hard · Corporate Credit Analysis
An analyst is comparing two peers in the chemical industry. Andean Chemicals has an EBITDA margin of 25% and fixed costs representing 60% of its total cost structure. Iron Ore Corp has the same margin but fixed costs are only 20% of its structure.
If revenue for both drops by 10%, which firm will see a sharper EBITDA decline and why?
- Both will decline by 10%, as margins are identical
- Iron Ore Corp, because its costs are more variable
- Andean Chemicals, but only if it also carries higher financial leverage
- Andean Chemicals, due to higher operating leverage
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