CFA Level I · CFA Level I Exam · Analyzing Income Statements
Two firms in the same industry have identical net profit margins. Firm A has a higher operating profit margin than Firm B. Which conclusion is most likely?
Firm A most likely has higher non-operating costs or a higher tax burden relative to revenue. Its operating margin is higher, yet net margins are equal, so larger deductions such as interest or taxes below operating profit must have absorbed the advantage.
- AFirm A has lower non-operating costs or a higher tax burden relative to revenue than Firm B.
- BFirm A has higher non-operating costs or a higher tax burden relative to revenue than Firm B.Correct
- CFirm A has a lower gross margin than Firm B.
Explanation
Net margin equals operating margin less interest, other non-operating items and taxes, all as a share of revenue. If Firm A starts with a higher operating margin but ends with the same net margin, its deductions below operating profit must be larger. Gross margin cannot be inferred.
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