You are part of an investment club with some of your friends. The club has decided to invest in the pharmaceutical industry. One of your friends prepared an analysis of two companies in the industry that your club is considering investing in. Your friend concluded his presentation to the club with the following statement:
“Both companies are profitable, but Company A has a higher profit margin than Company B even though it had a lower gross margin. We should therefore invest in Company A because it managed to generate a higher net profit margin even with a lower gross margin. Company A sounds like a company that will generate good investment returns for our club.”

Required

Explain whether or not your friend’s rationale is correct.