Net operating profit margin and Invested Capital

Net operating profit margin

The net profit margin is calculated as an estimate of the net operating profit relative to the sales.

Table 4.2 demonstrates the underlying drivers for the development of the margin.

86 Table 4.2: Own creation

It can be concluded that Lego has been able to decrease their production cost, in relation to revenues, from 27% in 2013 to just below 25% in 2019. Lego maintains stable production costs as the company continuously invest in improving their factories e.g. introducing automated warehousing and processing facilities, including factories in countries with lower wage costs (LEGO.com, Q).

This level is significantly lower than of Lego’s peers as Mattel has increasing cost of sales, in relation to revenue, from 46 % to 56 % in the analyzed period whereas Hasbro maintains a level around 39 %. This might indicate that it is an advantage for Lego to have in-house production as they are able to keep costs lower than its competitors, as they, in a high degree, have outsourced their production. Lego is furthermore built around the System of Play, which, as previously mentioned, allows them to reap cost savings from not having to change manufacturing operations dramatically as trends in the industry changes as does most of their competitors.

The operating expenses for Lego have increased from 37 % to 42 % from 2013-2019. Lego has had an increasing number of newly established stores that require more expenses while the company also has increased their IT efforts e.g. improving their e-commerce platform and increasing their integrated digital play. The EBITDA-margin has, therefore decreased somewhat over time. As mentioned, the operating profit margin has decreased over time but is still at a satisfying level compared to Lego’s peers. It can, therefore, be concluded that Lego is effectively returning a higher bottom-line on its revenues compared to Mattel and Hasbro. For a full overview of the peers, see Appendix 11-12.

Inverse Asset turnover ratio

The underlying components of the inverse asset turnover rate inform of how much capital is required to generate DKK 1 of revenue.

The inverse asset turnover ratio has two primary components the net working capital (NOWC) and the net operating noncurrent assets (NONCA). In table 4.3, the decomposition of both NOWC and NONCA is presented.

Operating Profit Margin 2013 2014 2015 2016 2017 2018 2019

Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Production costs 27.0% 25.6% 25.0% 25.3% 25.7% 25.0% 24.9%

Gross-margin 73.0% 74.4% 75.0% 74.7% 74.3% 75.0% 75.1%

Operating expenses 37.0% 35.5% 36.2% 36.8% 38.8% 39.4% 41.9%

EBITDA margin 36.0% 38.9% 38.8% 37.9% 35.5% 35.6% 33.2%

Depreciation 3.0% 4.7% 4.3% 4.8% 5.6% 5.7% 5.1%

EBIT-margin 33.0% 34.2% 34.5% 33.1% 29.9% 29.9% 28.1%

Tax on EBIT 8.5% 8.9% 8.4% 7.9% 7.0% 6.9% 6.4%

NOPAT-margin 24.5% 25.3% 26.0% 25.2% 22.9% 23.0% 21.7%

87 Table 4.3: Own creation

The table above analyzes the period from 2014-2019 due to the use of average numbers on the balance sheet figures.

Lego has some fluctuations in their NWOC but is overall stable. More capital is tied up in 2017, mainly due to the decreasing revenues. NONCA has increased in the analyzed period, mainly due to increasing tangible assets including increasing Property, plant and machinery as Lego doubled the size of their factory in Hungary in 2016 and opened the factory in China the same year as well as the establishment of new stores. Hasbro is nearly at the same level as Lego in both NOWC and NONCA, whereas Mattel has had significant increases in their NONCA increasing from 0.57 in 2014 to 0.64 in 2019, explaining their decreasing turnover rate. For a full overview of the peers, see Appendix 11-12.

Sub conclusion

Based on the financial analysis, it can be concluded that Lego manages to prepare an annual report each year without remarks from the auditors. It has been necessary to reformulate the income statement and balance sheets for Lego and its peers as these have helped assess the companies’

profitability in the best way.

The profitability analysis has provided an insight into the company’s financial situation as well as its peers. It can be concluded that Lego’s ROE is at a satisfactory level compared to its peers although the ROE has been decreasing in the analyzed period. The financial leverage shows a decreasing trend as Lego is equity financed close to its peer Hasbro whereas Mattel has a significantly higher financial leverage.

Furthermore, Lego has had an overall decrease of its ROIC indicating but is sustained at a satisfactory level compared to its peers. The decrease in ROIC is caused by decreasing operating profit margin as

1/Asset Turnover Ratio 2014 2015 2016 2017 2018 2019

Net Operating Working Capital

Inventories/Revenue 0.070 0.069 0.076 0.077 0.068 0.068

Trade receivables/revenue 0.188 0.172 0.179 0.193 0.180 0.181

Other current operating assets/Revenue 0.049 0.045 0.055 0.057 0.051 0.054

Trade payables/Revnue -0.083 -0.079 -0.079 -0.081 -0.083 -0.086

Other current operating liabilities/Revnue -0.086 -0.085 -0.093 -0.101 -0.102 -0.101

Working capital/Revnue 0.138 0.121 0.138 0.145 0.114 0.117

Net Operating Non Current Assets

Intangible assets/Revenue 0.009 0.008 0.009 0.009 0.007 0.010

Tangible assets/Revenue 0.340 0.337 0.362 0.410 0.401 0.393

Other non current operating assets/Revenue 0.016 0.017 0.018 0.022 0.021 0.020

Other non-current operating liabiilities/revenue -0.009 -0.006 -0.003 -0.005 -0.006 -0.006

Total non-current assets/Revenue 0.357 0.358 0.386 0.435 0.423 0.417

Invested capital 0.495 0.479 0.524 0.580 0.537 0.533

88

well as a decreasing turnover rate of invested capital. The decrease in operating profit margin is caused by increasing operating expenses which are believed to be affected by the company’s increased IT efforts and increasing sales and marketing costs in relation to new established stores. The decreasing turnover rate of invested capital is mainly caused by increases in tangible assets due to increasing investments in production facilities. However, the level of Lego’s operating profit margin is relatively higher than its peers whereas the level of turnover rate of invested capital is rather similar to its peer, Hasbro.