The gross profit margin ratio measures the profitability (or gross profit margin) that is generated from each dollar of sales. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs than its competitors. In that respect, Lego Group increased its Gross profit margin between 2004 and 2005.
This ratio shows us that the company has a net income of DKK 0.58 for each corona of sales. This is a rather high number compared to the rest of the sector. On the other hand, the gross profit margin of Mattel decreased between 2004 and 2005 from 47.2% to 45.8%. This result is closer to the average of the sector. With respect to Gross profit margin, Lego has better results than Mattel. Thus Lego is more profitable and generates more profits for each dollar of sales.
[...] Mattel has to pay back its suppliers faster than Lego has to. It means that Mattel does not have as much time as Lego between investing its money and paying its suppliers. Mattel should renegotiate its payment delays in order to match Lego. b. Stock holding period ratio This ratio calculates the average time that inventory is held. It measures the company's performance that gives an idea of how long it takes the company to turn its inventory into sales. [...]
[...] Mattel has implemented efforts to control its variable costs, that is why its operating margin is higher; its operating margin ratio shows that this company is healthier than the Lego Group. However, Mattel has to be careful because its operating ration decreased between 2004 and 2005: this implies that the firm did not manage its costs in 2005 as well as it did in 2004. c. Profit before tax margin ratio The profit before tax margin ratio measures how financial income and expenses influence the profitability of the company compared to the operating profit margin ratio. [...]
[...] Operating profit margin = operating profit or loss x 100 / revenues margin Operating margin gives us an idea of how much Lego Group makes on each dollar of sales before interest and taxes. When looking at its operating margin, we can see that Lego had an operating loss in 2004 and the operating ratio shows that the operating loss margin is negative indeed. According to the annual report, impairment of fixed assets and restructuring expenses bear upon operating profit in 2004 and that is why it was negative. [...]
[...] Mattel has a better stock holding period than Lego: it uses its inventory faster. Mattel turns its inventory into cash faster. Lego should manage its stocks better in order to reduce the money immobilization and turn its investments into cash faster. c. Creditors payment period ratio This ratio shows us how much time the clients take to pay back the company. Shorter the period, the better it is for the company because then the company does not have to allow long credit period to clients. [...]
[...] Mattel is more efficient that Lego in making its investments profitable. However, Lego's ROCE increased 34% between 2004 and 2005 whereas Mattel's ROCE dropped e. Net profit margin ratio The net profit margin ratio measures the proportion of all incomes and expenses and how they influence the profitability of the company. Net profit margin = Net profit of the year x 100/revenues the year This ratio shows us that Lego improved its net margin: this is the major factor that made the net profit margin positive in 2005, instead of repeating the negative margin in 2004. [...]
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