Series 79 practice questionmediumFinancial Statement Analysis
A retailer's gross margin expands from 32% to 38% with flat SG&A as a percentage of sales. What does that most directly suggest?
- AInterest expense has declined materially
- BThe company is retaining more profit on each dollar of revenue before overhead expenses✓ Correct answer
- CWorking capital is turning faster
- DThe tax rate has fallen
Explanation
Why B — The company is retaining more profit on each dollar of revenue before overhead expenses
The company is retaining more profit on each dollar of revenue before overhead expenses Gross margin measures revenue less direct costs, so expansion means unit economics or pricing improved before overhead. Bankers often isolate gross margin changes to understand whether earnings improvement is operational rather than purely financial.
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