1. How does cardinal health industry profit margin compare to that of firms in its industry?
2. How does cardinal health industry asset turnover compare to that of firms in its industry?
3. Generally we see a trade-off between profit margin and turnover, as high margin products often have lower sales volume than low margin products. Which describes cardinal health industry ratios best: high margin or high turnover? Does that seem to be consistent with what you know about the firm’s strategy? (Ex. We know Wal-Mart positions itself as having the lowest prices, so we expect them to have low margins and high turnover.) Is this an industry-wide approach in your industry or are some firms the “low price leaders” while others are the “luxury” brands?
4. Return on Assets (ROA) is one measure of the effectiveness of a firm’s investment policy. Using DuPont Analysis, ROA is equal to Net Profit Margin times Total Asset Turnover. How does your firm’s ROA compare to that of firms in its industry? Would you say your firm’s approach to the trade-off between margin and turnover is successful? (Ex. A firm may lower margins to increase turnover but the resulting increase might not be enough to make the firm’s ROA as good as or better than its competitors. That would be unsuccessful.)
5. Return on Equity (ROE) measures the effectiveness of a firm’s investment policy and its financing or capital structure policy. Using DuPont Analysis, ROE equals ROA (the investment results) times Equity Multiplier (the effect of debt financing); therefore larger differences between ROA and ROE indicate more leverage. Does your firm appear to use a lot of debt to “lever up” ROE? Does your firm’s use of debt seem risky (interest coverage < 4)?
6. Complete or reword the following sentence, filling in the blanks: Cardinal health industry has relatively __________________ margins and ___________________ turnover. Net profit margin times total asset turnover equals ROA, which is a measure of the effectiveness of a firm’s investment policy. ROA times the equity multiplier equals ROE. Firms can therefore boost their return to stockholders by using debt to finance investments. The more debt used, the greater the boost but also the greater the risk of bankruptcy. (Enter your firm’s name) ROE is relatively ________ because __________ (enter margin, turnover, and/or leverage) is ___________. My firm _________ (should or should not) consider using more debt because____________.