Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Based on the ratio analysis below, in which company would you be willing to invest and why? RATIOS S&P 500 Ford Motor Co General Motors
Based on the ratio analysis below, in which company would you be willing to invest and why?
RATIOS | S&P 500 | Ford Motor Co | General Motors Co | ANALYSIS |
Profitability Ratios (%) | ||||
Gross Margin | 15.01 | 17.9 | General Motors Company (GM) has higher ratios than Ford Motors(FM) which indicates GM has higher profitability than FM. Particularly the EBITDA margin and operating margins reflect GM has an edge over FM. | |
EBITDA Margin | 8.66 | 15.55 | ||
Operating Margin | 2 | 3 | ||
Pre-Tax Margin | 2.71 | 5.81 | ||
Effective Tax Rate | 14.96 | 5.54 | ||
Financial Strength | ||||
Quick Ratio | 1.04 | 0.73 | Quick and Current ratios show that FM is in a much better position to meet short term obligations and daily operating expenses. The Debt/ Equity of FM is higher than GM. FM is more leveraged compared to GM which shows there's more debt in FM balance sheet. Lastly, the interest coverage ratio of GM is much higher showing GM is in a better position to service its interest expense on debt. | |
Current Ratio | 1.2 | 0.92 | ||
LT Debt to Equity | 2.8 | 1.88 | ||
Total Debt to Equity | 7.14 | 5.85 | ||
Interest Coverage | 4.54 | 14.05 | ||
Valuation Ratios | ||||
Price/Earnings Ratio | 17.1 | 4.9 | 35.6 | When comparing valuation ratios, GM has much higher ratios than FM signifying company shares are overvalued ie. more expensive and the FM ratios are undervalued ie. cheaper compared to industry average ratios. |
Price to Sales P/S | 1.9 | 0.2 | 2.2 | |
Price to Book P/B | 3.2 | 0.9 | 1.2 | |
Free Cash Flow per Share | 2.26 | -6.95 | ||
Management Effectiveness (%) | ||||
Return On Assets | 1.43 | 3.6 | Management effectiveness measures are higher for GM which shows returns are more for GM compared to FM, and GM is working at good returns compared to FM. | |
Return On Investment | 2.18 | 6.02 | ||
Return On Equity | 10.38 | 21.43 | ||
Efficiency | ||||
Receivable Turnover | 2.5 | 4.74 | Receivables turnover is higher for GM which shows that the days of sales outstanding will be less for GM than FM. Inventory turnover is higher for FM indicating the Days of inventory in hand will be less for FM. | |
Inventory Turnover | 12.68 | 11.78 | ||
Total Asset Turnover | 0.62 | 0.67 | ||
Free Cash Flow/Net Income | 1.97 | -1.28 |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started