On Tuesday, June WTI crude which expired at the end of the session, remained above the price for the July contract, ending at $32.50 a barrel

On Tuesday, June WTI crude which expired at the end of the session, remained above the price for the July contract, ending at $32.50 a barrel after surging 8.1% on Monday.

Unlike last month when the may contract was settled at a negative price, Junte WTI crude was supported by  global supply cuts and signs of improving demand.

WTI crude oil prices settled in backwardation, meaning that the spot price and nearby futures are higher than contracts for later delivery. This was a shift compared to the contango observed last month (later dated futures are bid higher than nearby contracts) indicating a near-term oversupply and offering incentive to store it for future use under the condition that the difference in price is greater than the cost of storage.

As a reminder the oil market witnessed a never before seen event in its entire history, which is the price on the futures contract for West Texas crude, went into negative territory of USD – 37.63 a barrel. Such a movement could be attributed to the ongoing Covid-19 situation. To be specific, since the pandemic led to a global economic halt, there is already much unused oil stored that American energy companies have run out of space to store it. It is important to note that the settlement of the futures contract, would involve a physical delivery of the oil, which comes with a burden of high carrying costs and the current low demand and almost no place of storing it. Such situation led to a selloff, which resulted in the WTI futures contract ending up in negative territory.

For today, we decided to present you with a DuPont analysis of Croatian 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 stock analysts and investors to examine the profitability of a company using information from both the income statement as well as the balance sheet. This gives the analyst a thorough view of a company’s financial health and operating efficiency.

Return on Equity of Croatian Companies (trailing 12m) (%)

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

The chart shows the three components of the DuPont model for the CROBEX10 components with the addition of Arena Hospitality Group and Končar, based on Q1 2020 results trailing 12 months.

Of the observed companies, Optima Telekom recoded the highest ROE of 95.7%, which came on the back of the financial leverage (equity multiplier) which stood at 71.68, by far the highest of all companies. The company currently operates with very low equity, as a result of recording net losses in the recent years. Ericsson NT and Atlantic Grupa follow with a ROE of 28.7% and 14.23%, respectively. This is especially noteworthy considering that both companies operate with very little debt. On the flip side, Končar recorded the lowest ROE of the observed companies of 1.9% as it has a relatively low profit margin of 1.6%.

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 analysts 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.

For today we decided to present you with the updated analysis of the interest coverage ratio of Croatian companies.

For this we used Q1 2020 trailing 12m figures. Interest coverage ratio is used as a measure which gives us an insight on the company’s ability to meet its interest payments. The ratio is calculated by dividing the company’s operating profit by the interest expenses. Therefore, a higher ratio indicates that the company is less burdened by debt and the other way around.

Interest Coverage Ratio of Selected Croatian Companies

As visible in the graph Ericsson NT operates with the highest interest coverage ratio of 68.1, which does not come as a surprise given that the company operates with low debt. Next come two Food companies, Podravka and Atlantic with an interest coverage ratio of 20.6 and 15.7, respectively. Both companies operate also with low debt, as net debt/EBITDA of these companies amounts to 1.35 and 1.1, respectively.

On the flip side, of the observed companies, Optima Telekom operates with the lowest interest coverage ratio of 1.2, indicating that the debt payments present a big burden for the company relative to its operations.

To read our analysis of indebtedness of Croatian companies, click here.

To read about how much cash per share do Croatian blue chips have, click here.