Economies in Central and Eastern Europe are less indebted and more profitable than their Western peers, according to a report by Erste Bank Group. It highlighted the Czech Republic and Slovakia for have the least indebted and most efficient nonfinancial corporate sector.
“Given its higher return on capital and ROE (return on equity), CEE should stay attractive for capital inflows into the corporate sector. The much lower indebtedness and high return on capital enables CEE companies to benefit from leveraging their balance sheets once their investments start to grow,” the report stated.
The CEE region has been generating about twice the level of return on capital compared with the eurozone, the report states. Slovakia has had the most productive capital allocation in the nonfinancial corporate sector, generating 26.2 percent gross return on capital and 19.3 percent net after tax return on equity even during the downturn, according to 2009 figures. The Czech Republic had the fifth-highest return on capital out of the 23 economies surveyed.
The Czech Republic had 18.4 percent gross return on capital and 14.1 percent net after tax return on equity in the same period. It had the fifth-highest return on capital out of the 23 economies included. The eurozone had 8.1 percent gross return on capital and 8.2 percent net after tax return on equity.
The only country outside of Central and Eastern Europe to reach similar levels its CEE peers was Germany, with 14.9 percent gross return on capital and 18.6 percent net after tax return on equity.
“Labor productivity in manufacturing has increased in many CEE countries during the crisis, in order to preserve their competitiveness/profitability. Maintaining a higher return on capital and return on equity is positive news for CEE economies, as it partially justifies strong capital inflows into these economies and investments made in the past,” the report stated.
Companies in the CEE region are generally less indebted compared to the value added they create or compared to their after-tax profits. Czech, Slovak and Polish companies are the least indebted, with gross debt lower than the value added they create in one year, or corresponding to three-four years’ net after tax profit, according to Erste Bank Group.
Gross debt as percent of gross added value in the nonfinancial corporate sector in 2009 was 81 percent in the Czech Republic, 85 percent in Slovakia and 88 percent in Poland. The eurozone was at 203 percent.
The Czech Republic also scored well in gross profit share, calculated by gross operating and mixed income as a percent of gross value added. The country scored 46 in 2009, well-above the eurozone average of 37. Ireland, had the highest, 52, followed by Poland, Lithuania and Latvia.
Erste Bank Group is one of Central and Eastern Europe’s largest financial service providers, focusing on banking for small and medium-size enterprises (SMEs) and retail clients. In the Czech market it operates Česká spořitelna, the country’s largest bank by client numbers.