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 ration analysis on each one and decides to compare them to one another. 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 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 roatios confusing. Help him out.
a. What problem 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 utilily 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 ulitlity 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 profitaboe companies? (focus on risk and return.)