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Li & Fung Ltd (LFUGF) Operating Income
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GuruFocus has detected 4 Warning Signs with Li & Fung Ltd $LFUGF.
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Li & Fung Ltd (OTCPK:LFUGF)
Operating Income
$380 Mil (TTM As of Dec. 2016)

Li & Fung Ltd's operating income for the six months ended in Dec. 2016 was $239 Mil. Its operating income for the trailing twelve months (TTM) ended in Dec. 2016 was $380 Mil.

Operating margin is calculated as operating income divided by its revenue. Li & Fung Ltd's operating income for the six months ended in Dec. 2016 was $239 Mil. Li & Fung Ltd's revenue for the six months ended in Dec. 2016 was $8,690 Mil. Therefore, Li & Fung Ltd's operating margin for the quarter that ended in Dec. 2016 was 2.75%.

Warning Sign:

Li & Fung Ltd operating margin has been in 5-year decline. The average rate of decline per year is -11%.

Li & Fung Ltd's 5-Year average Growth Rate for operating margin was -11.00% per year.

Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatt’s definition. Li & Fung Ltd's annualized return on capital for the quarter that ended in Dec. 2016 was 13.85%. Li & Fung Ltd's annualized return on capital (Joel Greenblatt’s) for the quarter that ended in Dec. 2016 was 230.09%.


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.

For company reported semi-annually, GuruFocus uses latest annual data as the TTM data. Li & Fung Ltd Operating Income for the trailing twelve months (TTM) ended in Dec. 2016 was $380 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.

Li & Fung Ltd's annualized Return on Capital (ROC) for the quarter that ended in Dec. 2016 is calculated as:

Return on Capital (ROC)(Q: Dec. 2016 )
=NOPAT/Average Invested Capital
=Oper. Inc.*(1-Tax Rate)/( (Invested Capital (Q: Jun. 2016 ) + Invested Capital (Q: Dec. 2016 ))/2)
=478.192 * ( 1 - 16.51% )/( (3153.355 + 2612.265)/2)
=399.2425008/2882.81
=13.85 %

where

Invested Capital(Q: Jun. 2016 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=753.972 + 562.984 + 2370.457 - 534.058
=3153.355

Invested Capital(Q: Dec. 2016 )
=Book Value of Debt + Book Value of Equity - Cash
=Long-Term Debt + Short-Term Debt + Total Equity - Cash
=753.458 + 528.999 + 2325.544 - 995.736
=2612.265

Note: The Operating Income data used here is two times the semi-annual (Dec. 2016) operating income data.

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

Li & Fung Ltd's annualized Return on Capital (Joel Greenblatt’s) for the quarter that ended in Dec. 2016 is calculated as:

ROC (Joel Greenblatt’s)(Q: Dec. 2016 )
=EBIT/Average of (Net fixed Assets + Net Working Capital)
=EBIT/Average of (Net PPE+Net Working Capital)
     Q: Jun. 2016  Q: Dec. 2016
=EBIT/( ( (Net PPE + Net Working Capital) + (Net PPE + Net Working Capital) )/2 )
=499.95/( ( (213.027 + max(-189.399, 0)) + (221.55 + max(-230.788, 0)) )/2 )
=499.95/( ( 213.027 + 221.55 )/2 )
=499.95/217.2885
=230.09 %

where Working Capital is:

Working Capital(Q: Jun. 2016 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(0 + 385.753 + 2099.241) - (2266.122 + 0 + 408.271)
=-189.399

Working Capital(Q: Dec. 2016 )
=(Accts Rec. + Inventory + Other Curr. Ass.) - (Accts Pay. + Defer. Rev. + Other Curr. Liab.)
=(0 + 277.841 + 2240.851) - (2209.473 + 0 + 540.007)
=-230.788

When net working capital is negative, 0 is used.

Note: The Earnings Before Interest and Taxes (EBIT) data used here is two times the semi-annual (Dec. 2016) EBIT data.

3. Operating Income is also linked to Operating Margin:

Li & Fung Ltd's Operating Margin for the quarter that ended in Dec. 2016 is calculated as:

Operating Margin=Operating Income (Q: Dec. 2016 )/Total Revenue (Q: Dec. 2016 )
=239.096/8689.899
=2.75 %

* 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.


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, Growth Rate Calculation Example (GuruFocus)


Historical Data

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

Li & Fung Ltd Annual Data

Dec07Dec08Dec09Dec10Dec11Dec12Dec13Dec14Dec15Dec16
Operating Income 462393515679880791812724595380

Li & Fung Ltd Semi-Annual Data

Jun12Dec12Jun13Dec13Jun14Dec14Jun15Dec15Jun16Dec16
Operating Income 385406233579295429225370141239
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