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Red Hat Inc  (NYSE:RHT) Operating Income: $344 Mil (TTM As of May. 2017)

Red Hat Inc's Operating Income for the three months ended in May. 2017 was $88 Mil. ts operating income for the trailing twelve months (TTM) ended in May. 2017 was $344 Mil.

Operating Margin % is calculated as Operating Income divided by its Revenue. Red Hat Inc's Operating Income for the three months ended in May. 2017 was $88 Mil. Red Hat Inc's Revenue for the three months ended in May. 2017 was $677 Mil. Therefore, Red Hat Inc's Operating Margin % for the quarter that ended in May. 2017 was 12.94%.

Warning Sign:

Red Hat Inc operating margin has been in 5-year decline. The average rate of decline per year is -4.3%.

Red Hat Inc's 5-Year average Growth Rate for Operating Margin % was -4.30% per year.

Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatt's definition. Red Hat Inc's annualized ROC % for the quarter that ended in May. 2017 was 63.55%. Red Hat Inc's annualized ROC (Joel Greenblatt) % for the quarter that ended in May. 2017 was 189.17%.


Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

* Premium members only.

Red Hat Inc Annual Data

Feb08 Feb09 Feb10 Feb11 Feb12 Feb13 Feb14 Feb15 Feb16 Feb17
Operating Income Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only 201.04 232.29 249.99 288.05 332.25

Red Hat Inc Quarterly Data

Aug12 Nov12 Feb13 May13 Aug13 Nov13 Feb14 May14 Aug14 Nov14 Feb15 May15 Aug15 Nov15 Feb16 May16 Aug16 Nov16 Feb17 May17
Operating Income Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only Premium Member Only 75.36 81.88 80.77 94.23 87.61

Calculation

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.

Red Hat Inc's Operating Income for the fiscal year that ended in Feb. 2017 is calculated as

Operating Income(A: Feb. 2017 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=2411.803-354.378-1244.512
-Research & Development-Depreciation, Depletion and Amortization-Others
-480.668-85.309--85.309
=332

Red Hat Inc's Operating Income for the quarter that ended in is calculated as

Operating Income(Q: May. 2017 )
=Revenue-Cost of Goods Sold-Selling, General, & Admin. Expense
=676.796-100.696-351.329
-Research & Development-Depreciation, Depletion and Amortization-Others (1)
-137.163-21.817--21.817
=88

Operating Income(Q: May. 2017 )
=EBITDA-Depreciation, Depletion and Amortization-Others (2)
=112.832-21.817-3.407
=88

Operating Income for the trailing twelve months (TTM) ended in May. 2017 was 81.884 (Aug. 2016 ) + 80.773 (Nov. 2016 ) + 94.225 (Feb. 2017 ) + 87.608 (May. 2017 ) = $344 Mil.

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.


Explanation

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

Red Hat Inc's annualized ROC % for the quarter that ended in May. 2017 is calculated as:

ROC %(Q: May. 2017 )
=NOPAT/Average Invested Capital
=Operating Income*(1-Tax Rate)/( (Invested Capital (Q: Feb. 2017 ) + Invested Capital (Q: May. 2017 ))/2)
=350.432 * ( 1 - 13.82% )/( (532.162 + 418.234)/2)
=302.0022976/475.198
=63.55 %

where

Invested Capital(Q: Feb. 2017 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt & Capital Lease Obligation + Current Portion of Long-Term Debt + Total Equity - Cash
=745.633 + 0 + 1247.32 - 1460.791
=532.162

Invested Capital(Q: May. 2017 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt & Capital Lease Obligation + Current Portion of Long-Term Debt + Total Equity - Cash
=751.173 + 0 + 1305.544 - 1638.483
=418.234

Note: The Operating Income data used here is four times the quarterly (May. 2017) operating income data.

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

Red Hat Inc's annualized ROC (Joel Greenblatt) % for the quarter that ended in May. 2017 is calculated as:

ROC (Joel Greenblatt's)(Q: May. 2017 )
=EBIT/Average of (Net fixed Assets + Net Working Capital)
=EBIT/Average of (Property, Plant and Equipment+Net Working Capital)
     Q: Feb. 2017  Q: May. 2017
=EBIT/( ( (Property, Plant and Equipment + Net Working Capital) + (Property, Plant and Equipment + Net Working Capital) )/2 )
=364.06/( ( (189.629 + max(-1036.162, 0)) + (195.281 + max(-1128.214, 0)) )/2 )
=364.06/( ( 189.629 + 195.281 )/2 )
=364.06/192.455
=189.17 %

where Working Capital is:

Working Capital(Q: Feb. 2017 )
=(Accounts Receivable + Total Inventories + Other Current Assets) - (Accounts Payable & Accrued Expense + Defer. Rev. + Other Current Liabilities)
=(634.821 + 0 + 220.09) - (376.957 + 1512.762 + 1.354)
=-1036.162

Working Capital(Q: May. 2017 )
=(Accounts Receivable + Total Inventories + Other Current Assets) - (Accounts Payable & Accrued Expense + Defer. Rev. + Other Current Liabilities)
=(429.908 + 0 + 233.258) - (303.668 + 1486.409 + 1.303)
=-1128.214

When net working capital is negative, 0 is used.

Note: The EBIT data used here is four times the quarterly (May. 2017) EBIT data.

3. Operating Income is also linked to Operating Margin:

Red Hat Inc's Operating Margin % for the quarter that ended in May. 2017 is calculated as:

Operating Margin %=Operating Income (Q: May. 2017 )/Revenue (Q: May. 2017 )
=87.608/676.796
=12.94 %

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

4. Please click Growth Rate Calculation Example (GuruFocus) to see how GuruFocus calculates Wal-Mart Stores Inc (WMT)'s revenue growth rate. You can apply the same method to get the operating income growth rate using operating income per share data.


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.


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