Week 2 Discussion 1 & 2

Week 2 - Discussion Forum 1

Guided Response: Respond to at least two of your fellow students’ or instructor posts in a substantive manner and provide information or concepts that they may not have considered. Each response should have a minimum of 100 words and be respectful of others’ opinions and beliefs that differ from your own. Support your position by using information from the week’s readings. You are encouraged to post your required replies earlier in the week to promote more meaningful and interactive discourse in this discussion forum. Continue to monitor the discussion forum until Day 7 and respond with robust dialogue to anyone who replies to your initial post.

Britney Graves

During week one, I decided to explore Walmart because it's a place that I encounter regularly. To calculate the gross profit ratio, we must look at gross profit and divide it by net sales. Because Walmart is an international company, It's essential to include that the following numbers are based on Walmart's domestic and international stores. To find gross profit, we look at net sales minus operating costs. In 2019 the gross profit ratio was 24.5 percent, and in 2020 it was 24.1 percent. The .4 decrease was due to investment in Walmart's U.S. segments and Flipkart in Walmart's international sections. The percentages listed above give investors a way to measure the profitability that is brought in after expenses. Next, the operating margin ratio is a measurement of the revenue made based on operating income. After studying Walmart's annual report, the operating margin was 4.27 percent in 2019, and in 2020 the ratio was 3.91 percent. (Ross, 2019) explains that "It is not particularly useful to compare the operating margin of a car parts manufacture to a clothing retailer. Higher operating margins are generally better than lower operating margins…" (p. 1). While operating margin may help make decisions, it's essential to look at competitors to see their ratios before assuming one ratio is better or worse than another. Finally, the net income margin ratio is comparing net income to net sales. The net income margin ratio went up 1.54 percent in 2020, from 1.30 in 2019 to 2.84 in 2020. After exploring IBIS, I didn't see Walmart's average ratios.

According to (Porter et al., 2018) "The relationship between gross profit and net sales—as measured by the gross profit ratio—is one of the most important measures used by managers, investors, and creditors to assess performance of a company" (Chapt. 5). After looking at Publix Super Markets Inc., their ratio for 2020 was 28.91, which is roughly 4 percent higher than Walmart. While Publix's ratio is higher, it's still not an accurate comparison because Publix's inventory is far less than a Walmart Super Center. For example, Publix doesn't sell electronics, lawn care items, or home improvement necessities like Walmart. Therefore, while Walmart's ratio maybe less, it's hard to compare it to much else because of its wide variety. Profit ratio is helpful because it shows how profitable a company is at a glance; however, it's essential to dig deeper to gain a bigger picture of its success. The operating margin ratio is how much money is made from operations. A higher margin indicates that the company is being well managed and isn't at risk of going under. Lastly, net income margin provides total revenue after expenses are paid, which helps display profitability, and if the business is proportional in sales vs. cost. Like the other ratio, this is useful because if operating costs are higher than sales, it could be a dim future for Walmart. For example, if products cost more than they sell for, it negatively impacts the net income ratio and tells Walmart's leadership that they should look elsewhere for a product or pay less to obtain it.

After reviewing the year to year ratios on Walmart's annual report, I noticed that they never change drastically. For example, in the majority of the 2020's ratios, there was an increase from 2019; however, a decrease from 2018 to 2019. Walmart is such a big company that I don't believe these changes are something to be overly worried about. Although the company isn't struggling financially, there are factors that these ratios don't show. For example, Walmart's crunch on China for products can be quickly impacted by a trade war. Also, Walmart's lack of innovation- Amazon is one of Walmart's top competitors, and they strive for not only low prices and a large inventory but adapting to change and quality.

Reference

Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). https://www.cengage.com (Links to an external site.)

Ross, S. (2020, January 29). What is a good operating margin for a business? Retrieved May 27, 2020, from https://www.investopedia.com/ask/answers/010915/what-good-operating-margin-business.asp

Marlon Fletcher

Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between gross profit and total net sales revenue. It is a popular tool to evaluate the operational performance of the business. The ratio is computed by dividing the gross profit figure by net sales. Firms with excellent long term economics tend to have consistently higher margins. Durable competitive advantage creates a high Gross Margin % because of the freedom to price in excess of cost. Companies can be categorized by their Gross Margin %. Delta Air Lines had a gross margin of 5.34% for the quarter that ended in Mar. 2020 = No sustainable competitive advantage

Consistency of Gross Margin is key 1. Greater than 40% = Durable competitive advantage 2. Less than 40% = Competition eroding margins 3. Less than 20% = no sustainable competitive advantage

Delta: 2020- 5.34%     2019- 22.09% GPR = Gross Profit/Net Sales

Operating margin ratio is the ratio of operating income to the revenue of the business. It highlights the operating income of the business as a percentage of the revenue and tells the contribution of company's operations towards the profitability. It is important to see a company maintains its operating margin over time. Among the same industry, a company with higher operating margin is more efficient in its operation. It is also more stable during industry slowdown or recessions.

Delta: 2020- 4.77%    2019- 14.08% OMR = Operating Income/Total Revenue or EBIT/Total Revenue

Net profit margin is equal to how much net income or profit is generated as a percentage of revenue. Net profit margin is the ratio of net profits to revenues for a company or business segment and illustrates how much of each dollar in revenue collected by a company translates into profit. It is the least reliable due to the fact the reported earnings can be manipulated easily by adjusting any numbers such as Depreciation, Depletion and Amotorization and non-recurring items. The long term trend of the net margin is a good indicator of the competitiveness and health of the business.

Delta: 2020- 6.22%     2019- 10.14% NPM = (Net Profits/Net Sales) x 100

If a company loses its competitive advantages, usually its gross margin declines well before its sales declines. Watching Gross Margin % and Operating Margin % closely helps avoid value trap situations. Delta stock will take a hit since it seems pretty clear now that airlines can no longer borrow money due to the COVID-19 epidemic and travel restrictions domestic and international. Most states are just beginning to lift restrictions on non-essential movement. Delta stock appears to be in slightly better shape than the average airline but the problem is the company is still burning nearly $100 million per day. The bottom line is that Delta is going to need more money and will likely have to issue common stock to raise this cash as a result Delta stock will begin to fall again. Therefore, I would not buy stock in the company at this time Delta is deeply indebted and still losing money.

 

Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). Retrieved from https://www.cengage.com (Links to an external site.)

Delta Air Lines (2020). Quarterly Results. Retrieved from https://ir.delta.com/financials/default.aspx#quarterly-results (Links to an external site.)