Mr. Mohamed, the director of the company “StarDZ”, expressed the wish that you prepare a file highlighting the relationships between profitability and risk, both from an economic and financial point of view. In order to comprehensively present the links between profitability and risk, and to help Mr. Mohamed make informed decisions, you will begin with an analysis of these concepts in a basic situation. Then, you will examine these aspects in the context of a reduction in turnover, following the economic difficulties that Mr. Mohamed seems to anticipate for the period to come.

The basic situation will be illustrated through two companies, A and B, which share the same turnover but have made different financing choices. The condensed balance sheets and income statements of A and B are provided in appendices 1 and 2. Based on these simplified documents, and using specific calculations linked to the study of profitability and risk, you will present to Mr. Mohamed the reasons why one of the companies is more profitable and/or riskier than the Othe.

Using appendices 1 and 2:

• Approach at the economic level study of economic profitability and economic risk

Work to do:

1) Define the concept of economic profitability and detail the associated calculation methods.

2) Evaluate the economic profitability before and after the application of the Corporate Profit Tax (IBS=23%) for companies A and B.

3) Clarify the concept of economic risk, also known as operational risk.

4) Calculate the operating leverage for companies A and B, and analyze the results obtained.

5) Identify other instruments for measuring economic risk.

6) Generally speaking, explain how a company can reduce its economic risk.