Hi folks, Schweser V1 Exam 2 Afternoon Q23:
“Yoakam has computed the EBIT margin for each division over the last three years, as well as the ratio of the percentage of total capital expenditures to the percentage of total assets for each division.” In the corresponding table "EBIT / Assets". Is this a valid EBIT margin, I would expect revenues?
Can you provide the number calculations in there? I think they could be calculating the weighted average of the EBIT margins by division where the weightings are the CAPEX / Total asset by division.
Konker has three major operating divisions: Konker Industrial, Konker Defense, and Konker Capital. Yoakam has computed the EBIT margin for each division over the last three years, as well as the ratio of the percentage of total capital expenditures to the percentage of total assets for each division.
EBIT / Assets 20X8 20X7 20X6 Konker Industrial 6.2% 7.5% 6.7% Konker Defense 6.7% 7.2% 6.9% Konker Capital 10.1% 12.1% 11.1%
CapEx % / Assets % 20X8 20X7 20X6 Konker Industrial 1.5 1.3 1.2 Konker Defense 0.5 0.6 0.7 Konker Capital 0.7 0.6 0.5
Regarding the three operating divisions of Konker, Yoakam should be most concerned that:
A)Konker is growing the Industrial division over time. B) the operating ROA of the Capital division has fallen over the last year. C) the ratio of the Capex percent change to the asset percentage is significantly less than one for the Defense division." Hi Harrogath, the have also included the table above. The corresponding question is classical, and answer not too complicated, but still I am confused regarding the EBIT margin vs EBIT / Asset.
I came across that question last night. While it says he calculates EBIT margin, it’s not given to you so you must work with what you have. A is the correct answer, as Industrial is growing most rapidly shown through highest capex % / asset % and would need to further investigate by looking at EBIT margin. It’s not asking you to actually complete that investigation.
Im not sure what your question is, but what they have done above simply looked at different metrics of the 3 different companies.
You can see a decreasing ebit margin for Konker Industrial. The magin has dropped from 6.7 in 2006 to 6.2 in 2008. Despite the decreasing trend, The firm seems to be adding more capex to that segment, which is shown by the increasing rate of capex/ total assets (1.2 in 2006 to 1.5 in 2008). Also you can the under segments all have capex/ total assets rations below 1. Hence the analyst should be concerned that a division which is showing lower ebit margin is being given more capex.
Again: How is EBIT Margin = EBIT / Assets? Is this an alternative definition that I am not aware of?
I think I recall doing this question before. Don’t get caught up on the name EBIT-margin.
It’s not a name, just a way of explain the ratio between EBIT and the Assets it’s using to generate this Operating Income (EBIT).