Question - Steven has just won a significant amount of money from the state lottery. He has decided to use the funds to create an investment portfolio containing stocks from different industries. Steven has learned financial ratio analysis is a tool that he can use to help make his investment decisions. Some of the companies and ratios are:
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South Regional Electric
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CheapO Burger
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Quality Software
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Heavy Duty Machinery
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Current Ratio
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0.9
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1.4
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7.1
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3.9
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Quick Ratio
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0.8
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0.9
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5.2
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2.8
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Debt Ratio
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71%
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50%
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0%
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36%
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Net Profit Margin
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6.5%
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13.2%
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26.9%
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9.0%
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What are the difficulties in comparing the ratios of these companies to one another?
Why are the liquidity ratios for the utility and fast food companies so much different from the software and machinery manufacturing company?
Would it be advisable for the software company to carry the same debt ratio as the utility company? Why or why not?
Make a recommendation to Steven regarding these investment choices. Based on these ratios, what is your advice? If another student makes different suggestions, challenge them to justify their choices.