Page 105 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

Capital Allocation Decisions
Consolidated financial statements can hide the individual READING 19: INTEGRATION OF FINANCIAL STATEMENT ANALYSIS TECHNIQUES
characteristics of dissimilar subsidiaries –hence, firms are required
to disaggregate financial information by segments to assist users. MODULE 19.4: CAPITAL ALLOCATION

Although required disclosure under U.S. GAAP and IFRS is limited, the disclosures are valuable in identifying each segment’s contribution to revenue and profit, the
relationship between capital expenditures and rates of return, and which segments should be de-emphasized or eliminated.

Continuing our example, Thunderbird operates four different divisions: aircraft, automotive, marine, and specialty products. Figure 19.8 presents Thunderbird’s revenue and
EBIT by segment.
Using the % from Figure 19.9, we
can calculate the ratio of
proportional capital expenditures to
proportional assets for each
segment.

A ratio greater than one indicates
the firm is growing the segment by
allocating a greater % of its capital
expenditures to a segment than
that segment’s proportion of total
assets.
Conversely, a ratio of less than one
indicates the firm is allocating a
smaller % of its capital
expenditures to a segment than its
proportion of total assets.
If these trends continue, the
segments will represent a more or
less significant proportion of the
firm over time.
In terms of contributing revenue and EBIT, the automotive division is Automotive division requires the greatest proportion of
the largest segment while the specialty products division is the assets and capital expenditures. By comparing the EBIT margin
smallest. contributed by each segment to its
Specialty products division has the least assets of all ratio of capital expenditure
Also, the percentage contribution to EBIT by the specialty products four divisions and that the aircraft division has required proportion to asset proportion, we
division declined from 5.8% in 2014 to 5.1% in 2016. the least capital expenditures. can determine if the firm is
investing its capital in its most
Also note that the capital expenditures of the specialty profitable segments.
products division have increased over the period.