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Brocade Communications Systems Inc (NAS:BRCD)
Operating Income
$386 Mil (TTM As of Oct. 2014)

Brocade Communications Systems Inc's operating income for the three months ended in Oct. 2014 was $127 Mil. Its operating income for the trailing twelve months (TTM) ended in Oct. 2014 was $386 Mil.

Operating margin is calculated as operating income divided by its revenue. Brocade Communications Systems Inc's operating income for the three months ended in Oct. 2014 was $127 Mil. Brocade Communications Systems Inc's revenue for the three months ended in Oct. 2014 was $564 Mil. Therefore, Brocade Communications Systems Inc's operating margin for the quarter that ended in Oct. 2014 was 22.42%.

Good Sign:

Brocade Communications Systems Inc operating margin is expanding. Margin expansion is usually a good sign.

Brocade Communications Systems Inc's 3-Year average Growth Rate for operating margin was 48.40% per year.

Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatt’s definition. Brocade Communications Systems Inc's annualized return on capital for the quarter that ended in Oct. 2014 was 15.19%. Brocade Communications Systems Inc's annualized return on capital (Joel Greenblatt’s) for the quarter that ended in Oct. 2014 was 113.27%.

Operating income is also linked to Joel Greenblatt’s definition of earnings yield. Brocade Communications Systems Inc's earnings yield (Joel Greenblatt’s) for the quarter that ended in Oct. 2014 was 9.72%.


Definition

Operating income, sometimes also called Earnings Before Interest and Taxes (EBIT), is the profit a company earned through operations. All expenses, including cash expenses such as cost of goods sold (COGS), research & development, wages, and non-cash expenses, such as depreciation, depletion and amortization, have been deducted from the sales.

Brocade Communications Systems Inc's Operating Income for the fiscal year that ended in Oct. 2014 is calculated as

Operating Income (EBIT)(A: Oct. 2014 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=2211.267-745.474-639.456
-Research & Development-Depreciation, Depletion & Amortization-Others
-345.549-100.647--5.971
=386

Brocade Communications Systems Inc's Operating Income for the quarter that ended in Oct. 2014 is calculated as

Operating Income (EBIT)(Q: Oct. 2014 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=564.358-187.24-166.537
-Research & Development-Depreciation, Depletion & Amortization-Others (1)
-83.687-20.277--19.913
=127

Operating Income (EBIT)(Q: Oct. 2014 )
=EBITDA-Depreciation, Depletion & Amortization-Others (2)
=147.13-20.277-0.323
=127

Brocade Communications Systems Inc Operating Income for the trailing twelve months (TTM) ended in Oct. 2014 was 121.49 (Jan. 2014 ) + 20.195 (Apr. 2014 ) + 117.897 (Jul. 2014 ) + 126.53 (Oct. 2014 ) = $386 Mil.

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.


Explanation

1. Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatt’s definition.

Brocade Communications Systems Inc's annualized Return on Capital (ROC) for the quarter that ended in Oct. 2014 is calculated as:

Return on Capital (ROC)(Q: Oct. 2014 )
=(EBIT - Adjusted Taxes)/Average Total Capital
=Net Income/( (Total Capital (Q: Jul. 2014 ) + Total Capital (Q: Oct. 2014 ))/ 2 )
=333.676/( (2150.726 + 2242.795)/ 2 )
=333.676/2196.7605
=15.19 %

where

Total Capital(Q: Jul. 2014 )
=Book Value of Debt + Book Value of Equity - Cash
=Total Current Assets + Property, Plant and Equipment + Other Current Assets
=1542.16 + 448.195 + 160.371
=2150.726

Total Capital(Q: Oct. 2014 )
=Book Value of Debt + Book Value of Equity - Cash
=Total Current Assets + Property, Plant and Equipment + Other Current Assets
=1658.005 + 445.433 + 139.357
=2242.795

Note: The Net Income data used here is four times the quarterly (Oct. 2014) net income data.

2. Joel Greenblatt’s definition of Return on Capital:

Brocade Communications Systems Inc's annualized Return on Capital (Joel Greenblatt’s) for the quarter that ended in Oct. 2014 is calculated as:

ROC (Joel Greenblatt’s)(Q: Oct. 2014 )
=EBIT/Average of (Net fixed Assets + Net Working Capital)
=Operating Income/Average of (Net PPE+Net Working Capital)
     Q: Jul. 2014  Q: Oct. 2014
=Operating Income/( ( (Net PPE + Net Working Capital) + (Net PPE + Net Working Capital) )/2 )
=506.12/( ( (448.195 + max(-109.844, 0)) + (445.433 + max(-184.32, 0)) )/2 )
=506.12/( ( 448.195 + 445.433 )/2 )
=506.12/446.814
=113.27 %

where Working Capital is:

Working Capital(Q: Jul. 2014 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(191.816 + 40.586 + 160.371) - (274.594 + 225.353 + 2.67)
=-109.844

Working Capital(Q: Oct. 2014 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(224.913 + 38.718 + 139.357) - (347.315 + 239.993 + 0)
=-184.32

When net working capital is negative, 0 is used.

Note: The Operating Income data used here is four times the quarterly (Oct. 2014) operating income data.

3. It is also linked to Joel Greenblatt’s definition of Earnings Yield:

Brocade Communications Systems Inc's Earnings Yield (Joel Greenblatt’s) for the quarter that ended in Oct. 2014 is calculated as:

Earnings Yield (Joel Greenblatt’s)=Operating Income (TTM)/Enterprise Value (Q: Oct. 2014 )
=386.112/3973.33101
=9.72 %

4. EBIT is also linked to Operating Margin:

Brocade Communications Systems Inc's Operating Margin for the quarter that ended in Oct. 2014 is calculated as:

Operating Margin=Operating Income (Q: Oct. 2014 )/Total Revenue (Q: Oct. 2014 )
=126.53/564.358
=22.42 %

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.


Be Aware

Compared with a company’s EBITDA margin, Operating Margin can be manipulated by adjusting the rate of depreciation, depletion and amortization (DDA).

If a company is facing competition, its Operating Margin may decline. Often the Operating Margin declines well before the company’s revenue or even profit decline. Therefore, Operating Margin is a very important indicator of whether the company is facing problems.

For instance, by 2012, Nokia (NOK)’s problems were well known and its stock had lost more than 90% of its market value since 2007. But Nokia’s Operating Margin had already been in decline since 2002, although its earnings per share were still rising. Investors who paid attention to Operating Margin would have avoided this huge loss. The same can be said for Research-in-Motion (RIMM).

Therefore, Operating Margin is a very important screening filter for GuruFocus. GuruFocus’s Buffett-Munger screener requires that the profit margin is either consistent or expanding. The Model Portfolio of the Buffett-Munger screener has outperformed the market every year since inception in 2009.


Related Terms

Revenue, Cost of Goods Sold, Selling, General, & Admin. Expense, Research & Development, Gross Profit, EBITDA, Depreciation, Depletion and Amortization, Return on Capital, Return on Capital (Joel Greenblatt’s), Earnings Yield, Operating Margin


Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Brocade Communications Systems Inc Annual Data

Oct05Oct06Oct07Oct08Oct09Oct10Oct11Oct12Oct13Oct14
Operating Income 43741002928211178278308386

Brocade Communications Systems Inc Quarterly Data

Jul12Oct12Jan13Apr13Jul13Oct13Jan14Apr14Jul14Oct14
Operating Income 70869357748412120118127
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