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 Q1 2021 results (trailing 12m).

Return on Equity of Croatian Companies (%)

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 three Tourist companies (ARNT, RIVP and MAIS) as they noted a TTM net loss. 3 out of 9 observed companies, recorded a double-digit ROE, with Ericsson Nikola Tesla leading the list (27.3%). Such a ROE came on the back of a solid asset turnover of 1.93 (the highest among the observed companies) and an equity multiplier of 2.68.

Optima Telekom and Atlantic Grupa comes next with a ROE of 11.1% each. Such a high ROE of Optima came almost exclusively from the equity multiplier of 59.9, by far the largest among all observed companies. As a reminder, the company has been operating with losses for quite some time which reduced it’s equity. To be specific, losses brought forward as of end Q1 stands at HRK -857.6m.

Atlantic Grupa, reported a profit margin of 6.4% (highest of all observed companies) and an asset turnover of 0.95. Such a ROE 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 3.5%. Such a low ROE could be attributed mostly to a relatively low profit margin of 2.4% (the second lowest of the observed companies).