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. Note that for this analysis we used (trailing 12m) H1 2020 results.
Return on Equity of Croatian 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 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.
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 the observed companies, Optima Telekom recoded the highest ROE of 48.9%, which came on the back of the financial leverage (equity multiplier) which stood at 55.37, 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 19% and 11.8%, respectively. This is especially noteworthy considering that both companies operate with very little debt.
On the flip side, Arena Hospitality Group witnessed the lowest ROE (of the observed companies which operate with a trailing 12m profit) of 2%. Note that such a ROE is currently not fully representative as it does not account for the Q3 2020 results, where the company derives most of its revenues and which are expected to be significantly different YoY due to the Covid-19 crisis.
For today we decided to present you with the updated analysis of the interest coverage ratio of Croatian companies.
For this we used H1 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. A ratio lower than 1 indicates that the company’s operating profit is not sufficient to cover for the interest payments.
Interest Coverage Ratio of Selected Croatian Companies
As visible in the graph Ericsson NT operates with the highest interest coverage ratio of 53.1, 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 23.5 and 13.5, respectively. Both companies operate also with low debt, as net debt/EBITDA of these companies amounts to 1.24 and 1.06, respectively.
On the flip side, of the observed companies, the only two companies operating with an interest coverage ratio below 1 are Optima Telekom and Arena Hospitality Group.
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.