1. Supermarkets have high asset turnover due to their high volume sales.

In addition, most food

products found in super markets are perishable furthering the need to sell these products within
short time frames. Coinciding with this, consumers tend to buy groceries on a regular basis as
their stash of food products depletes fairly quickly due to consumption and their tendency to
perish. Pharmaceutical companies would also have a high asset turnover. Limited shelf life for
drugs, similar to food items with super markets, plays a part in this. I assume drug stores would
plan for this and stock their shelves based on shelf life, and in turn, pharmaceutical companies
would estimate production needs in the same fashion. In addition, their total assets tend to be low
because their main costs (R&D) are expensed rather than recorded as assets. As for jewelry
retailers, their asset turnover would most definitely be low. Their product, jewelry is expensive
and durable, meaning it is also not frequently bought. Also, jewelry is a highly distinguished
product. Consumers do not want to spend a large chunk of their money on something everyone
else has. Because of this, jewelry stores tend to keep large inventories of similar products. In
addition, the stores inventory is their main asset, and as it sells slowly, their asset turnover is
naturally low. Steel companies are another industry with low asset turnovers. Because their
product is highly asset intensive, steel companies tend to invest millions in the property, plant,
and equipment needed to produce steel. Furthermore, steel is highly durable, with useful lifetime
lasting years or even decades. Relative to the immense investments costs, the amount of sales is
simply not capable of producing a high turnover rate.
2. As for sales, supermarkets definitely have low margins. Competition is extremely high, and
most supermarkets carry the same brands and products offering very little competitive advantage.
Consumers are very price sensitive, but since most markets offer similar prices, with very little
difference, most consumers will stick to their closest store. Furthermore, since price is the only

real ability to draw in new consumers (albeit limited), lower prices also mean lower margins.
Pharmaceutical companies, however, boast high sales margins for a couple of reasons. Little
competition due to patents and highly differentiated products (non-price based) are the driving
factors. Jewelry retailers also produce high sales margins due to their highly differentiated
products. In addition, many retailers have higher price tags based on intangible such as service
and reputation. Software companies follow similar lines as jewelry and pharmaceutical
companies. Their high sales margins are driven by low production costs, software developments
costs are expensed early on, and the high costs for consumers to switch to new systems.
3. Operating cash flows and earnings numbers are bother very important figures to analyze, but I
disagree with this brokers statement. For one, they will differ based on short vs. long term
accruals. Credit sales would cause earning to be higher than cash flows, but unpaid expenses
would cause cash slows to be higher. Normally, generalizations, such as the one this broker has
made, tend to be ineffective over long periods of time. Instead of solely relying on one over the
other, it is more important for financial analysts to understand why they may differ based on
certain company financial situations.
4. ROE = (net profit/sales)*(sales/assets)*(assets/equity)
With this in mind, ROE depends on return on sales, leverage, and asset turnover. These will be
the main factors driving differences between the ROE of IBM and HP. Based on the information
given, HP has greater asset turnover, which does not really explain IBMs huge advantage in
ROE. However, IBMs leverage is much better at .42 versus -0.16. In addition, IBMs return on
sales is much higher than HP at 9% versus 2.7%. These two differences clearly define the large
gap between both companies ROE.

5. This statement is false. A sustainable growth rate is the rate a company can grow without
changing financial policies or its level of profitability. Mathematically this equals to ROE*(1dividend payout ratio). Simply put, all a company needs to do to surpass its sustainable growth
rate is increase ROE through higher asset turnover, greater leverage, or higher return on sales, or
it could decrease dividends and have more cash available for reinvestment.
6. First, cash from operations is a companys cash flow, or cash earned, during a specific period
of time. Working capital refers to the difference between current assets and current liabilities.
Working capital provides a snapshot of a companys present financial health, while cash from
operations shows a companys ability to generate cash over time. A company could have lower
cash from operations due to the company raising money or borrowing cash. Since these forms of
cash generation are not tied to the companys general business, both actions would cash working
capital to rise over cash flow. In both cases, the company in question could have a dire need for
cash that they are unable to generate from cash flows. For instance, a steel company may want to
build a new plant, buy new equipment, or expand operations. While they may be able to
accomplish this from saved up cash, most companies would probably borrow at least some
money from a bank or raise cash by issuing more stock.