Comment, question or quotation of the day
01-04-2020 : If turnover falls by 10% as a result of the coronavirus crisis, how much will profits fall?
This is a question that is easy to answer ... to a certain extent.
In each edition of Vernimmen we give a breakdown of the fixed and variable costs estimated by Exane for the main European listed companies. With an operating leverage of 2.7 estimated for 2019, a 10% drop in sales translates, on average, into a 27% drop in operating income and probably a little more for net income due to the fixed nature of financial expenses.
That said, like the slope of a tangent to a hyperbola, operating leverage becomes distorted and increases the closer one gets to breakeven. For example, with the 10% drop in sales, operating leverage is no longer 2.7, but 3.2. A further 10% drop in sales would this time lead to a 32% drop in operating income. This is in line with the first break-even law, which states that the closer you are to break-even, the greater the sensitivity of earnings to a change in business.
However, many companies have higher operating leverage than listed companies because their margins are lower than those of the tenors of the stock market, which averaged an operating margin of 15.1%.
Good day and see you tomorrow
31-03-2020 : Quote of the day
“We should let the markets take care of all that is important, and leave what is essential to the State.”
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The Vernimmen.com Letter
Number 128 of March 2020
News : Liquidity and solvency in this new world
Statistics : Easier said than done: the vote of institutional investors in favour of environmental issues during AGMs
Research : Dramatic drop in the number of listed companies
Q&A : If the dividend doesn't remunerate shareholders, what does?
COMMENTS : Comments posted on Facebook