Turning Around Loss-Making Business Segments
As large organizations expand into diversified business segments, not all units perform equally. Some segments quietly dilute group profitability despite healthy revenue streams. To manage capital effectively and maximize enterprise value, financial leaders must take a structured approach to segment-level performance evaluation.
This article outlines how to assess underperforming or loss-making business units using:
- Contribution Margin Analysis
- Capital Return Metrics (ROIC, ROCE, ROE, ROA)
- Forecasting and Budgeting
- Post-Investment Review
All calculations reflect the updated 15% UAE Corporate Tax rate for large multinational enterprises (MNEs), effective January 1, 2025.
1. Identifying Underperformance: Contribution Margin Analysis
Contribution Margin (CM) shows how much a segment contributes toward covering fixed costs and generating profit, after accounting for variable costs.
CM Formula: Revenue - Variable Costs
CM Ratio: CM Revenue × 100
Segment-Level CM Example (in $000)
| Segment | Revenue | Variable Costs | CM | Fixed Costs | EBIT | Status |
|---|---|---|---|---|---|---|
| Segment A | 15,000 | 13,800 | 1,200 | 2,000 | -800 | 🔴 Loss-Making |
| Segment B | 20,000 | 16,000 | 4,000 | 2,500 | 1,500 | 🟢 Profitable |
| Segment C | 12,000 | 11,500 | 500 | 1,200 | -700 | 🔴 Loss-Making |
2. Capital Efficiency Metrics
| Metric | Formula (Visual) | Description |
|---|---|---|
| ROIC | NOPAT Invested Capital | Measures operating return on capital |
| ROCE | EBIT Capital Employed | Broad return on debt + equity |
| ROE | Net Income Equity | Return to shareholders |
| ROA | Net Income Total Assets | Asset productivity |
Capital Return Table (in $000)
| Segment | EBIT | NOPAT | Net Income | ROIC | ROCE | ROE | ROA |
|---|---|---|---|---|---|---|---|
| A | -800 | -680 | -600 | -6.80% | -8.00% | -12.00% | -6.00% |
| B | 1,500 | 1,275 | 1,050 | 15.94% | 18.75% | 21.00% | 13.13% |
| C | -700 | -595 | -500 | -6.26% | -7.37% | -10.53% | -5.26% |
3. Forecasting and Budgeting for Recovery
For loss-making segments, financial planning can model recovery scenarios. One simple improvement could be in the contribution margin.
Segment A Recovery Forecast (in $000)
| Scenario | Current | Recovery Plan |
|---|---|---|
| Revenue | 15,000 | 15,000 |
| CM Ratio | 8.0% | 12.0% |
| CM | 1,200 | 1,800 |
| Fixed Costs | 2,000 | 2,000 |
| EBIT | -800 | -200 |
A 4% CM improvement could reduce EBIT losses by 75%—highlighting the power of margin control.
4. Post-Investment Evaluation
For business units with high CapEx (e.g., store renovations, tech upgrades), a post-investment review ensures strategic alignment and ROI delivery.
| Segment | CapEx | Target ROI | Actual ROI | Payback Period | Status |
|---|---|---|---|---|---|
| D | 3,500 | 18% | 9% | 4 → 8 yrs | Underperforming |
| E | 2,000 | 15% | 16% | 5 → 4.5 yrs | On Track |
Conclusion
With the introduction of a 15% CIT for large MNEs in the UAE, segment-level capital discipline is more important than ever.
By applying contribution margin analysis, capital return metrics, forecasting, and post-investment review, organizations can:
- Identify underperforming units early
- Redirect investment to higher-yielding areas
- Maximize return on equity and shareholder value
📈 Sustainable profitability is not just about revenue—it's about return.