FIN 101 Saudi Electronic University Wk 6 Financial Ratios Questions
Question Description
- Classify the following changes in each of the accounts as either an outflow or an inflow of cash. (1 Mark 0.2 each)
- 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:
- What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? (Select all the answers that apply.) (0.25 Marks)
- Is a decrease in land and buildings an inflow or an outflow of cash?
- Is an increase in accounts payable an inflow or an outflow of cash?
- Is a decrease in vehicles an inflow or an outflow of cash?
- Is an increase in accounts receivable an inflow or an outflow of cash?
- Is the payment of dividends an inflow or an outflow of cash?
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.
- The four companies are in very different industries.
- The operating characteristics of firms across different industries vary significantly resulting in very different ratio values.
- Financial ratios from software companies are never very reliable.
- Caution must be exercised when comparing older to newer firms, e.g., utility company vs. software company.
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