Ratio comparisons Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to one another. Some of his ratios are listed here. Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out. a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies? c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? d. Why wouldn't investors invest all of their money in software companies instead of in less profitable companies? (Focus on risk and return.) a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? (Select all the answers that apply.) A. The operating characteristics of firms across different industries vary significantly resulting in very different ratio values. B. Financial ratios from software companies are never very reliable. C. Caution must be exercised when comparing older to newer firms, e.g., utility company vs. software company. The four companies are in very different industries
Ratio comparisons Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to one another. Some of his ratios are listed here. Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out. a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies? c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? d. Why wouldn't investors invest all of their money in software companies instead of in less profitable companies? (Focus on risk and return.) a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? (Select all the answers that apply.) A. The operating characteristics of firms across different industries vary significantly resulting in very different ratio values. B. Financial ratios from software companies are never very reliable. C. Caution must be exercised when comparing older to newer firms, e.g., utility company vs. software company. The four companies are in very different industries
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Ratio comparisons Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on
each one and decides to compare them to one another. Some of his ratios are listed here. Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the
wide differences in these ratios confusing. Help him out.
a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios?
b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies?
c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company?
d. Why wouldn't investors invest all of their money in software companies instead of in less profitable companies? (Focus on risk and return.)
a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? (Select all the answers that apply.)
A. The operating characteristics of firms across different industries vary significantly resulting in very different ratio values.
B. Financial ratios from software companies are never very reliable.
C. Caution must be exercised when comparing older to newer firms, e.g., utility company vs. software company.
D. The four companies are in very different industries.
Data table
(Click the icon here in order to copy the contents of the data table below into a spreadsheet.)
Island Electric
Burger Heaven
KIITT
1.32
0.86
0.43
14.29%
Ratio
Current ratio
Quick ratio
Debt ratio
Net profit margin
Utility
1.14
0.89
0.66
6.21%
Fink Software
6.75
5.15
0.01
28.55%
Roland Motors
4.55
3.72
0.32
8.42%
X
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