Trend Analysis of Gross Profit Margin

Easy Analysis Techniques Trend Analysis

An analyst is evaluating the financial performance of Company XYZ over the last five years. She observes that the revenue has consistently increased year over year, while the cost of goods sold (COGS) has decreased relative to revenue. This pattern seems to indicate a positive trend. The analyst decides to assess the overall performance trend by calculating the gross profit margin (GPM) over this time period.

Which of the following statements correctly describes the implication of this trend analysis?

The decrease in COGS relative to revenue will lead to a decline in operating income.

The gross profit margin is likely to improve as revenue grows faster than COGS.

The analysis of the trend does not provide meaningful insights into profitability.

Hint

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