Question

Question 2: DuPont method

In year 2016, Apple Inc. had profit margin of 27.8% (i.e., it generated 27.8 cents of profit per dollar of sales) and asset turnover of 0.670 (i.e., it generated 67.0 cents of annual sales per dollar of assets).

a) The profit margin indicates that Apple has
low pricing power -- it cannot charge high prices relative to costs
high pricing power -- it can charge high prices relative to costs    
high production efficiency -- it has very low costs

The asset turnover indicates that Apple is
relatively inefficient in generating sales per dollar of assets
extremely efficient in generating assets per dollar of sales    
extremely efficient in generating sales per dollar of assets

b) Compute Apple's return on investment (ROI)
ROI = % (if your answer is 15.3%, enter 15.3 without the percent sign; round your answer to one digit after the decimal point, i.e., enter 15.3 not 15 or 15.332)

c) Huawei Technologies is a major manufacturer of low-cost Android phones. Think about Apple vs Huawei.
Which company likely has higher profit margin? Apple or Huawei

Which company likely has higher asset turnover? Apple or Huawei

Answer 1

Answer a-i

High pricing power -- it can charge high prices relative to costs

Explanation:

This means that Apple can charge high price against per dollar of cost.

Answer a-ii

Extremely efficient in generating sales per dollar of assets

Explanation:

Asset turnover ratio (ATR) refers to sales divided by assets. High ATR means that sales are high in respect to assets. So, it suggests that Apple is extremely efficient in generating sales per dollar of assets.

Answer b

Return on Investment = 18.626%

Calculation:

Return on investment (ROI) = Profit margin * Asset turnover

Return on investment (ROI) = 27.80 % * 0.670

Return on investment (ROI) = 18.626 %

Answer c

Higher profit margin = Apple

higher asset turnover = Huawei

Explanation:

Apple would have high profit margin as Apple is able to charge high margin against per unit cost. But Huawei, being the low cost manufacturer, would have high Asset Turnover Ratio (ATR) as it can generate high number of sales in respect to assets.

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