Interest Coverage Ratio of Croatian Companies – 9M 2022

Today, we are bringing you a brief analysis of the interest coverage ratio of the Croatian blue chip companies, based on the latest 9M 2022 results.

The interest coverage ratio, as its name implies, is a ratio that tells us how easily a company can service the interest on its outstanding debt. This ratio is calculated by dividing a company’s operating profit (EBIT) by its interest expense, in any given period. It can be used to determine the company’s riskiness relative to its current debt or any future borrowings. A ratio lower than 1 indicates that the Company’s operating profitability is not sufficient to cover the interest payments, while a ratio lower than 1.5 might indicate that it might not be able to in the future.

It should be noted that using this ratio between different industries is not prudent, as different industries operate with varying degrees of debt levels, and as such, a level of debt that is sustainable and even encouraged for one type of industry is discouraged in another.

Looking at the Croatian blue chip companies, all of them expect Hrvatski Telekom are included in this comparison, as HT has no financial debt.

Croatian blue chips interest coverage ratio (9M 2021 vs. 9M 2022, points)

Source: Companies’ data, InterCapital Research

As we can see from the graph, the Company which recorded the largest YoY change is AD Plastik, as their interest coverage ratio deteriorated from positive 6x to negative 48.7x. This is due to the fact that the Company’s EBIT amounted to HRK 28m in 9M 2021, and it decreased to HRK 134.7m, while the interest expense decreased. The 2nd highest increase in the interest coverage ratio was recorded by Podravka, with a growth of 52% to 84x. This is also one of the highest interest coverage ratios out of all the Croatian blue chips, but considering the low level of debt, as well as the solid levels of profitability recorded by the Company, this isn’t surprising.

Following them, we have Valamar Riviera, and Arena Hospitality Group, with interest coverage ratios of 13.7x and 7.8x, representing an increase of 52% and 46%, respectively. Both of these companies operate in the tourism industry, and 9M 2022 marks the 1st time since 9M 2019 that they were able to operate under normal conditions. As such, they recorded an increase in EBIT, with Valamar’s growing by 34% YoY, while Arena’s grew by 91% YoY. During this same period, Valamar decreased its debt by almost 20%, to HRK 2.7bn, which led to a decrease in the interest expense of app. HRK 6m, thus leading to a higher ratio. At the same time, Arena’s debt level increased by 6%, leading to an increase in the interest expense of app. HRK 5m.

Next up, we have Adris, at a 30% increase, leading to an interest coverage ratio of 22.5x, which came as a result of higher EBIT (+15%), and a lower interest expense (-12%) due to the fact that companies in the Adris Group (Maistra, HUP, Croatia osiguranje and Cromaris) recorded solid results for the year.

While this ratio can be quite interesting, taking it by itself does not show the true picture. Levels of debt and the cash positions of the companies should also be looked at. If you would like to see our breakdown of the level of indebtedness for the Croatian companies in 9M 2022, click here, and if you like to see the cash position analysis during the same period, click here.

Category : Flash News

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