Question

Company 1:

	Industry Median	2020	2019	2018	2017	2016
Profitability
Gross Margin	39.2%	29.8%	29.3%	29.7%	30.1%	29.5%
EBITDA Margin	9.5%	9.3%	8.9%	9.3%	10.3%	9.7%
Operating Margin	6.1%	6.0%	5.5%	5.6%	6.3%	7.5%
Pretax Margin	5.4%	5.4%	4.9%	5.0%	5.6%	6.7%
Effective Tax Rate	23.3%	22.0%	21.3%	29.3%	32.7%	32.5%
Net Margin	4.2%	4.2%	3.8%	3.5%	3.8%	4.5%

Company 2:

	Industry Median	2020	2019	2018	2017	2016
Profitability
Gross Margin	21.3%	22.1%	21.7%	22.0%	22.4%	22.2%
EBITDA Margin	4.9%	4.1%	4.2%	4.2%	5.0%	5.2%
Operating Margin	3.2%	2.0%	3.6%	2.1%	3.0%	3.3%
Pretax Margin	2.4%	1.6%	3.3%	1.2%	2.5%	2.8%
Effective Tax Rate	23.6%	23.7%	22.6%	34.8%	32.8%	33.8%
Net Margin	1.5%	1.2%	2.5%	0.8%	1.7%	1.9%

Please discuss the profitability aspects for both companies and decide which company do you think perform better. The discussion should include, but not exhaustive to trend, prospect, competitive structure etc.

Answer 1

Solution:-

              Here, the above question profitability of the company shall be discussed by evaluating gross margin and net margin of the company. Gross margin is the difference between revenue and cost of goods sold divided by the revenue.Net margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividend have been deducted from the company’s revenue. In the above question company 1 have gross margin above 25% for the last 5 years, but the company 2 have less than 25% for the last 5 years, and the net profit margin of the company 1 is always higher than company 2. Both the company performing well in the operational stage. but the net profit the company 2 is always less than 3% for the last 5 years.

       As per the verification of the ration of two companies ,company 1 performing well more than company 2 because the company two gross margin and net margin is always more than company two. Ratios such as net profit ,gross profit ,operation margin and pre tax margins are always more than company two for the last 5 years. But, both the company has not been a increasing trend year by year, always the ratios are varying ,but from the discussion it is noted that Earning before interest, tax,Depreciation and amortization (EBITDA) in increasing trend for the company 2,this trend is not safe for the company. EBITDA shall be an increasing trend or a consistent trend to for understand the company is performing well ,on the basis of EBITDA Investors can assume that the company shall improve performance in the future.

      From the above discussion we can easily say that the company 1 performance shall be better than company two.