Read Example 1 and explain your take away. Add additional information. Your document should include minimum 200 words plus credible references.
Example 1:
Ford Motors and General Motors are two renowned companies operatingin the auto motors industry in the United States that have had fiercecompetition since their inception. Due to the industry’scompetitiveness, the measures for profitability, and hedging risks toeliminate fraud are important for the businesses’ long-term survival inthe competitive industry. This post will answer various questionsregarding profitability metrics, the information that is likely toindicate the red flags for the business operations, and assess whetherthe profitability and the red flag measures would still stand if acompany from another industry is used.
Operating cash flow, payout ratios, and profit margin ratios arecrucial statistics that might be used in the determination ofprofitability for the Ford Motors and General Motors. Operating cashflow will be applicable in determining cash flow because it helps inanalyzing the business’s ability to generate cash during the ordinaryundertakings of its ordinary business activities (Alkhuzaie & Asad,2018). The operating cash flow for Ford Motors was 67.27B in the year2019, as compared to General Motors 8.77B, Ford Motors was doing betterthan General Motors in the generation of cash (Ford Motor Company;General Motors, 2020). The other profitability ratio is the payoutratios that measure the amount of dividend payable to the shareholders.Therefore, the ratio is a measure of returns to the shareholders interms of dividends. Finally, the profit margin ratios can be used as aprofitability measure that measures the net profit generated from thesales. According to Alkhuzaie & Asad (2018), the net profit marginshows the efficiency of entities to convert sales into profit and managethe cost of operations. Ford Motors and General Motors can use theratio to show the profitability of their entities, compare the resultswith their peers, and make the necessary changes and adjustments toimprove their profitability. Ford Motors had a profit margin ratio of-1.43%, while General Motors had a profit margin ratio of 1.46% (FordMotor Company; General Motors, 2020). A comparison of the two companiesshows the General motors were performing better in profitability ascompared to Ford Motors. Thus it was perceived to be in a betterposition than its competitor.
The information that may be used to show red flags is mainly thetrailing P/E since it shows the current stock price and monitors theearning per share for 12 months (Alkhuzaie & Asad, 2018). Accordingto Alkhuzaie & Asad (2018), forward price to earnings also measuresthe forecasted earnings for the price to earnings. Therefore, thetrailing to earnings ratio can show a possibility of fraud and helps themanagement ascertain the stock price and the forecasted stock price inthe future.
Conclusion
In essence, Ford Motors and General Motors are automakers ofcompanies that are very competitive in the automotive industry in theUnited States. Therefore, profitability measures and checking red flagsare essential practices to help companies survive in the industry in theforeseeable future. The margin ratios, the payout ratios are some ofthe essential measures that can be used by the two companies. However,if the companies were not in the same industry, the analysis ofprofitability would be impossible.
References:
Alkhuzaie, A. S., & Asad, M. (2018). Operating cash flow, corporate governance, and sustainable dividend payout. International Journal of Entrepreneurship, 22(4),1-9.https://www.abacademies.org/articles/operating-cas…
Ford Motor Company. (2020). valuation measures & financialstatistics. Retrieved fromhttps://finance.yahoo.com/quote/F/key-statistics?p…
General Motors. ( 2020). General Motors Company (GM) valuationmeasures & financial statistics. Retrieved fromhttps://finance.yahoo.com/quote/GM/key-statistics?…
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