For today, we decided to present you with a DuPont analysis of Slovenian 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).

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.

ROE of Slovenian Blue Chips (TTM results)

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 the purpose of this analysis, we will observe some of the biggest Slovenian non-financial companies. Two of the five observed companies recorded double digit ROE, with Krka leading the list (15.8%). Such a ROE mostly came on the back of a high profit margin of 19.8%, the highest of all observed companies. Meanwhile, its asset turnover stood at 0.6 while equity multiplier is at 1.3.

Looking at profit margins, 3 companies have a double digit profit margin, Krka, Luka Koper and Cinkarna Celje. On the flip side, Petrol has the lowest profit margin of 2.5%. This could partially be attributed to the industry the company operates in and drop sharp drop in net profit in 2020 of 32.4%.

In terms of asset turnover, Petrol has by far the highest one of 1.7, indicating that the company is using efficiently its assets to generate sales. All other observed companies have an asset turnover lower than 1. However, one has to take into account that we should not directly compare these ratios to draw conclusions on the efficient use of assets, as that could vary across industries. Therefore, we advise looking at the peer comparison as well.

Turning our attention to the equity multiplier of the companies, one can observe that none of the companies are heavily using leverage to increase their ROE.