Week 1 Discussion 2 Classmate Response
Guided Response: Review the posts from your classmates and respond to at least two. Compare and contrast the points you and your classmates made regarding the use of key indicators when making investment decisions. Each response should have a minimum of 100 words.
Below there are two of my classmate’s discussion that needs I need to response to their names are James Varughese and Gabriela Santos
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List the key metrics you would consider before purchasing stock in a company.
The two key metrics that I would consider before purchasing stock in a company would be the profitability of the organization and the potential of the products/services offered by the organization. I believe in long term investments and for me, it is critical that the organization is profitable and offers valuable products/services which will ensure that my investment will stay lucrative in the long run.
List and explain the components of the ratios that would be the most important for you to analyze before making an investment decision. Explain why you selected the ratios above.
Profit margin, Return on Equity and Debt to total assets (Block, Hirt, & Danielsen, 2019) are the components of the ratios that I would analyze before making the investment decision.
Profit margin: it is a way to measure the amount of money the business makes from its products/services; it is also an indicator of an organization’s financial health and its growth potential (Investopedia, 2020). This means that organization has products/services which has value and credibility among to customer to be successful. It gives me the confidence that I will have returns on my investment.
Return on Equity: it is a measure of an organization’s ability to generate income from the available equity (Wikipedia, 2020). It gives me an understanding of how well the business is performing and I can compare businesses to evaluate the efficiency of an organization to make my investment decisions.
Debt to total assets: it is an indicator of the organization’s financial strength and also gives an indication of the amount of debt an organization is carrying to run the business (Averkamp, 2020). For me it critical that the organization is financially stable to put my trust and make investments in it.
Averkamp, H. (2020). Accounting Coach. What is the debt to total assets ratio?: Retrieved from https://www.accountingcoach.com/blog/debt-to-total-assets-ratio
Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/
Investopedia. (2020, April 5). Profit Margin. Retrieved from https://www.investopedia.com/terms/p/profitmargin.asp
Wikipedia. (2020, March 26). Return on equity. Retrieved from https://en.wikipedia.org/wiki/Return_on_equity
ThursdayApr 9 at 11:02pm
Manage Discussion Entry
I must admit that going into this class my knowledge and understanding of a company’s financial standing are limited and mostly based on the hit show Shark Tank. The show evaluates a company’s numbers in an effort to gain an investor. Obviously, the show’s goal is entertainment, not education. Even so, as I read this chapter, I found my mind going back to that show and the tidbits I do know. Key metrics when considering to invest can be different to investors, but it’s a good idea to be very knowledgeable before choosing to invest in anything. Personally, I want to know how good the company is at “paying back” the money they take in. For that, I would look at the return on equity and debt utilization ratios. I want to know how much return current stockholders are receiving and how much debt the company is paying back.
Profitability ratios show how much money is being made on sales, assets, and investments. The main component of profitability is net profit. Net profit is compared to expenses. The bigger the ratio, the more the money is paying off. Asset utilization ratios evaluate inventory in comparison to sales in a given time period. The main component of these ratios involves time and speed. Liquidity ratios measure how fast a company can its duties when they are due. Components include assets and liabilities. Lastly, debt utilization ratios measure debt compared to assets (Block, Hirt, & Danielson, 2019).
I selected all the ratios above because it’s important to look at the entire picture of a company, not just some key figures. Financial statements are important and they give us key figures, but they tell a picture together. The Ten Commandments of Analysis article advises not to just even look at financial statements or figures, and to always to be very knowledgeable (Beaver & Horngren, 1991). Even billionaires on tv shows lose money on deals!
Beaver, W. H., & Horngren, J. E. (1991). Ten Commandments of Financial Statement Analysis. Financial Analysts Journal, 47(1), 9–20.
Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management. New York: Irwin. (17th ed.). Retrieved from https://www.vitalsource.com/