Concept explainers
Learning Goals 2, 3, 4, 5
P3-10 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 below.
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 their money in software companies instead of in less profitable companies? (Focus on risk and return.)
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