Mr. Carlos recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Mr. Carlos performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed below: Ratio Island Electric Utility Burger Heaven Fink Software Roland Motors Current ratio 1.10 1.3 6.8 4.5 Quick ratio 0.90 0.82
Mr. Carlos recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Mr. Carlos performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed below:
|
Ratio |
Island Electric Utility |
Burger Heaven |
Fink Software |
Roland Motors |
|
|
1.10 |
1.3 |
6.8 |
4.5 |
|
Quick ratio |
0.90 |
0.82 |
5.2 |
3.7 |
|
Debt ratio |
0.68 |
0.46 |
0.0 |
0.35 |
|
Net profit margin |
6.2% |
14.3% |
28.5% |
8.4% |
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, answering the following:
- What problems might Robert encounter in comparing these companies to one another on the basis of their ratios?
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 other companies?
- Why might it be all right for the electric utility to carry a large amount of debt, but not the software company?
- Why wouldn’t investors invest all of their money in software companies instead of in less profitable companies?
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