Today, we present you with the DuPont analysis of several Slovenian 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 Slovenian Companies (TTM results)
Dupont analysis essentially allows analysts to have an in-depth look into a company, giving them the ability to better see the company’s strengths as well as its weaknesses. This allows the analysts to quickly know which part of the business to look at (be its margins, the company’s inventory management, or its debt structure) for a closer look. Even so, DuPont analysis is still broad of a measure, 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
It should be noted that NLB, Sava Re, and Triglav were excluded from this breakdown, as their financial data is recorded in a different way due to the industry they operate in (Banking for NLB, Insurance for Sava Re and Triglav). Out of the remaining companies, Krka has the highest ROE, with 17.2%, followed closely by Cinkarna Celje, with 17.1%. The main reasons for their high places are good profit margins (16.7% and 20.6% respectively) as well as good asset turnovers (0.84 and 0.66 respectively).
Next up with we Petrol, with an ROE of 14%. Out of the observed companies, Petrol has the lowest profit margin (3.2%), however, they also have the highest asset turnover of 2.03, showing that the Company has the most effective usage of assets out of all observed companies. At the same time, the Company has one of the largest equity multipliers of 2.18 among the observed companies and considering they operate in an asset-heavy industry (oil and gas distribution), this higher number does not surprise.
On the flip side, we have Telekom Slovenije and Luka Koper, with an ROE of 5.4% and 7.2% respectively. Looking at Luka Koper, the Company has a solid profit margin of 14.7%, its asset turnover is the lowest among the observed companies (0.36), which does lower the ROE of the Company. At the same time, the Company has an equity multiplier of 1.38, which considering they operate in the transportation and storage industry (specifically shipping), this number is not surprising.
Profit margin breakdown (TTM)
