It is widely know that grocery chains have low profit margins. on average they earn about 1% on sale.?

Question

so what is the explanaton of the fact that their ROE is about 12%? does this seem logical?

Answer 1

It's true. Grocery chains have a notoriously low margin. Here are a couple of quotes and the sites are listed below:
"Grocery stores face stiff competition in their local markets, typically making profits that are only a couple of percentage points of their gross revenues."

"Food retailers experience intense competition. Profit margins are about 1 cent on each dollar of sales. After-tax net profit for the U.S. supermarket industry was 1.16 percent during fiscal 2004-05, based on FMI’s 2005 Annual Financial Review."

"Competitive industries like grocery stores or discount chains tend to have very low profit margins. This is because it does not take all that much to get into those businesses."

Grocery chains rely on large volumes. The margin may be low, but the queues at the check-out counters will tell you they do a roaring trade and they do make a profit. ROE is merely net income divided by shareholders' equity. ROE can be high for a variety of reasons : net income is high, or shareholders' equity is low. The shareholders could have put in just a little as equity and pumped in more funds as loans, which would not show as equity but as liabilities. (Some shareholders prefer to give loans than buy more shares cos when the company has the cashflow, they can take back their loans, whereas reduction of capital is a messy affair.) So it's dangerous to just look at ROE without looking at other ratios and the company's leverage or borrowings.

Answer 2

no it doesn't,but what figures are you working on.
I was a manager of a grocery store for 10 years and low profit is poor managment.
I think your 1% is way too low.