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

Since the beginning of the week, we looked at two components of the 5-step DuPont decomposition of ROE: operating margin and financial leverage. You can read about it here. Today, we present further DuPont decomposition of selected Croatian Blue Chips. Today we will look at asset turnover.

Asset turnover compares a company’s assets to its sales. This ratio helps us to determine how efficiently a company uses its assets to generate revenue. This ratio is crucial as every company has to utilize its assets. The higher the ratio is, the more efficiently company uses its assets to generate revenues. This means the company uses its equity and debt to produce higher revenues, compared to the company having a lower asset turnover ratio.

Asset turnover – Croatian Blue Chips [FY 2022]

Source: ZSE, Bloomberg, InterCapital Research

As can be seen from the graph above, just as economic theory would indicate, the asset turnover of Croatian blue chips closely follows their industry mean. Asset turnover is closely tied to the nature of a company’s assets. It should not be surprising that Atlantic Group, Podravka and Končar have the highest asset turnover, due to the nature of their sales and business. Also, conversely looking, on the other end, we have Valamar Riviera whose fixed assets amount to 86% of the company’s total assets. Asset-heavy hospitality companies hold a high amount of fixed assets so this also should not come as a surprise that Valamar’s assets amount to EUR 852.1m. Nevertheless, Valamar’s higher assets turnover from its peers indicates Valamar operates its assets more efficiently than its peers.

Končar reports interesting decomposed numbers, which DuPont decomposition lets us see clearly. In the graph above, we can clearly see that Končar has an assets turnover significantly higher than its peers, indicating a more efficient use of its assets. Consequently, Končar achieves a higher operating margin compared to its peers (read here), yet again, looking at the return on equity of Končar we can notice it was lower by 4.4. p.p. lower than its peers. The answer lies in another mentioned DuPont variable – financial leverage, which was elaborated on yesterday. How can Končar have a lower ROE than its peers if the company uses its assets more efficiently? The answer lies in lower financial leverage, which does not let the company amplify its results as much as its competitors do.