Today, we present you with further DuPont decomposition of selected Croatian Blue Chips by looking into financial leverage and comparing it with their peers.
Yesterday, we looked at the first component of DuPont 5-step decomposition of ROE – Operating Margin. You can read about it here. Today, we present you with further DuPont decomposition of selected Croatian Blue Chips. Today we will look into financial leverage.
Financial leverage divides a company’s total assets with the company’s equity, giving us information on how leveraged the company is with debt. Financial leverage can be useful as it emphasizes the financial stability of a company. Financial leverage equal to 1 would indicate the company has no debt – that company financed its total assets with equity.
The higher the financial leverage goes, the more leveraged company is. High leverage can be a dangerous threat for a company during a recession, as the company may not be able to pay off its debt. However, the company should use debt to finance the growth and operations of the company, as the use of leverage amplifies the magnitude of operations. If used carefully, financial leverage can make “wonders”, as famous Warren Buffet likes to emphasize.
Financial leverage – Croatian Blue Chips [FY 2021]
We can clearly see the trend of lower financial leverage of Croatian blue-chips, when compared with its regional comparable peer group. Only Valamar Riviera has the same financial structure in equity and liabilities, as their peer group. The highest deviation from it’s peer group is reported for HT. HT has financial leverage of 1.2x, while it’s peer comparables have much higher leverage to boost their operations, with median financial leverage amounting to 2.7x. This difference can be attributed to the large cash position of HT. The roots of this correlation of HT’s cash position and lower leverage lies within industry norms and structure. This industry is highly capital intensive, meaning a lot of CAPEX is necessary in order to operate within the industry. Consequentially, if a company does not have a large equity position, it has to finance – via debt. In this case, debt enables a company to even operate and grow further. As HT has mentioned large cash position, it doesn’t have to finance via debt, thus having much lower financial leverage.
Last week, the Constitutional Court of the Republic of Slovenia adopted a decision to suspend the application of the Swiss francs law until the final decision of the Constitutional Court is made on the conformity of the Law with the Constitution.
On the 10 March 2022 the Constitutional Court of the Republic of Slovenia adopted a decision to suspend in whole the implementation of the „Law on limitation and distribution of foreign exchange risk between creditors and borrowers concerning loan agreements in Swiss francs“ until the final decision of the Constitutional Court on the conformity of the Law with the Constitution is made. This decision was adopted unanimously. The implementation of this Law has been suspended until the final decision of the Constitutional Court on the conformity of the Law with the Constitution. During this time, the deadlines set for individual liabilities of banks do not apply.
The initiators, ten banks licensed by the Bank of Slovenia to provide banking services, are challenging the „Law on limitation and distribution of foreign exchange risk between creditors and borrowers concerning loan agreements in Swiss francs“ in full. They claim that it is inconsistent with Articles 2 and 155 of the Constitution because the law allegedly unconstitutionally interferes with civil law relations (credit agreements in Swiss francs), which have already been fully fulfilled or exhausted, or are supposed to interfere in the still valid credit agreements, as well as in credit agreements on which a final judgment has already been made. In the latter case, it is also alleged to be inconsistent with Article 158 of the Constitution.
The initiators are of the opinion that the legislator has unconstitutionally interfered with the contractual freedom protected in Article 35 of the Constitution when it provided for the renewal of credit agreements and inclusion of a currency cap in contracts. However, the legislator allegedly did not have a constitutionally permissible goal for such an intervention. The regulation referred to in Article 6 of the “Law on limitation and distribution of foreign exchange risk between creditors and borrowers concerning loan agreements in Swiss francs“, according to which creditors must pay any damage to any damage to his property, together with default interest, according to the initiators, which run from the day of the overpayment, constitutes an interference with the right to private property protected in Articles 33 and 67 of the Constitution. It is said to be a confiscation of property without compensation, which is also contrary to the case law of the law of the European Court of Human Rights. According to the initiators, the “Law on limitation and distribution of foreign exchange risk between creditors and borrowers concerning loan agreements in Swiss francs“ also interferes with their freedom of economic initiative, protected in Article 74 of the Constitution, whereby the intervention cannot pass the test of proportionality. The “Law on limitation and distribution of foreign exchange risk between creditors and borrowers concerning loan agreements in Swiss francs“ imposes a number of obligations on creditors, from the preparation of the prescribed documentation to the return of the overpayment and the delivery of land registry permits, the regulation of relations with guarantors, debtors, etc. On the other hand, the legislator did not prescribe to borrowers the deadline by which they must return the signed contracts on the regulation of mutual relations. The European Central Bank also pointed out that a fair distribution of the burden among all stakeholders must be taken into account in order to avoid a moral hazard in the future.
A separate request for the review of the constitutionality of the Law was also submitted by the Bank of Slovenia. NLB announced yesterday that they believe that the Constitutional Court will establish the inconsistency of the Law with the Constitution and annul it in its entirety. NLB was one of the banks which together with eight other banks filed an initiative to review the constitutionality of the Law. At the beginning of February, we have written on how this law might influence the Slovenian banking system. You can read more about it see here.
In February, BET decreased by -3.59%, ending the month at 12,716.51 points.
The Bucharest Stock Exchange has published its monthly trading data for February 2022. In the report, they highlight that during the two years of the pandemic, the Romanian capital market went up by 55% (expressed by BET-TR which includes dividend reinvestment) or 39% if taking BET index into account only. Compared to January 2022, the transactions with shares listed on the Regulated market decreased by -32.6% and amounted to RON 1.36bn, app. EUR 275.3m.
This would also mean that the total equity turnover on the Exchange amounted to EUR 275.3m, which would translate into an average daily turnover of EUR 13.8m. Turning our attention to the top shares with the highest turnover, Banca Transilvania had a turnover of EUR 55.5m (or 20.2% of total equity turnover), followed by BRD with EUR 34.5m (or 12.6% of total), OMV Petrom with EUR 30.6m, Fondul Proprietatea with EUR 20.5m, and Sif Muntenia, with EUR 19.8m.
Looking over to the BET constituents, we can see that out of 19 companies, 16 had negative returns, with only 3 companies having a slightly positive return. The largest decline was experienced by Purcari, which lost -20.8% of its value, followed by ALRO with -16.5%, Teraplast with -15.6%, and Nuclearelectrica, Transgaz, and Transelectrica, with -10.59%, -10.31%, and -10%, respectively. Out of the remaining companies, only Digi, Banca Transilvania, Fondul Proprietatea and OMV Petrom, and One United Properties had declines of less than -5%. On the flipside, Romgaz, BRD, and BVB were the only ones with positive returns, at 1.72%, 0.5%, and 0.4%, respectively.
This decline was recorded across all equity markets due to the uncertainty leading to the Russian invasion of Ukraine (e.g. the Russian declaration of Luhansk and Donetsk Republics on 21 February), as well as the invasion (24 February) itself. It should also be noted that February is the month when Romanian companies release their preliminary FY results, which also had an effect on this.
In turn, this would mean that the BET index experienced a decrease of -3.59%, ending the month at 12,716.51 points.
Performance of BET constituents in February 2022 (%)