Question

A firm made a significant increase in the firm’s marketing expense towards the end of the fiscal year 2019. Since the marketing splurge is so late in the fiscal year, there is no expected increase in revenue in 2019. Explain how this investment would impact the firm’s Asset Turnover, operating margin, FCF, EVA, and TSR in 2019? In your opinion, how did this decision impact the firm’s financial performance in 2019 (increase, decrease, neutral, or not sure)?

Answer 1

The firm made significant marketing expense towards the end of financial year 2019 so the expenditure would be subtracted from the company’s incomes statement in the year 2019 but majority of its benefits will occur probably next year since there is no impact on the revenue, the asset turnover will increase because the expenditure would be treated as reduction in profits and total asset base would be low. The operating margin would decrease because of the increase in expenditure, Free cash flow to the firm will also decrease because marketing expenditure is treated as expenditure not non-cash expenditure. EVA and total shareholder return in (2019) will decrease however the impact can change if the company decides to treat the expenditure in a different way rather than setting it off in the same year.