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Eastman Chemical Co (NYSE:EMN)
Operating Income
$1,145 Mil (TTM As of Jun. 2015)

Eastman Chemical Co's operating income for the three months ended in Jun. 2015 was $469 Mil. Its operating income for the trailing twelve months (TTM) ended in Jun. 2015 was $1,145 Mil.

Operating margin is calculated as operating income divided by its revenue. Eastman Chemical Co's operating income for the three months ended in Jun. 2015 was $469 Mil. Eastman Chemical Co's revenue for the three months ended in Jun. 2015 was $2,533 Mil. Therefore, Eastman Chemical Co's operating margin for the quarter that ended in Jun. 2015 was 18.52%.

Good Sign:

Eastman Chemical Co operating margin is expanding. Margin expansion is usually a good sign.

Eastman Chemical Co's 3-Year average Growth Rate for operating margin was 8.60% per year.

Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatt’s definition. Eastman Chemical Co's annualized return on capital for the quarter that ended in Jun. 2015 was 12.82%. Eastman Chemical Co's annualized return on capital (Joel Greenblatt’s) for the quarter that ended in Jun. 2015 was 29.44%.


Definition

Operating income, 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.

Eastman Chemical Co's Operating Income for the fiscal year that ended in Dec. 2014 is calculated as

Operating Income(A: Dec. 2014 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=9527-7306-755
-Research & Development-Depreciation, Depletion & Amortization-Others
-227-450--373
=1,162

Eastman Chemical Co's Operating Income for the quarter that ended in Jun. 2015 is calculated as

Operating Income(Q: Jun. 2015 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=2533-1813-194
-Research & Development-Depreciation, Depletion & Amortization-Others (1)
-57-142--142
=469

Operating Income(Q: Jun. 2015 )
=EBITDA-Depreciation, Depletion & Amortization-Others (2)
=615-142-4
=469

Eastman Chemical Co Operating Income for the trailing twelve months (TTM) ended in Jun. 2015 was 338 (Sep. 2014 ) + 27 (Dec. 2014 ) + 311 (Mar. 2015 ) + 469 (Jun. 2015 ) = $1,145 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.

Eastman Chemical Co's annualized Return on Capital (ROC) for the quarter that ended in Jun. 2015 is calculated as:

Return on Capital (ROC)(Q: Jun. 2015 )
=NOPAT/Average Invested Capital
=Oper. Inc.*(1-Tax Rate)/( (Invested Capital (Q: Mar. 2015 ) + Invested Capital (Q: Jun. 2015 ))/2)
=1876 * ( 1 - 25.81% )/( (10891 + 10819)/2)
=1391.8044/10855
=12.82 %

where

Invested Capital(Q: Mar. 2015 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=7293 + 351 + 3443 - 196
=10891

Invested Capital(Q: Jun. 2015 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=7072 + 251 + 3764 - 268
=10819

Note: The Operating Income data used here is four times the quarterly (Jun. 2015) operating income data.

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

Eastman Chemical Co's annualized Return on Capital (Joel Greenblatt’s) for the quarter that ended in Jun. 2015 is calculated as:

ROC (Joel Greenblatt’s)(Q: Jun. 2015 )
=EBIT/Average of (Net fixed Assets + Net Working Capital)
=EBIT/Average of (Net PPE+Net Working Capital)
     Q: Mar. 2015  Q: Jun. 2015
=EBIT/( ( (Net PPE + Net Working Capital) + (Net PPE + Net Working Capital) )/2 )
=1892/( ( (4957 + max(1557, 0)) + (5011 + max(1329, 0)) )/2 )
=1892/( ( 6514 + 6340 )/2 )
=1892/6427
=29.44 %

where Working Capital is:

Working Capital(Q: Mar. 2015 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(998 + 1447 + 525) - (1199 + 0 + 214)
=1557

Working Capital(Q: Jun. 2015 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(1021 + 1439 + 439) - (1370 + 0 + 200)
=1329

When net working capital is negative, 0 is used.

Note: The Earnings Before Interest and Taxes (EBIT) data used here is four times the quarterly (Jun. 2015) EBIT data.

3. Operating Income is also linked to Operating Margin:

Eastman Chemical Co's Operating Margin for the quarter that ended in Jun. 2015 is calculated as:

Operating Margin=Operating Income (Q: Jun. 2015 )/Total Revenue (Q: Jun. 2015 )
=469/2533
=18.52 %

* 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, EBIT


Historical Data

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

Eastman Chemical Co Annual Data

Dec05Dec06Dec07Dec08Dec09Dec10Dec11Dec12Dec13Dec14
Operating Income 7406545045193458449378001,8621,162

Eastman Chemical Co Quarterly Data

Mar13Jun13Sep13Dec13Mar14Jun14Sep14Dec14Mar15Jun15
Operating Income 39342847956236143633827311469
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