DuPont Serial Analysis of Croatian Companies – FY 2023 [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 the 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 the 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 ventures, this ratio will fall below 1, meaning that net financial & investment result have 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 tax impacts a company’s bottom line. It is calculated as a company’s bottom line, net profit, divided by 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 2023]

Source: Bloomberg, InterCapital Research

As can be seen 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 1.12 as its EBT (EUR 88.8m) was higher than EBIT (EUR 79.3). The reported interest burden higher of 1, by itself, indicates a positive net financial & investment result. Končar reported just a slightly negative net financial result of EUR 385k. However, 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 EUR 9m. Each other taken blue chip has an interest burden amounting to <1.

Tax burden – Croatian Blue Chips [FY 2023]

Source: Bloomberg, InterCapital Research

As can be seen from the graph above, the tax burden of all Croatian blue chips closely follows the industry mean, which should also not come as a surprise. Tax burden indicates how much does tax impacts a 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 income tax in the amount of EUR -227k as a result of the recognition of deferred tax in the amount of EUR -3.1m and current tax of EUR 2.9m, resulting in just a slight deviation in EBT and Net profit. Consequently, the Group’s tax burden amounted to 1x. Finally, Podravka’s tax burden amounted to >1 on the back of the positive income tax amounting to EUR 11.3m due to tax incentives based on the Investment Promotion Act.

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 context.

Category : Flash News

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