The group is growing – but which companies drive profitability?

Revenue is rising. The sales report looks strong. Yet the group margin is falling. Before management asks every company to cut costs, the CFO needs to answer one question: Has operating performance deteriorated, or is the group growing fastest where margins were already lower?

These are different situations. They call for different decisions. A consolidated income statement shows the outcome, but not necessarily what drives it.

More earnings, a lower margin

The group margin is not the simple average of its companies’ margins. It is total earnings divided by total revenue, after relevant group adjustments and eliminations. Company size therefore matters as much as the margin percentage when explaining the overall result.

A simplified calculation illustrates the difference. The figures below are hypothetical, in NOK millions. They are neither customer data nor figures from Sumledger’s demo group. We use EBITDA as the earnings measure, comparable reporting periods and two companies with no intercompany revenue, central costs or other group adjustments.

• Company A has revenue of 60 and EBITDA of 12 in both periods. Its margin is 20 per cent.
• Company B increases revenue from 40 to 60 and EBITDA from 2 to 3. Its margin stays at 5 per cent.
• Total revenue rises from 100 to 120. EBITDA increases from 14 to 15. Yet the group margin falls from 14 to 12.5 per cent.

Neither company has a weaker EBITDA margin. The entire decline of 1.5 percentage points reflects the lower-margin company accounting for a larger share of revenue. At the same time, the group earns an additional NOK 1 million in EBITDA.

Calling this “weaker subsidiary performance” would be misleading. Calling the growth unambiguously positive would also be too simple. The next question is how much capital, capacity and risk that additional million requires.

Separate the scale of growth from its quality

Company A still generates most of the earnings. Company B generates all the earnings growth. Both observations matter, but they answer different questions.

To explain performance, the CFO should show each company’s contribution in absolute amounts, not just rank companies by margin percentage. A small company with a high margin may contribute less to group earnings than a large company with a moderate margin.

Then connect the change to a business explanation. Does growth come from more deliveries, higher prices, an acquisition or currency translation? Has the customer mix changed? Have costs risen because the company is building capacity for future revenue, or because current contracts are underpriced?

Separate acquired growth from performance in the companies included in both periods. Show currency effects separately where material. Otherwise, management may mistake a change in group composition for better or worse operations.

Give management an earnings bridge, not just a variance list

A useful earnings bridge starts with the previous period’s EBITDA and shows the contributions leading to the current result. In the example, the bridge is simple: 14 from the previous period, no change from A and an additional million from B produce 15.

In a real group, central costs, group adjustments and eliminations must also be visible. This connects the individual company explanations to reported group earnings. Show one-off effects separately without removing them from the reported result.

Use the same definition of the earnings measure across all companies. Comparable periods and consistent treatment of shared costs are necessary for the bridge to explain the business. If an allocation basis has changed, make that effect visible before crediting or blaming a company for the movement.

The short management explanation becomes: “EBITDA is increasing, but the margin is falling because all growth comes from the lower-margin company. We need to assess the economics of further growth there, not treat this as a margin decline across every company.”

Different causes should lead to different actions

An across-the-board cost cut is not a natural response to a pure mix shift. It could weaken capacity in the company driving earnings growth without addressing the strategic trade-off.

For B, management should investigate pricing, delivery costs and the capital required by new contracts. If growth contributes positively to earnings with acceptable capital requirements, a lower group margin may be a deliberate choice. If growth absorbs more and more cash without a corresponding return, higher revenue alone is a weak argument for continuing.

For A, the question is different: Can it grow profitably, or does its current high margin depend on limited capacity and an unusually favourable customer mix? A high historical margin does not promise the same margin on the next sale.

EBITDA is not cash flow either. Consider earnings alongside receivables, inventory, capital expenditure and other relevant capital needs before allocating resources. The company generating the most EBITDA is not always the one delivering the best return on capital.

Bring the explanation into the next budget decision

For the 2027 budget, every material growth initiative should have clear expectations for earnings contribution, resource needs and capital requirements. Track both absolute earnings and margin, and agree who will explain variances in the next reporting cycle.

Sumledger brings together financial control, group reporting and consolidation across companies and accounting systems. Analysis by company and account, with access to transactions and vouchers where source data and configuration support it, helps finance teams investigate what sits behind the numbers. Decisions on pricing, capacity and capital allocation remain with management.

Read more about group reporting across companies.

The goal is not to defend one margin percentage. It is to know which growth the group should prioritise, and why.