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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
- 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:
Island | Burger | Fink | Roland |
| |
Ratio | Electric Utility | Heaven | Software | Motors | |
Current ratio | 1.06 | 1.35 | 6.79 | 4.55 | |
Quick ratio | 0.92 | 0.87 | 5.23 | 3.73 | |
Debt ratio | 0.69 | 0.45 | 0.04 | 0.34 | |
Net profit margin | 6.25% | 14.33% | 28.46% | 8.43% |
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.
- 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.) (0.25 Marks)
- Their inventory balances are going to be very close to zero because it is impossible to stockpile electricity and burgers.
- The explanation for the lower current and quick ratios most likely relates to poor management performance.
- Their accounts receivable balances are going to be much lower than for the other two companies.
- 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.
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