Question

Rocket Singh Software Ltd. and Aerodynamics Software Ltd. are two leading software companies based in Hyderabad. Rohit a fundamental analyst working with Ace Financials wants to choose one company where he can invest based on the data given about the company. Rohit believes that liquidity will dry in the short run and hence there is going to be lack of funds in the future. Suggest Rohit where he should invest?

Particular	Rocket Singh Software Ltd	Aerodynamics Software Ltd
Net Profit Margin	13%	12%
Asset Turnover	1.5	2.0
Financial Leverage	2	1.5

Answer 1

Particular	Rocket singh Software Ltd	Aerodynamics software Ltd	Remarks
Net profit margin	13%	12%	Higher of Rocket singh software Ltd
Asset turnover	1.5	2.0	Higer of  Aerodynamics software Ltd
Financial levearge	2	1.5	Higher of Rocket singh software Ltd

Analysis

Net profit Margin:-

The net profit margin indicates how much net income a company with total sale.Higher net profit margin indiacates a company is more efficient at converting sales into actual profit and more effective in its cost control.

In investment point of view it is advise Rohit should invest in the company which has higher net profit margin i.e in Rocket singh Software Ltd (13%).

Asset Turnover Ratio

It is known as the value of sale generated for every $ investment in asset for given financial year.

Higer asset turnover ratio means better is the management company and maximize its return for every investment.But it is observed that companies with low profit margin have higher Asstet turnover ratio.This is because low margine Companies tend to focus more on volume rather than per unit profit.

Therefore in investment point of view asset turnover ratio does not mesure how well a company is earn profit only mesure genereate sales.Higher sale may not get translate to increase profit.

Financial Leverage

Financial leverage measures the amount of value of total asstets supported for each one $ unit of equity.It also konwn as levearge ratio.The higher the financial leverage ratio is more leverage a company.

In above case financial leverage of Rocket singh software Ltd has higher ratio(2).

Conclusion

Rocket singh software Ltd has higher net margin ratio and higher Financial Leverage ratio.From above discussion it is advisable to Rohit should choose Rocket singh software Ltd for investment.