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.

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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

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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%

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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.

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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

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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.