What is the operating margin and return on equity/capital?
The margins of the company should be evaluated on both relative and absolute basis. Though relative comparison makes more sense because higher the margin of company relative to its competitor more secure it will be in case of a downturn when pricing power is lost and margins are eroded. A company with lower margin shows a greater fluctuation in profits. In case of upturn, the profits of companies with lower margin grow faster giving an illusion that it is a better investment. However capitalism is case of survival of fittest. A company making lower margin is more susceptible to extinction and earns much lower profits over a business cycle compared to one with a much higher margin. Any company, which is a good investment option, has to have a high return on equity (that is amount of profit it earns divided the money invested by shareholders in terms of initial capital and reinvested profits). A high return on equity (with Consumer Price Index growing at 6 per cent) would be anything in
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