Problem - Margins and Turnover
Accountants often express ROI as the product of two components-capital turnover and return on sales. You are considering investing in one of three companies, all in the same industry, and are given the following information:
|
Company
|
|
Abel
|
Baker
|
Charlie
|
|
Sales
|
$6,000,000
|
$2,500,000
|
$37,500,000
|
|
Income
|
$600,000
|
$375,000
|
$375,000
|
|
Capital
|
$3,000,000
|
$12,500,000
|
$12,500,000
|
1. Why would you desire the breakdown of return on investment into return on sales and turnover on capital?
2. Compute the return on sales, turnover on capital, and ROI for the three companies, and comment on the relative performance of the companies as thoroughly as the data permit.
3. Notice that Baker and Charlie have the same income and capital but vastly different levels of sales. Discuss the types of industries that Baker and Charlie might be in.