Question

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

Answer:

Profit margins- These ratios are the measure of profitability of the company. These include Gross profit margin, operating profit margin, net profit margin, Return on investment, return on assets and return on shareholder's equity.

Turnover ratios- These ratios tell the effectiveness and efficiency of the company's management. These include Asset turnover, account receivables turnover, Inventory turnover ratio etc.

DuPont equation- It is the equation that divides the return on equity in three parts:

Profit margin * Asset turnover * Financial leverage

In grocery companies, profit margins are lower because sales is higher and products are sold very frequently so they work on lower margins while turnover ratios are higher because inventory is sold very frequently and higher volume of business transactions. These companies are Business to Customers (B2C)

In steel manufacturing companies, profit margins are very higher because products are not sold very frequently and they work on higher margins. In steel companies, turnover ratios are lower because sale is less and lower volume of business transactions. These companies are into Business to business (B2B).