Because chemical company activity is so diverse, it's common to see detailed segmental reporting.

This is helpful for modeling this type of company.

Here you can see lanxess has overall negative revenue growth, but projecting that out several years may be difficult because you'd be trying to forecast what's happening in consumer protection.

Things like water purification and specialty additives.

Maybe things you add to concrete to make it dry better.

These are very different sub-sectors, so it's better to separate them out because management have given us a lot of information and guidance.

This is possible. Management will often tell us sales margins and capital efficiency in individual segments enabling us to do the same in our forecasts.

This can then be built out into a sum of the parts.

Valuation revenue can be divided into a number of factors.

Here you can see Axo Noble's model where volume and price are being split out on their impact on revenue.

This is helpful because you can see that Axo is really struggling to sell more in this segment because chemical companies thrive on scale.

This does not bode well for Axo.

EBIT can also be divided If Axo raised its price.

If nothing happened to its cost, you'd see a one-to-one impact on EBIT.

This model takes a much more subtle approach.

It says that there's a drop through.

This represents that one-to-one ratio I just mentioned, but in a different ratio.

Here you can see we're predicting about a 99.4% impact of the price on the EBIT pricing drop through is the extent to which price increases convert to EBIT expansion.

This can result from mixed benefits, so selling different products price increases in excess to any costs which have not been forecast separately.

For example, if you look carefully at this model, you can see we are forecasting raw materials separately.

They get their own forecast because they're so important to Axo.

This means that the pricing drop through deals with all variable costs other than raw materials, things like labor.

Finally, in this bridge, you can see operating leverage.

This is an important idea in chemicals as it quantifies the balance between fixed and variable costs.

In this case, when Axo sells more E six times F two in the formula, it will have a 54% impact on its EBIT.

This represents Axo selling more products with the same production base.

It doesn't need a new factory every time. It sells another tin of paint.

The rest is consumed by variable costs rising in line with volumes.

This kind of bridge work may create a whole raft of metrics to analyze.

For a chemical company, for example, Axo has six segments it reports on with a lot of detail, with available info put out by management, we could calculate two bridges for each of these six segments.

We could then analyze the company's ability to use scale for each of these.

This would be a huge improvement on having one overall figure for revenue increase for the whole company and another for the EBIT margin.