Today, we present you with further DuPont decomposition of selected Croatian Blue Chips by looking into financial leverage and comparing it with their peers.

Yesterday, we looked at the first component of DuPont 5-step decomposition of ROE – Operating Margin. You can read about it here. Today, we present you with further DuPont decomposition of selected Croatian Blue Chips. Today we will look into financial leverage.

Financial leverage divides a company’s total assets with the company’s equity, giving us information on how leveraged the company is with debt. Financial leverage can be useful as it emphasizes the financial stability of a company. Financial leverage equal to 1 would indicate the company has no debt – that company financed its total assets with equity.

The higher the financial leverage goes, the more leveraged company is. High leverage can be a dangerous threat for a company during a recession, as the company may not be able to pay off its debt. However, the company should use debt to finance the growth and operations of the company, as the use of leverage amplifies the magnitude of operations. If used carefully, financial leverage can make “wonders”, as famous Warren Buffet likes to emphasize.

Financial leverage – Croatian Blue Chips [FY 2021]

We can clearly see the trend of lower financial leverage of Croatian blue-chips, when compared with its regional comparable peer group. Only Valamar Riviera has the same financial structure in equity and liabilities, as their peer group. The highest deviation from it’s peer group is reported for HT. HT has financial leverage of 1.2x, while it’s peer comparables have much higher leverage to boost their operations, with median financial leverage amounting to 2.7x. This difference can be attributed to the large cash position of HT. The roots of this correlation of HT’s cash position and lower leverage lies within industry norms and structure. This industry is highly capital intensive, meaning a lot of CAPEX is necessary in order to operate within the industry. Consequentially, if a company does not have a large equity position, it has to finance – via debt. In this case, debt enables a company to even operate and grow further. As HT has mentioned large cash position, it doesn’t have to finance via debt, thus having much lower financial leverage.