Ratio Analysis Fundamentals - Essay Example

The gross profit margin shows the ability of an entity to control its cost of sales and management’s efficiency in producing each unit of a product (Tracy, 2012). From table 1 above, the gross profit margins for General Motors, Alliance Pharmaceutical, Inc., Apple Inc., and Walmart Inc. were 13.19%, 60.29%, 38.58%, and 24.82% respectively. Operating profit margin, on the other hand, shows an entity’s ability to control its operating expenses such as selling and distribution costs, and administrative expenses.

From the table, I, operating profit margins for General Motors, Alliance Pharmaceutical, Inc., Apple Inc., and Walmart Inc. were 3.30%, 29.35%, 28.72%, and 5.64% respectively. In the same context, the net profit margin indicates an entity’s ability to control its financing expenses (Tracy, 2012). In this regard, General Motors, Alliance Pharmaceutical, Inc., Apple Inc., and Walmart Inc.’s net profit margins were 3.43%, 21.06%, 21.61%, and 3.36% respectively as shown in table 1 above.

Besides the effects of operating expenses and financing activities on the profit margins computed above, the Entrepreneur Media, Inc. (2009) associates the differences in these margins to the different industries that the companies analyzed in this case operate in. As such, these industries treat their inventories differently from each other1.ConclusionThis paper aimed at comparing profit margins for different companies, operating in different industries. From this comparison, it has been evidenced that an entity’s ability to control its costs, directly affects its gross profit margin, operating profit margin, and net profit margin.

Additionally, the different ways in which different entities in different industries account for their inventories also affect their margins.