Today, we present you with the DuPont analysis of several Croatian companies, a technique used to break down the ROE into its main drivers.
The DuPont analysis is a useful technique that is used to differentiate between multiple drivers of ROE.
This model gives the stock analysts and investors a way to examine the profitability of a company using information from both the balance sheet as well as the income statement.
This gives the analyst a clear idea of a company’s financial health and operating efficiency. The following analysis is based on 9M 2021 results.
ROE of Croatian Companies (TTM results)
In general, the DuPont analysis allows analysts to have an in-depth overview of a company, giving them the ability to better see the company’s strengths as well as its weaknesses.
This allows analysts to quickly know which part of the business to look at (margins, inventory management, debt structure) for a closer look.
However, it should be mentioned that the measure is still broad and shouldn’t be used as a replacement for a detailed analysis.
The DuPont analysis shows us that ROE is affected by three things:
- Operating efficiency, which is measured by the profit margin
- Asset use efficiency, which is measured by the total asset turnover
- Financial leverage, which is measured by the equity multiplier
Out of the observed companies, Ericsson NT has the highest ROE, with 40.6%. The main reason for this is the high asset turnover of 1.84, which indicates an effective usage of the Company’s assets.
Similarly, to Ericsson NT, Optima Telekom also has a high ROE of around 33.3%. However, this is where the DuPont analysis becomes useful. With it we can see that even though the Company’s ROE is high, the main culprit behind it is a high equity multiplier of 38.4, which could be attributed to a relatively low equity. As a reminder, the Company has been observing losses in previous years, which has significantly decreased the company’s equity.
Among food companies, Atlantic Grupa has the highest ROE of 13.5%, followed by Podravka with a ROE of 8.4%. Both companies have a similar ROE breakdown structure, with Atlantic Grupa outperforming Podravka slightly on all points. Compared to this, we have Kraš, which even though operates in the same industry and should have similar margins, only has a ROE of 4.3%. The main reason for this discrepancy compared to the aforementioned companies is the lower profit margin of only 3% for Kraš.
Profit margin breakdown (TTM)