Question

7.4 Profit margins and turnover ratios vary from one industry to another. What differences would you expect to find between a grocery chain and a steel company? Think particularly about the turnover ratios, the profit margin, and the DuPont equation.

Answer 1

Solution Profit margin is income divided by revenue that is a ratio between revenue and income. Business with higher profit margin have lower expenditure related to sales and high profit while business with lower profit margin have higher expenditure related to sales Thus business with low margin needs to have high volume of sales to make up for the low margin. Turnover ratios tell how many times a company is trading their inventories or collecting their debtors. Higher turnover shows that company is producing and selling their products quickly and lower turnover ratio indicates that company is taking time in producing and selling their product that is there is more holding period. Grocery Chain are business having lower profit margin, high turnover ratio and hence higher volume of business transaction whereas Steel Company is a business having higher profit margin, low turnover ratio and hence lower volume of business transactions.