Jinping Zhang recently inherited a stock portfolio from her father. She is a finance student…

Jinping Zhang recently inherited a stock portfolio from her father. She is a finance student…

Jinping Zhang recently inherited a stock portfolio from her father. She is a finance student enrolled in PhD program at Hong Kong Polytechnic University. She uses her accounting and finance knowledge to perform a ratio analysis on each of the company, her father has invested in. Some of the ratios are listed below:

Ratio

Sino Electric

Burger King

Tencent Technology

Sichuan 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 her father was a rational investor who assembled the portfolio with care, she finds the wide differences in these ratios confusing.

a. What problems JinPing might 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 technology company?

d. Why wouldn’t investors invest all of their money in technology companies instead of in less profitable companies?

Jinping Zhang recently inherited a stock portfolio from her father. She is a finance student…

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