The performance of large non-financial corporations 1998-2004

From the analytical point of view, the year-on-year decrease in pre-tax profit in 2005 H1 elicits two questions. First, how efficient was the relatively strong growth in equity in previous years? Second, what caused the decrease in profit at a time of very buoyant economic growth in 2005 H1, and, in particular, did the decrease reflect temporary factors or was it also linked with the efficiency of the investment realised?

Financial efficiency can be analysed using the CZSO's data on the financial performance of large corporations (with 100 employees or more) in 1998-2004 and a quantitative analysis of the increase in profit by means of Du Pont analysis, which identifies the manner in which the profit increased using the following variables:

Z = R 1/R 0 * O 1/O 0 * P 1/P 0 * K

Z - profit increase, R - return on sales (profit/sales), O - asset turnover (sales/assets), P - leverage (total capital/equity), K - equity increase

IR 10/2005 box 2 chart 1

The analysis reveals that the considerable increase in profit was achieved amid a much lower rise in equity in 1998-2004. This indicates that the increase in equity (including tangible investment) contributed to the reported increase in profit to a lesser extent, and that more efficient utilisation of equity and external capital was the major factor. This is confirmed by the other components of the profit analysis, which express the financial efficiency of non-financial corporations measured using profitability indicators. Equity grew approximately by one-third in the period under review, but the rise in return on equity was roughly sixfold. Return on sales was the dominating factor behind the growth in return on equity, increasing by about 130%. The increase in asset turnover was much lower (see Chart 1). From the longer-term perspective, return on equity in non-financial corporations is thus recording an upward trend, as Chart 2 clearly shows.

IR 10/2005 box 2 chart 2

The favourable evolution of profitability indicates that profit was generated amid higher capital productivity, due mainly to investment in new production equipment realised primarily with the aid of foreign capital. Although the economy went through a phase of buoyant growth in 2005 H1, more detailed analyses of the profit generation suggest that the year-on-year decrease in profit was primarily a result of a rise in the prices of energy inputs and worse terms of trade. However, the decrease did not fundamentally negate the long-term upward trend in capital utilisation efficiency.

IR 10/2005 box 2 chart 3