Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Five – Valuing a company
Exhibit 5.6: Sandvik EBIT margin
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Less distorted by acquisitions, disposals and currency, this very much follows the
pattern that we might expect, with a boom in the late 1980s, a severe recession in
the early 1990s, a falling away with the Asian economic crisis of 1997/8, and a
very bad year in 2003. It also shows that the underlying trend in operating margin
is almost completely stable, which should again make it reasonable to use this as
a basis for extrapolation.
Remember that it is not only sales and margins that are cyclical. There tends to
be a build-up of inventory as companies enter recession, and a working off of the
surplus as they move out of it again. This basic cycle can be broken by price
discounting, changes in credit terms to customers, and other business responses,
or even changes in revenue recognition (see Chapter four) so a perfect correlation
with economic activity is unlikely. And, again, there is a question of trend.
Exhibit 5.7 shows inventory days for Sandvik, expressing inventory in terms of
cost of goods sold.
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