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Making Investment Decisions based on Financial Ratios
For Dr. Bueller to make the best decision on which company to invest in among the two,
it is important to consider all the relevant financial ratios. For this case, the ratios available for
the investor to analyze include the operating income margin, net income margin, current ratio,
earnings per share and the price-to-earnings (P/E) ratio. These are discussed below in relation to
Industrial Company #1 and Industrial Company #2 and investment advice given accordingly.
Operating Income Margin
Operating margin is a profitability measure that shows the amount of revenue that
remains after deducting the expenses and cost of goods sold. For Industrial Company #1, the
operating margins for 2008, 2009, and 2010 are 9.41%, 9.89%, and 10.11% respectively. The
industrial average operating margin is 10.50%. For Industrial Company #2, the operating
margins for the years 2008, 2009 and 2010 are 10.00%, 10.53%, and 11.06% respectively.
The operating margins for all the three years are higher for Industrial Company #2. This
means that for every dollar that this company makes in its sales, it constitutes a higher
percentage of it in operating earnings compared to Industrial Company #1. This means that
Industrial Company #2 is more efficient and hence more profitable than Industrial Company #1.
Therefore, using the operating margin criteria, Dr. Bueller should invest in Industrial Company
This is the proportion of revenue left after deducting interests, taxes, preferred stock
dividends, and all other operating expenses from a firm’s total revenue. The net margin is
significant since it is an indicator of how well a firm is converting its income into profits for its
shareholders. It therefore means that a company with a higher net margin is better in terms of
converting sales into profits. The three-year average net margin for Industrial Company #1 is
4.54% while that of Industrial Company #2 is 4.81% which i...