Case: Relationships among ratios
You are a part-time financial advisor. A client is considering an investment in common stock of a waste recycling firm. One motivation is a rumor the client heard that the company made huge investments in a new fuel creation process. Unable to confirm the rumor, your client asks you to determine whether the firm's assets had recently increased significantly.
Because the firm is small, information is sparse. Last quarter's interim report showed total assets of $324 million, approximately the same as last year's annual report. The only information more current than that is a press release last week in which the company's management reported "record net income for the year of $21 million, representing a 14.0% return on shareholders' equity. Performance was enhanced by the Company's judicious use of financial leverage on a debt/equity ratio of 2 to 1."
Required:
Use the information available to provide your client with an opinion as to whether the waste recycling firm invested in the new fuel creation process during the last quarter of the year.