DuPont Serial Analysis of Croatian Companies – FY 2021 [Continuation]

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

Since the beginning of the week, we looked at two components of 5-step DuPont decomposition of ROE: operating margin, financial leverage and asset turnover. You can read about it here. Today, we present you with the last two components of DuPont decomposition of the selected Croatian Blue Chips. Today we will look at interest burden and tax burden. These components highlight how much do tax and interest weigh down a company’s net profitability. These two components, along with discussed operating margin, are just an extension of the net profit margin calculation to give us detailed information about the impact of operating activity, interest and tax effect on the net profit margin of the company.

We should note that both interest and tax burden are calculated using P&L operating level and under, meaning they can more often be under the impact of “one-offs”.

Interest burden tells us the extent to how much the net financial result of the company together with profit from associates (20-50% shareholding) and investments (<20% share) impacts its profit. If a company pays more interest on its debt than what it receives as interest from its loans or profits from its investments into associates or joint venture, this ratio will fall below 1, meaning that net financial & investment result has impacted its profit negatively. It is calculated as EBT divided by EBIT.

Tax burden gives us a proportion of profits retained after tax. This indicates how much does tax impacts on company’s bottom line. It is calculated as a company’s bottom line, net profit, divided with EBT, pre-tax income. If a company has to pay in the observed period, this ratio will naturally fall below 1, dragging a company’s profitability downwards.

Interest burden – Croatian Blue Chips [FY 2021]

As can see from the graph above, the interest burden of all Croatian blue chips closely follow the industry mean, which should not come as a surprise. This is just a result of a similar capital structure within the same industry. Within the valuation context, this leads to a similar weighted average cost of capital (WACC), due to more similar capital and debt weights. Also, the reported situation can be partly explained due to companies operating in the same region and generating sales from a similar region. This leads to similar FX gains/losses, which are also affected by the company’s risk management and hedging strategy.

Nevertheless, Končar reported an interest burden of 1.23 as its EBT (HRK 238m) was higher than EBIT (HRK 194m). The reported interest burden higher of 1, by itself, indicates a positive net financial & investment result. Končar reported a net financial result of HRK 5m and net investment result of HRK 39m. The highest impact on net financial gain was achieved by interest revenues (amounting to HRK 6.8m) generated by the interest received on given deposits/loans which were higher than interest on loans paid of HRK 4m. Končar has a joint venture with Siemens, Končar-Power Transformers Ltd. (Končar – Energetski transformatori d.o.o., Zagreb) where it has a shareholding of 49%. This company was very profitable in this FY and Končar’s share of profit has amounted to HRK 35.4m.
Tax burden – Croatian Blue Chips [FY 2021]

As can see from the graph above, the tax burden of all Croatian blue chips closely follow the industry mean, which should also not come as a surprise. Tax burden indicates how much does tax impacts on company’s bottom line. If any of the blue chips reported significant deviation from the industry mean, it would probably be due to some “one-offs”, for example, a tax incentive. Valamar Riviera reported exactly the above-stated scenario. Valamar reported positive tax expense, effectively meaning it increase Valamar’s bottom line. Positive tax expense is a combination of this year’s tax expense, deferred tax assets and tax benefit, while tax benefit happened due to government incentives for Valamar’s investment in Isabella Resort, Family Life Bellevue Resort and Girandella Village.

Tomorrow we will elaborate the impact of all five decomposed components on Croatian Blue Chip’s Return on equity (ROE) and compare the whole picture given by DuPont within the industry contexts.

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