© 2000 John Petroff 

G- Differences among industries

One of the major conclusions from this chapter should the need for all companies to use operating leverage to increase profitability and efficiency, as long as sales are stable enough. But, this conclusion cannot be extended to groups of companies, whether grouped by size or industry. In Graph G-9.3 - Gross margins in four US sectors by size of sales in 1999, we saw that the gross margin of larger firms is relatively smaller than that of smaller firms. It stands to reason that the larger a firm the more it uses operating leverage. Thus, there is an inverse correlation between size of firm and gross margin. It would be appropriate to inquire about any correlation between operating leverage and net rather than gross profit margin, but numerous other elements come into play that need to be studied in following chapters.

If we look at firms grouped in sectors, we find the opposite of what the conclusion at the micro level suggests. For instance, in Graph G-9.3 the highest gross margin was earned in the retail sector. Table T-10.13 below shows that the retail sector is (except for wholesale) the sector that uses fixed assets the least.

 

Table T-10.13

Normalized average balance sheet of eight US sectors
. U T I S M R C W
Number of firms 326 4152 2791 10504 22676 15406 7215 17048
Current assets 28.67 37.95 50.72 52.10 61.16 68.65 66.68 74.98
Fixed assets 57.33 51.14 28.56 30.77 29.17 21.76 24.48 16.20
Other assets 14.00 10.91 20.72 17.13 9.67 9.59 8.84 8.82
Total assets 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Short term liabilities 27.33 34.32 40.78 43.85 39.75 45.61 46.96 50.63
Long term liabilities 31.33 29.32 25.44 22.1 17.14 16.73 13.04 10.81
Other liabilities 9.31 2.06 5.7 0.94 4.64 3.53 2.3 4.00
Equity 32.03 34.3 28.08 33.11 38.47 34.13 37.7 34.56
Total liabilities and Equity 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
U=Utilities, T=Transportation, I=Information, S=Services, M=Manufacturing, R=Retail, C=Construction,W=Wholesale
Source: Robert Morris Associates, "Annual Statement Studies 1999-200"

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