Question

2. Firm A has net income of $3 million and Firm B net income of $6 million, both in 2017. Discuss at least three major reasons why Firm A might actually have performed better than Firm B in 2017, despite having the lower net income.

Answer 1

1) Firm A could have lower net income than Firm B but on a much smaller sales, i.e. Firm A might have higher profitability than Firm B.

2) Firm A might have lower capital deployed in order to generate these net income in comparison to Firm B which required much higher capital. It means Firm A has higher return on capital than Firm B.

3) The net income of Firm B might be due to one off / non-recurring sales of assets, while its operational profits could be lower than that of Firm A.