Read Example 2 and explain your take away. Add additional information. Your document should include minimum 200 words plus credible references.
Example 2:
Profitabilityratios measure a companys profitability and future performance. Twocommon profitability ratios shown on Yahoo! Finances statistics tab areprofit margin and operating margin. The profit margin measures thepercentage return on all of a companys activities, while the operatingmargin measures the percentage return generated by the core activitiesof a company. The profit margin is more useful when wanting to evaluate acompany overall, while the operating margin is more useful to determineif the core operations of the company are able to generate a decentreturn (Accounting Tools, 2018). The operating margin also indicates howwell a company manages its expenses. Based on the most recent reportingperiod, Targets profit margin is 4.16%, while its operating margin is6.24% (Yahoo! Finance, 2020a). In comparison, Walmarts profit margin is3.30%, while its operating margin is 4.62% (Yahoo! Finance, 2020b).Target appears to be more profitable and better able to handle itsexpenses than Walmart is, with higher percentages for both ratios.
When looking at a companysstatistics and financial ratios, recognizing red flags is key todetermining how successful and viable the company is. Some red flags mayinclude: (1) a rising debt-to-equity ratio, which may indicate that acompany is taking on more debt than it can handle; (2) revenue trendingdown for several years in a row; (3) higher liabilities than assets forseveral years in a row; and (4) unsteady cash flow (Sullivan, 2015).Investors and creditors may be alarmed by a high debt-to-equity ratio ordownward trending revenues, as this may indicate that the company is ina sticky financial position.
It is important that financialstatement users understand how to fully read the information presented,and compare statistics to other companies in the industry, as well asindustry standards. Not all industries operate the same, therefore anindividual cannot compare the profit margin of a retail company to thatof a tech company. The retail industry tends to have some of the lowestprofit margins, between 0.5% and 4.5% (Ross, 2020). Knowing this, we cansee that while Target is performing better than Walmart, bothcompanies profit margins are within the industry standard range. If wewere looking at the profit margins for a tech company, 4.16% and 3.30%would be incredibly low, since the standard is much higher at about50-60% (Jude OKelly, 2016).
References:
Accounting Tools. (2018). The difference between profit margin and operating margin. Retrieved from https://www.accountingtools.com/articles/the-difference-between-profit-margin-and- operating-margin.html#:~:text=The%20operating%20margin%20measures%20the,on %20all%20of%20its%20activities.
Jude OKelly. (2016). Profitability Measures for Tech Companies. Retrieved from https://www. judeokelly.com/2016/08/14/profitability-measures-tech-companies/
Ross, S. (2020). What Is a Good Profit Margin for Retailers? Retrieved from https://www. investopedia.com/ask/answers/071615/what-profit-margin-usual-company-retail-sector. asp
Sullivan, M. (2015). 8 Red Flags You Can Spot On Your Financial Statements. Retrieved from https://quickbooks.intuit.com/r/bookkeeping/8-red-… -statements/
Yahoo! Finance. (2020a). Target Corporation Statistics. Retrieved from https://finance.yahoo. com/quote/TGT/key-statistics?p=TGT
Yahoo! Finance. (2020b). Walmart Inc. Statistics. Retrieved from https://finance.yahoo.com /quote/WMT?p=WMT&.tsrc=fin-srch
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