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.
Return on Equity of Croatian Companies (trailing 12m) (%)
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
The chart shows the three components of the DuPont model for the CROBEX10 components with the addition of Arena Hospitality Group and Končar, based on Q1 2020 results trailing 12 months.
Of the observed companies, Optima Telekom recoded the highest ROE of 95.7%, which came on the back of the financial leverage (equity multiplier) which stood at 71.68, 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. Ericsson NT and Atlantic Grupa follow with a ROE of 28.7% and 14.23%, respectively. This is especially noteworthy considering that both companies operate with very little debt. On the flip side, Končar recorded the lowest ROE of the observed companies of 1.9% as it has a relatively low profit margin of 1.6%.
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.
