Suppose you are analyzing two firms in the same industry.Firm A has a profit margin of 10% versus a margin of 8% for Firm B.Firm A's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt + Preferred stock + Common equity)] is 70% versus 20% for Firm B.Based only on these two facts,you cannot reach a conclusion as to which firm is better managed,because the difference in debt,not better management,could be the cause of Firm A's higher profit margin.

Question

Quizplus · Accepted Answer

A's higher total debt to total capital ratio would tend to lower its profit margin.Since its margin is already higher,this indicates that A is the better managed company.

Suppose You Are Analyzing Two Firms in the Same Industry