2020 results.
Return on Equity of Croatian Companies (%)*
*using trailing 12m net profit (9M 2020)
Speaking in broad terms the equation allows analysts to dissect a company, and to efficiently determine where the company is weak and where it is strong. This allows analysts to quickly know what areas of business to look at (inventory management, debt structure, margins) for more answers. However, the measure is still broad and is not a substitute for detailed analysis.
DuPont tells us that ROE is affected by three things:
- Operating efficiency, which is measured by profit margin
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier
For this we excluded 3 Tourist companies (ARNT, RIVP and MAIS) as they recorded a trailing 12m net loss. 4 out of 9 observed companies, recorded a double-digit ROE, with Optima Telekom Leading the list (38.6%). However, such a high ROE came on the back of the financial leverage (equity multiplier) which stood at 61.6, by far the highest of all companies. The company currently operates with very low equity, as a result of recording net losses in the recent years. Next comes Ericsson NT with a ROE of 23.2%. The company witnessed the highest asset turnover of 1.8, among the observed companies, indicating that Ericsson NT is efficiently using its assets to generate sales. To read about the Group’s 9M 2020 results, click here.
Dalekovod follows with a ROE of 14.7%, which once again came on the back of a high financial leverage (equity multiplier) of 14.2. Note that the company has recorded losses or very low net profit in the previous periods, which has somewhat decreased the company’s equity. The company’s Equity currently stands at HRK 63.6m, as loss brought forward piled up to HRK -365.96m. Also note that revaluation reserves account for roughly two thirds of the company’s equity.
Next comes Atlantic Grupa with a ROE of 11.8%, which could be considered as quite high, considering that the Group operates with very little debt. To read more about indebtedness of Croatian companies click here.
On the flip side, Kraš observed the lowest ROE of 3.2%. Despite an increase in net profit in 9M of 2020 (+42%), the company still recorded a relatively low profit margin of 2.3%. To read more about the company’s 9M 2020 results, click here.
