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.$)$

C$.$ Caution must be exercised when comparing older to newer firms, e$.$g$.,$ utility company vs$.$ software

company.

D$.$ Financial ratios from software companies are never very reliable.

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? $($Select all the answers that apply.$)$

A$.$ Their accounts receivable balances are going to be much lower than for the other two companies.

B$.$ Their inventory balances are going to be very close to zero because it is impossible to stockpile electricity

and burgers.

C$.$ The explanation for the lower current and quick ratios most likely rests on the fact that these two industries

operate primarily on a cash basis.

D$.$ The explanation for the lower current and quick ratios most likely relates to poor management performance. table: Island Burger Fink Roland

Ratio Electric Utility Heaven Software Motors

Current ratio $1\mathrm{.}081\mathrm{.}256\mathrm{.}814\mathrm{.}54$

Quick ratio $0\mathrm{.}940\mathrm{.}815\mathrm{.}213\mathrm{.}75$

Debt ratio $0\mathrm{.}660\mathrm{.}480\mathrm{.}050\mathrm{.}36$

Net profit margin $(\%)6\mathrm{.}2214\mathrm{.}2628\mathrm{.}478\mathrm{.}35$