Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data:
$\begin{array}{lll}&\text { Widget Co. }&\text { Tools Inc. }\
\text { Net operating assets/common equity } & 1.37 & 1.53 \
\text { Net operating profit margin } & 19 \% & 21 \% \
\text { Income tax rate } & 47 \% & 28 \% \
\text { Revenues/net operating assets } & 0.81 & 0.61 \
\text { EBIT/revenues } & 38 \% & 32 \%
\end{array}$
-Widget has a higher EBIT/Revenue but lower net operating profit margin than Tool. Which of the following statements could explain this better as a percentage of sales?

Question

Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data:
 $\begin{array}{lll}&\text { Widget Co. }&\text { Tools Inc. }\
\text { Net operating assets/common equity } & 1.37 & 1.53 \
\text { Net operating profit margin } & 19 \% & 21 \% \
\text { Income tax rate } & 47 \% & 28 \% \
\text { Revenues/net operating assets } & 0.81 & 0.61 \
\text { EBIT/revenues } & 38 \% & 32 \%
\end{array}$
-Widget has a higher EBIT/Revenue but lower net operating profit margin than Tool. Which of the following statements could explain this better as a percentage of sales?

Quizplus · Accepted Answer

Widget Co. has a higher EBIT/Revenue ratio, indicating it generates more earnings before interest and taxes per dollar of revenue than Tools Inc. However, Widget Co. has a lower net operating profit margin, which factors in taxes but not interest expenses. Since interest expenses are not considered in net operating profit margin, the difference must be due to Widget Co. having a higher income tax rate (47% vs. 28% for Tools Inc.), not interest expenses.

Widget Co and Tools Inc -Widget Has a Higher EBIT/Revenue but Lower Net Operating Profit