This workout is going to help us understand research and development in industrial companies and how it can lead to some comparability issues. Having zoomed in a bit, we can take a look at the information that's been given.

We have two sets of footnotes, one from BMW, and we have an extract from the footnote of R&D, which tells us things like how much they spent, what their capitalization rate was.

We then have similar information for General Motors, which is a rival.

Notice that BMW is in Euros, so a European company that would report under IFRS and General Motors is in dollars, and this is a US GAAP company, which can create some of our comparability issues.

We've been tasked with figuring out how much they spend as a percentage of revenues and exploring that comparability issue that I mentioned just now. Reading through, we can find the total spend, the capitalization rate, amortization, and overall revenues. We can then read again and say it's only automotive revenues, which generate the kind of R&D that we're interested in, and so it's automotive revenues there that we're most interested in. For General Motors we can find they expensed 7.8 billion.

Their automotive revenue was 133 and they had automotive costs 120 and just shy of 10. We would emit the banking arm from our analysis here.

Notice that General Motors doesn't have a capitalization percent because it's running US GAAP and so probably isn't capitalizing very much or anything at all.

Once we've noticed these numbers, we can then transfer them into the gaps provided below.

Our first job was to figure out the R&D spend as a percentage of revenue. We can take the R&D spend and divide by the revenue.

We can then go ahead and do that for the second company.

You can see that both levels are high, but BMW's is higher, 8%, and if you wanted a simple analysis of that, you could say that BMW is investing more into the long-term future of its products by investing more in R&D.

The reported EBIT margin is easy for General Motors, but to make the two systems compatible, what we're Going to have to do is restate BMW's financial statements as if they were reporting under US GAAP.

The first problem we have is there is a fair amount of capitalized R&D sitting in the financial statements of BMW. When it sits there, it amortizes like many intangibles that amortization would never take place with this General Motors because General Motors doesn't capitalize its intangibles in the same way. What we're going to need to do is add back the amortization of capitalized R&D.

The second thing is we need to figure out how much of the research and development is being capitalized within the year and avoiding the P&L. In BMW, they're spending 6 8 90, of which 43.3% is finding its way into assets rather than the P&L. If we're going to pull this in into alignment with GM, that should really hit the P&L, and so we're going to have to adjust by imagining that instead of being capitalized, it hits the P&L as an expense.

Once we've imagined the situation having fixed the amortization and the R&D that's capitalized, we can find an adjusted EBIT.

That adjusted EBIT is now in alignment with General Motors EBIT and it's a more like for like comparison to find the adjusted EBIT margin as opposed to doing it just on reported numbers.

You can see that the numbers that we're adjusting by are not insignificant, and that's because the industrials sector has very high R&D as a whole and has high capitalization ratios because a lot the R&D is already into the development stage being fine tuning as opposed to inventing something from nothing.