Question

1. Based on the following information, what can you conclude regarding Firm A's profitability? Firm A...

1. Based on the following information, what can you conclude regarding Firm A's profitability?

Firm A Industry Average
Gross profit margin 0.87 0.90
Operating profit margin 0.34 0.21

2. If cash conversion cycle is negative, what does it mean to a firm?
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Answer #1

Answer to Question 1:

Gross profit margin of Firm A is less than that of Industry Average which means firm incurring higher production cost than average industry.
Operating profit margin of Firm A is more than that of Industry Average which means firm is able to control its operating cost to earn more operating profit than average industry.

Therefore, although Firm A is incurring higher production cost but due to controlled operating cost, Firm A is more profitable than average industry.

Answer to Question 2:

A negative cash conversion cycle is favorable for a firm. This means that firm is able to convert is inventory into sale more frequently, collect its receivable faster and pays its creditor at later period.

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