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Raphael Ochoa is puzzled. His company had a profit margin of 10% in 2008. He feels that this is an indication that the company is doing well. Cindy Lore, his accountant, says that more information is needed to determine the firm’s financial well being. Analyze the situation and determine who is correct and support your position.

In this scenario Cindy is right. As with any ratio, profit margins tell us a lot, but it’s not the whole story, about Raphael’s company's well being. The profit margin tells us how effectively management can bring profits from sales, and how much room a company has to withstand downturn, compete with competition and make mistakes. First it is important to determine net sales or revenue for the company. For example Raphael’s company may have a $10 profit on a $100 sale, which means that the profit margin is 10%. Or Raphael could have sales of $100,000 which will make his actual profit $10,000 with a 10% profit margin. It is important to understand that a low profit margin for one company may be high for another company. Some companies may have a higher cost of goods sold because of the industry that there in.

Read more: http://www.investopedia.com/articles/fundamental/04/042804.asp#ixzz1P5fbAEyE

The price-earnings ratio of General Motors (automobile) was 8, and the price-earnings ratio of Microsoft (computer software) was 38. Which company did the stock market favor? Explain.

The stock market favored Microsoft more because there P/E ratio is higher. Since the price is 38 which is substantially higher than General motors, the market may have high expectations for the stocks future and has cause the price to increase. In some cases the stock market could have overpriced the stock.