In 2019, a year in which the firm’s revenue increased, the firm’s operating margin increased, but...

In 2019, a year in which the firm’s revenue increased, the firm’s operating margin increased, but the firm’s net margin decreased. Based on this information, what can you say about the firm’s performance in 2019?

Expert Solution

Firm's investors require good returns on their capital. Thus, ROE (return on equity) and ROIC (return on invested capital) are the best ratios to evaluate profitability from the investor's perspective.

Both of these ratios use net income in the numerator.

If the net margin has declined, it is a reason to be concerned because it means that profitability has decreased (although net income may have increased as an absolute number).

Thus, the reasons for decreased net margin must be evaluated, and corrective action must be taken.

The firm's performance may be good based on the absolute value of net income in 2019, however it is not good if the net margin has declined. Profitability must improve.

jeff jeffy answered 2 years ago

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