For today, we decided to present you with a DuPont analysis of Slovenian companies, a useful technique used to decompose the different drivers of ROE.

The DuPont analysis is a useful technique used to decompose the different drivers of ROE. This model allows analysts and investors to examine the profitability of a company using information from both the income statement as well as the balance sheet, which gives them a thorough view of a company’s financial health and operating efficiency. Note that for this analysis we used (trailing 12m) H1 2020 results.

Return on Equity of Slovenian Companies (%)*

*using trailing 12m net profit (H1 2020)

Speaking in broad terms the equation allows analysts to dissect a company, and to efficiently determine where the company is weak and where it is strong. This allows them to quickly know what areas of business to look at (inventory management, debt structure, margins) for more answers. However, the measure is still broad and is not a substitute for detailed analysis.

DuPont tells us that ROE is affected by three things:

• Operating efficiency, which is measured by profit margin
• Asset use efficiency, which is measured by total asset turnover
• Financial leverage, which is measured by the equity multiplier

Of 8 observed companies, 6 companies recorded a double-digit ROE, with Krka leading the list (14.8%). The company also operates with the highest profit margin of 17.2%. As a reminder, Krka showed a very strong performance in H1, with net profit increasing by 15% YoY. Next comes Sava Re, with a ROE of 14.4%. Besides Krka, Sava Re is the only company which observed a net profit increase in H1 2020 (+43%), which mostly came on the back of the consolidation of Vita. The company has also been recording a very solid ROAE in the past 5 years, which on average amounted to 12.1%.

The company which most efficiently uses its assets to generate revenues is Petrol with asset turnover of 1.81. The company also recorded the highest equity multiplier of 2.14.

On the flip side, the only company with a negative ROE is Telekom Slovenije, which has recorded a trailing 12m net loss, when taking into account 1H 2020 results. As a reminder, in 2019, the company reported a net profit of EUR 1.2m (-96%), which came on the back of a lower net financial result. To be specific, the net financial result could be attributed to two key reasons. The first one is that in 2018, finance income from the equity holdings was higher due to the sale of Blicnet, while the second one is that in 2019 other finance expenses include a loss of EUR 17.6m on the acquisition of a 34% minority interest in Planet TV (former Antenna TV SL), claimed on the basis of an arbitration award in the proceedings between Telekom Slovenije and Antenna TV SL Slovenia B.V.

At yesterday’s meeting the Governing Council of the ECB took the decision to keep interest rates unchanged, which was in line with the market expectations.

To be specific, the interest rate on the main refinancing operations remains at 0.00%, the interest rates on the marginal lending facility remain at 0.25% and the deposit facility will remain -0.50%.

The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. It is worth noting that ECB has similar problem as FED (which announced that they are seeking to achieve inflation that averages 2% over time) as inflation in eurozone did not reach its target for several years now, except few months in the end of 2017. Although 5Y inflation swap index rose from March’s low of 0.7% to 1.20%, it still shows that market does not expect inflation to reach ECB target in the next 10 years, not even close.

The Council will also continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of EUR 1,350bn. These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation. The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. ECB noted that this allows the Council to effectively stave off risks to the smooth transmission of monetary policy. The Council will conduct net asset purchases under the PEPP until at least the end of June 2021 and, in any case, until it judges that the coronavirus crisis phase is over. The Council will reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2022. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

Furthermore, net purchases under the asset purchase programme (APP) will continue at a monthly pace of EUR 20bn, together with the purchases under the additional EUR 120bn temporary envelope until the end of the year. The Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates. The Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.

Yesterday we published a blog on our expectations from the yesterday’s meeting. In case you missed it, you can find it on the link here.