Which part of the business makes the money? Reading segment results

Here are the four numbers. Before you read on, guess which business is the better one.

If you said "stalls, obviously, they're five times bigger", hold that thought. Size and quality are different questions, and the table answers both if you do four small sums.

An analyst has emailed Sameer asking exactly this. He has brought the table to Riya.

The margin of each segment

Margin is profit per rupee of sales. Divide each segment result by its own revenue.

So each rupee of stall sales leaves 12 paise of operating profit, and each rupee of supply sales leaves 10. The company's 11.7% is a blend, pulled down a little by supply.

"Segment result" here means operating profit, or EBIT: profit before interest and tax. That's the level most Indian companies report segments at, because interest and tax are usually managed for the company as a whole.

Share of sales against share of profit

Now compare each segment's slice of revenue with its slice of profit.

This is the quickest test in segment reading. A segment whose share of profit is bigger than its share of sales is pulling above its weight. One whose share of profit is smaller is being carried. Here the gap is small: supply brings a sixth of the sales and a seventh of the profit.

What one point of margin is worth

Margins sound abstract. Turn them into rupees.

• One percentage point of margin on stalls: 1% × ₹100 crore = ₹1 crore of EBIT.
• One point on supply: 1% × ₹20 crore = ₹20 lakh.

And a "what if": if supply earned the stalls' 12% instead of its 10%, its EBIT would be 12% × ₹20 crore = ₹2.4 crore, not ₹2 crore. That's ₹0.4 crore more, taking total EBIT from ₹14 crore to ₹14.4 crore.

That tells management where effort pays. Squeezing one point out of the stalls is worth five times as much as one point out of supply. Closing supply's whole margin gap is worth less than a single point on the stalls.

Making the segments add up to the company

The segment results should reconcile to the company's own profit and loss. Ind AS 108 requires that reconciliation, and SEBI's format asks for anything not given to a segment to be shown separately as "unallocated".

Sameer Chai gives every cost to one segment or the other, so the segments add up exactly. Many companies keep head-office costs, or interest income, as unallocated lines. Then the segments add up to more (or less) than the company's operating profit, and the line marked "unallocable" is worth a look: a big, growing one can make every segment look healthier than the company really is.

Two more things the format makes companies show: inter-segment revenue, as a deduction, so sales from one segment to another aren't counted twice, and the segment table with every quarter's results, not just at the year end. Sameer Chai's segments don't sell to each other, so there's nothing to deduct.

Who decides what counts as a segment

Then three number tests decide which ones must be reported on their own. A segment counts if any one of these is 10% or more of the total for all segments:

• its revenue, including sales to other segments;
• its profit or loss (measured against the bigger of total profits or total losses);
• its assets.

Supply's revenue is 20 ÷ 120 ≈ 16.7%, so it passes the first test on its own. There's also a floor: the reported segments must cover at least 75% of the company's outside revenue. Stalls alone cover 83%, so that floor is met either way.

What about premix? Sameer Chai Foods is a separate company, so it only shows up in the consolidated accounts. There its revenue is 8 ÷ 128 ≈ 6.25% of the group, below the revenue test. Whether it passes the profit or assets test depends on numbers we haven't set out here, so the group might report it as a third segment or fold it into "others". In the annual report, Ind AS 108 requires segment information in the consolidated statements; a company that also gives it in the standalone set must follow the same standard.

What an analyst asks next

The four sums answer "which part earns more per rupee". An analyst's follow-up questions are about everything the sums can't see.

1. How much money does each segment tie up? SEBI's format gives segment assets and liabilities as well. A 10% margin on a business that needs few kiosks and little stock could earn more on its capital than 12% on one that needs a lot. Divide each segment's EBIT by its assets, minus its liabilities, and you get a rough return on the money each one uses.
2. Which is growing faster? One year of segments is a photo. Last year's split, set beside this year's, shows whether supply is the small fast one or the small slow one.
3. How are shared costs split? The ordering app, the vans and head office serve both. Ind AS 108 makes companies explain how they measure segment profit. Move a few crore of shared cost from one segment to the other and the margins swap places.
4. Does one customer matter too much? If a single customer brings in 10% or more of the company's revenue, Ind AS 108 makes the company say so, and which segment it sits in. For Sameer Chai, that line is ₹12 crore. A big office contract in the supply segment could get close.
5. Is the quarter-by-quarter trend steady? Segment tables come with every quarter's results. A segment whose margin slips three quarters in a row tells you more than a yearly average.

Real reports show why question 2 matters. On the stop above, a large food company's international sales grew while that segment's profit fell. A rising top line with a falling segment result is the pattern to look for.