Operating Leverage of a Segment
So I'm supposed to get operating leverage of a particular segment of a company, how do I go about doing this? Let's use Disney's Theme Parks segment as an example...
If operating leverage is (Contribution Margin)/(Net Operating Income),
and Contribution margin is (Theme park sales - Variable Theme park expenses),
How do I figure out variable expenses for theme parks. Disney doesn't break down the segment into fixed and variable expenses. I would assume that PP&E is a fixed expense, but I don't know what portion of PP&E is attributable to Disney's theme park segment. How would I go about this? Disney only discloses the following by segment:
Revenues, Op Income, Capex, Depreciation Expense, Amortization expense, "identifiable assets"
Am i missing something?
Thanks a lot!
anybody?
Depreciation is essentially how you measure PP&E on the Income Statement, so it is a fixed expense. As you mentioned, the company attributes depreciation to the segment already.
Then how would i figure out the variable costs?
EDIT: I have operating income by segment. Does that mean I have to do Theme park Revs - Theme park EBIT, and then take the FIXED costs out of that (Depreciation attributable to Theme parks) to get the Variable costs?
Thanks for your help. I really do appreciate it!
anyone?
I don't know a thing about theme parks...but...
*Talk to management *Look at sell side research reports, investor presentations and earnings calls *Look at pure play theme parks to decipher their cost structure, their filings may give more detail. I'm sure more than a few have been bankrupt, look at the disclosure statements (Six Flags) *Think through the costs it takes to run a theme park: Water, Repairs & Maintenance, employees, mgmt., concessions, insurance, leases, etc. and determine what are fixed, variable, or semi.
I think Damodaran used Disney as an example in his MBA corporate finance class a few years back, may want to see if he had any insight.
I'd imagine they have a decent amount of operating leverage until they have to build a new park/location and you get a dramatic step up in costs. They are probably cyclical in nature depending on how the economy is doing so you could look back at down years to see how the cost structure fluctuates with revenue.
No clue if this is any help...
Any help is appreciated, so no worries. Fristly, I don't think the operating leverage would fluctuate before the opening of a new park. From my understanding of the definition, it should always remain high because of the capital (pp&e) intensive nature of the theme parks industry. Operating leverage is a reflection of is the ratio between fixed costs/per sale (since talking about theme parks lets say per 1 guest) and variable costs/per 1 guest. Neither of those should change unless the depreciation attributable to theme parks rises due to the building of a new Theme park that is not yet open (so it doesn't generate any sales)... right?
But anyway, the main problem is that Disney doesn't disclose a fixed cost line item (ie the costs to run the theme parks like water, repairs & maintenance). But vfrex pointed out that the depreciation attributable to the Parks (which DIS does disclose) is the fixed portion of the costs.
If that's the case, then to get variable costs, do I just have to subtract "Depreciation attributable to Theme parks (ie PP&E theme park)" from "Theme parks Operating income" to get the Variable costs of theme parks segment?
Thank you!
To your first point, yes I agree with that. I was saying that for each new park you have a step up in cost structure. Imagine a stair case. Was more of me just thinking out loud.
I am not sure what your end game is here. You can do it that way (depreciation less total) if you want a high level swag. I think each expense item is going to behave a bit differently depending on the volume of guests. Some will be fixed, variable or semi-variable/fixed. The items I listed above are some data points I would look at to try to piece together a p&l with the key drivers. In addition, there could be multiple revenue streams that have different economics associated with them. You are never going to have perfect information but that may help.
I could be completely wrong and the other expenses are basically immaterial compared to depreciation. Also depreciation is a non-cash expense that companies can play games with especially with long lived assets. Would want to look at historical and planned cap ex if you are trying to value the business.
That's all I got...know nothing about theme parks...best of luck
anybody care to enlighten me, please?
There's a very low probability that you'll be able to get a black-and-white split between variable and fixed expenses. I would rather look at the incremental operating margin (change in EBIT/change in revenues) to get a good understanding of operating leverage and if fixed costs are a large % of their cost base.
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