An important case study/ test case for the disciples of Finance/Business/Economics as well as psychology to learn from the rise and fall of business ventures. Business do not groom overnight. It requires a lot of potential, hard work, determination and dedication to achieve a position.
P.S. As a part of student learning series, this story is being publishing for your information and learning. The KeterOnline does not have any legal/moral evidence regarding truth or confidence about the story. All the below information is collected from libraries, books, internet and case studies. Hope you will enjoy the series.
Part 3/4
The Bottom Line:
The collapse of Enron was an unfortunate incident, and it is
important to know how and why it happened, so we can understand how to avoid
these situations in the future. Looking back, the company had incurred
tremendous financial losses as a result of arrogance, greed and foolishness
from the top management, all the way down. Many of the company's losses started
the collapse that could have been avoided, if someone had had the nerve and the
foresight to put a stop to it. Enron will remain in our minds for years to
come, as a classic example of greed gone wrong, and of the action that was
taken to help prevent it from happening again. (By Investopedia)
Lesson we got from Enron Scandal:
Lesson 1
– Excessive leverage is usually a high-risk
strategy.
Financial leverage refers to the practice of utilizing borrowed money to invest in an asset. Leverage is often referred to as a double-edged sword, since it can amplify gains when asset prices are rising, but can also magnify losses when asset prices are tumbling.
Lesson 2
Financial leverage refers to the practice of utilizing borrowed money to invest in an asset. Leverage is often referred to as a double-edged sword, since it can amplify gains when asset prices are rising, but can also magnify losses when asset prices are tumbling.
Lesson 2
– Adequate liquidity is always a good thing.
Lesson 3 – Fraud never pays.
With former WorldCom
CEO Bernard Ebbers serving a 25-year jail sentence for fraud and conspiracy as
a result of the company's fraudulent accounting and financial reporting, the
lesson here is that fraud never pays.
Lesson 4 – Update your product/service/skills to remain competitive (before your financial situation deteriorates).
Lesson 4 – Update your product/service/skills to remain competitive (before your financial situation deteriorates).
General Motors was
the world's largest automaker for 77 years. In 1979, it was also the largest
private sector employer in the U.S., with over 618,000 employees. But it
ultimately became a victim of its own success, as a bloated cost structure and
poor management saw it rapidly lose market share to aggressive Japanese
automakers such as Toyota and Honda, from the 1980s onward. As a result, GM's
share of the U.S. market declined from 46% in 1980 to 20.3% by the first quarter
of 2009. This very substantial erosion of market share, coupled with the
company's huge overheads, resulted in GM's financial position deteriorating at
an accelerated pace during the recession, with total losses of close to $70
billion in 2007 and 2008.
The moral of the GM
story is that a company needs to update its product or service in order to
counter competition, well before its financial situation deteriorates. GM was
literally in the driver's seat for decades, but squandered its lead by virtue
of being unresponsive to its customers' requirements. As a result, its
gas-guzzlers steadily lost mindshare and market share to the more
fuel-efficient Accords and Camrys.
Lesson 5 – If you can't understand it, don't invest in
it.
One of Warren Buffett's maxims is, "Never invest in a
business you cannot understand." This is the key lesson that
the Enron bankruptcy holds for the investor. (To learn more about how
investors were led astray in the Enron scandal.
- Financial statements should be prepared accurately and properly so
that it can be understandable by the general public.
- Board of directors should properly perform their duties and
responsibilities to safeguard the interest of the shareholders
STAY TUNED FOR OTHER PART OF THE SERIES. CHEERS!!
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