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 each other. 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.)
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