CFA Practice Question

CFA Practice Question

A firm's financial statements reveal the following data:

interest coverage ratio: 3.6
interest expense: 788
depreciation: 678
total assets: 10,946
total asset turnover: 1.46

The firm's operating margin equals ______.
A. 17.75%
B. 21.99%
C. 13.84%
Explanation: Interest coverage = EBIT/interest expense
Operating profit margin = EBIT/net sales
Total asset turnover = sales/total assets

EBIT = 3.6 x 788 = 2,837
Net sales = 1.46 x 10,946 = 15,981
This gives operating profit margin = 2,837/15,981 = 17.75%.

User Contributed Comments 4

User Comment
SDog Operating profit margin does not include depreciation.
mtcfa EBIT = operating margin
volkovv EBIT = operating margin = gross profit marging - selling, general, and administrative expenses (depreciation is a part of SG&A)

so to calculate operating margin, we don't need to add depreciation, true EBIT = 2,837 / 15,981 = 17.75%.
Rsanches Good question.
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