For today, we decided to present you with a DuPont analysis of Romanian 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) H1 2020 results.
Return on Equity of Romanian Companies (%)*
*using trailing 12m net profit (H1 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
Of the observed 11 companies, 4 recorded a double-digit ROE, while 1 (Digi Communications) observed a negative ROE due to a trailing 12m net loss. Purcari leads the list with a ROE of 20%. Such a solid result came on the back of a relatively high profit margin of 19.8%, while its asset turnover stood at 0.56, in line with the average of the observed companies. Next comes Romgaz, with a ROE of 12.4%, which is quite impressive given that the company operates with almost no debt (negative net debt).
Transgaz has the highest profit margin of 24.6%, however the company has a relatively low asset turnover of 0.25, which could indicate that the company is not efficiently using its assets to generate sales. However, one must remain aware that Transgaz operates in quite an asset heavy industry.
On the contrary, Sphera Franchise Group is the only company whose asset turnover is higher than 1. The Group’s profit margin stood at 1.89%, as the company’s bottom line was severely hit by the pandemic (the most of all observed companies). To be specific, the company had to struggle with measures taken to prevent the spread of the Covid-19 virus which led to the closure of their restaurants. In 2019, Sphera’s profit margin stood at 5.8%.
Of the observed companies, MedLife has the highest financial leverage measured by the equity multiplier of 4.7, indicating that leverage was the primary driver of ROE. As of H1, the MedLife’s net debt/EBITDA stood at 4.4x.