This exhibit reveals that some industries such as

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This exhibit reveals that some industries, such as communication and utilities, are capital intensive with relatively low net operating asset turnover. Accordingly, for such industries to achieve a required RNOA (to be competitive in the overall market), they must obtain a higher profit margin. On the other hand, companies such as wholesalers and retailers hold fewer assets
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Module 3 I Profitability Analysis and Interpretation 3-14 - -- - EXHIBIT 3.4 Profitability and Productivity across Industries 5.00 4.50 4.00 •.. CII > 3.50 0 t: ~ 3.00 ai IJl IJl <I: 2.50 C) e :;; ~ 2.00 CII Q. 0 ai 1.50 z 1.00 0.50 0.00 .\ WHL&-Nondurables I. Repair ~,etail-Food Services Construction-Heavy \\ Retail-Furniture WHLS-Durables ~, Retail-Apparel Retail-General Retail-Hardware ,. MFG-Furniture Restaurants MFG-Transportation ~ngineering and Management Services Equipment MFG-Textiles MFG-Machinery MFG-Electrical. "': ~ Equipment .Movles MFG-lnstruments Mininq-Coal ~ Hotels Communication Auto Services Utilities. ...:" - Water Transportation / / 2% 4% 6% 8% 10% 12% Net Operating Profit Margin therefore, can operate on lower operating profit margins to achieve a sufficient RNOA. This ause their asset turnover is far greater. This exhibit warns of blindly comparing the performance of companies across different tries. For instance, a higher profit margin in the communications industry compared with retailing industry is not necessarily the result of better management. Instead, the communi- -ons industry is extremely capital intensive and thus, to achieve an equivalent RNOA, com- .cations companies must earn a higher profit margin to offset their lower asset turnover. - zsic economics suggests that all industries must earn an acceptable return on investment if __are to continue to attract investors and survive. The trade-off between margin and turnover is relatively straightforward when comparing panies that operate in one industry (pure-play firms). Analyzing conglomerates that oper- in several industries is more challenging. Conglomerates' margins and turnover rates are eighted average of the margins and turnover rates for the various industries in which they te. For example, Caterpillar, Inc., is a blend of a manufacturing company and a financial irution (Caterpillar Financial Services Corp.); thus, the margin and turnover benchmarks Caterpillar on a consolidated basis are a weighted average of those two industries. To summarize, ROE is the sum of the returns from operating (RNOA) and nonoperating ivities. Further, RNOA is the product of NOPM and NOAT. RESEARCH INSIGHT NOPM and NOAT Explain Stock Prices esearch shows that stock returns are positively associated with earnings-when companies report higher than expected earnings, stock returns rise. Research also reports that the RNOA com- nents (NOPM and NOAT) are more strongly associated with stock returns and future profitability an earnings (or return on assets) alone. This applies to the short-term market response to earn- gs announcements and long-term stock price changes. Thus, disaggregating earnings and the ~ance sheet into operating
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