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Hovnanian Enterprises Inc (NYSE:HOV)
Operating Income
$105 Mil (TTM As of Apr. 2015)

Hovnanian Enterprises Inc's operating income for the three months ended in Apr. 2015 was $-6 Mil. Its operating income for the trailing twelve months (TTM) ended in Apr. 2015 was $105 Mil.

Warning Sign:

Hovnanian Enterprises Inc had operating loss over the past 3 years.

Operating margin is calculated as operating income divided by its revenue. Hovnanian Enterprises Inc's operating income for the three months ended in Apr. 2015 was $-6 Mil. Hovnanian Enterprises Inc's revenue for the three months ended in Apr. 2015 was $469 Mil. Therefore, Hovnanian Enterprises Inc's operating margin for the quarter that ended in Apr. 2015 was -1.31%.

Hovnanian Enterprises Inc's 3-Year average Growth Rate for operating margin was 0.00% per year.

Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatt’s definition. Hovnanian Enterprises Inc's annualized return on capital for the quarter that ended in Apr. 2015 was -0.95%. Hovnanian Enterprises Inc's annualized return on capital (Joel Greenblatt’s) for the quarter that ended in Apr. 2015 was -2.25%.


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.

Hovnanian Enterprises Inc's Operating Income for the fiscal year that ended in Oct. 2014 is calculated as

Operating Income(A: Oct. 2014 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=2063.38-1674.389-254.912
-Research & Development-Depreciation, Depletion & Amortization-Others
-0-3.417--3.417
=134

Hovnanian Enterprises Inc's Operating Income for the quarter that ended in Apr. 2015 is calculated as

Operating Income(Q: Apr. 2015 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=468.949-405.971-69.107
-Research & Development-Depreciation, Depletion & Amortization-Others (1)
-0-0.87--0.87
=-6

Operating Income(Q: Apr. 2015 )
=EBITDA-Depreciation, Depletion & Amortization-Others (2)
=-5.581-0.87--0.322
=-6

Hovnanian Enterprises Inc Operating Income for the trailing twelve months (TTM) ended in Apr. 2015 was 43.342 (Jul. 2014 ) + 61.964 (Oct. 2014 ) + 5.483 (Jan. 2015 ) + -6.129 (Apr. 2015 ) = $105 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.

Hovnanian Enterprises Inc's annualized Return on Capital (ROC) for the quarter that ended in Apr. 2015 is calculated as:

Return on Capital (ROC)(Q: Apr. 2015 )
=NOPAT/Average Invested Capital
=Oper. Inc.*(1-Tax Rate)/( (Invested Capital (Q: Jan. 2015 ) + Invested Capital (Q: Apr. 2015 ))/2)
=-24.516 * ( 1 - 33.66% )/( (1689.4 + 1723.126)/2)
=-16.2639144/1706.263
=-0.95 %

where

Invested Capital(Q: Jan. 2015 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=1906.929 + 185.754 + -129.984 - 273.299
=1689.4

Invested Capital(Q: Apr. 2015 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=1908.38 + 217.946 + -146.334 - 256.866
=1723.126

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

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

Hovnanian Enterprises Inc's annualized Return on Capital (Joel Greenblatt’s) for the quarter that ended in Apr. 2015 is calculated as:

ROC (Joel Greenblatt’s)(Q: Apr. 2015 )
=EBIT/Average of (Net fixed Assets + Net Working Capital)
=EBIT/Average of (Net PPE+Net Working Capital)
     Q: Jan. 2015  Q: Apr. 2015
=EBIT/( ( (Net PPE + Net Working Capital) + (Net PPE + Net Working Capital) )/2 )
=-25.804/( ( (46.967 + max(1038.94, 0)) + (46.414 + max(1161.042, 0)) )/2 )
=-25.804/( ( 1085.907 + 1207.456 )/2 )
=-25.804/1146.6815
=-2.25 %

where Working Capital is:

Working Capital(Q: Jan. 2015 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(0 + 1481.976 + 24.488) - (161.592 + 33.901 + 272.031)
=1038.94

Working Capital(Q: Apr. 2015 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(0 + 1538.757 + 28.309) - (357.488 + 41.431 + 7.105)
=1161.042

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 (Apr. 2015) EBIT data.

3. Operating Income is also linked to Operating Margin:

Hovnanian Enterprises Inc's Operating Margin for the quarter that ended in Apr. 2015 is calculated as:

Operating Margin=Operating Income (Q: Apr. 2015 )/Total Revenue (Q: Apr. 2015 )
=-6.129/468.949
=-1.31 %

* 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.

Hovnanian Enterprises Inc Annual Data

Oct05Oct06Oct07Oct08Oct09Oct10Oct11Oct12Oct13Oct14
Operating Income 781558-609-1,101-918-214-18825132134

Hovnanian Enterprises Inc Quarterly Data

Jan13Apr13Jul13Oct13Jan14Apr14Jul14Oct14Jan15Apr15
Operating Income -23183761-21743625-6
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