Question

Company	Gross Profit Margin	Operating Margin	Return on Assets	Return of Equity
Tesla	1.4%	4.9%	1.4%	4.19%
Toyota	5.41%	6.67%	2.9%	9.49%
Industry Standards	1.2%	4.7%	0.8%	4.19%

Describe the Equity Valuation in the above chart?

Answer 1

The gross profit margin of a company tells us how much it makes profit on its cost of goods sold or cost of sales.it essentially tells us how efficiently the company has been using its supplies and labour in the manufacturing process. in this case Toyota has a huge profit margin as compared to industry standards, which tells us that the company will have more money to spend in the future- for increasing production, for research and development of new products. Even though Tesla is also doing good, but as compared to its rival, it will have fewer porspects from investing into new ventures.

When it comes to operating margin, higher the better. It tells us how much profit company has to pay off its interest, taxes, expense etc. In this case Toyota has a higher operating margin which means that the company is well managed and potentially in less risky position as compared to Tesla.

return on assets essentailly tells us how profitable a company is as compared to its total assets. Since Toyota has better return on assets as comapred to both industry standards and Tesla, it tells us it is extremely efficient in termsof its asset utilisation as comapred to its industry counterparts. It also tells us that the earnings from investments made by Toyota have been rewarding. even though Tesla is also in a good position, given the industry standards, it is earning less as compared to Toyota.

Return on equity essentially tells us the financial performance of the company. It also tells us the dividend and the stock growth rate of the company. Since Toyota has higher return on equity, it will attract more investors as the its fianacial position and growth prospects are significantly higher compared to industry standards. It is advisable to have slightly higer return on equity as compared to industry standards to be at a better position. Thus Tesla needs to utilise its investments and assets better to increase its return on equity.