Q1. Which of the following types of firms do you expect to have particularly high or low asset turnover?

Supermarket – High asset turnover. Supermarkets tend to be high volume businesses. Many of the food products in supermarkets are perishable, and freshness is often used to differentiate products, forcing a certain amount of inventory turnover. The typical consumer buys groceries on a regular basis, guaranteeing grocery stores a certain level of overall business. Apart from inventories, supermarkets largest assets are its warehouses and stores, all constructed to be relatively inexpensive. Thus, high sales volumes generate a high measured level of asset turnover.

Pharmaceutical Company – High asset turnover. Drugs typically have a …show more content…

Consequently, differentiation among jewellery retailers falls along lines of intangibles such as service, quality and reputation. The greater the differentiation, the higher the expected margin.

Software company – high sales margins. Margins are high for several reasons
1. There are relatively high switching costs for consumers learning a new system.
2. Production costs are very low – just the expense of disks or CD-ROMS and manuals, or the costs of distributing software via the internet and providing help online.
3. Most of the initial software development costs have been previously expensed.

Hence, software companies enjoy large margins.

Q3. What are the potential benchmarks that you could use to compare a company’s financial ratios? What are the pros and cons of these alternatives?

Comparison to firm’s prior history. By comparing the company with itself over time, it is possible to document changes whether they be improvements or declines in the company’s performance. Changes in capital structure or improvements in gross margins or return on assets may evolve slowly as the firm implements the necessary changes in operations and financing. Only by looking at the pattern of these changes over time can we see if the individual changes in financial ratios from year to year are permanent or temporary. However, this approach does not tell us how well the firm is doing compared to other companies. Eg a firm may appear to have