Here we analyse the extent to which the profit margin for manufacturers in the data set can be predicted using the other quantitative variables in the data set. We use scatter diagrams to determine the correlation between return on capitol employed and profit, and between return on shareholder funds and profit. The R squared value shows the strength of the correlation between the variables in both instances.
When analysing the correlation between return on capitol employed and profit margin, we can see in figure G.1 that the R squared value is 27%. This indicates that only 27% of the variation on return on capitol employed is explained and 73% is left unexplained, indicating quite a low correlation.
When looking at the correlation between return on shareholder funds and profit in figure G.2, the R squared value is notably lower than the prior. The R value in this is only 7.5%, leaving an entirety of 92.5% unexplained, also indicating a low correlation.
The client is best off not basing his decisions on the variables return on capitol employed and return on shareholder funds, they indicate little about profit margin.