A.) what problems does one have comparing companies in utility, fast food, softw

Question

A.) what problems does one have comparing companies in utility, fast food, software, and motors 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 in other companies c.) why might it be all right for the electric utility to carry a large amount of debt but not the software company? D.) why wouldn't investors invest all their money in software companies instead of less profitable companies (focus on risk and return) A.) what problems does one have comparing companies in utility, fast food, software, and motors 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 in other companies c.) why might it be all right for the electric utility to carry a large amount of debt but not the software company? D.) why wouldn't investors invest all their money in software companies instead of less profitable companies (focus on risk and return) 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 in other companies c.) why might it be all right for the electric utility to carry a large amount of debt but not the software company? D.) why wouldn't investors invest all their money in software companies instead of less profitable companies (focus on risk and return)

Explanation / Answer

A) It is very difficult to compare companies of different industries based on the ratios. For example in the utility business, debt equity ratio is usually very high since it requires a lot of investment.Wheras in software industry, it is usually very low as it doesn't requireme that much heavy investment in terms of plants and machinery which require a lot of funds. Similary, the revenue and cost drivers for fast food sectors are hughly different from that of motor sector. Hence, on account of varying requirements of debt and equity & different gestation periods among companies of different industries, it is quite sensible not to compare their respective ratios. However, ratios of the companies within same industry can be easily compared and conclusion drawn.

b) It is because of higher reliance on need for working capital. Utility companies need working capital almost on daily basis to run their plants & machinery else they would suffer heavy losses. Fast food companies too need working capital to cater to the daily demand of their customers on a daily basis. Because of this, they rely heavily on bank overdraft & short term loans to meet their purposes. Whereas in other companies, the working capital requirements is not so severe.

c) Software companies need investment only in computer equiments and human capital. They can run their operations almost from anywhere. Whereas, same is not the case with Electric utility companies. They have to constantly upgrade themselves with heavy investment in big assets to keep their operations running. Hence, they require heavy debt from bank and financial institutions. Apart from that, high maintenance of the machinery and plants also make them rely heavily on debt.

d) Software companies are highly volatile.The fluctutation in their stock prices is very huge.Reason being that they rely heavily on other businesses. There is high amount of dependency on them. for example in 2008 reccession, there was very grim sentiment in the business as a result of which software companies were in extremely bad shape. And investors lost a lot of money in their investment. Hence, it is wise to not invest the entire amount in software companies considering the level of fluctuations. But the investor keep a portion of investment in software companies too because just like there is quite a possibility of share prices going down, similarly there is an equal chance of prices shooting up as well considerably giving windfall gains to the investor. Any postitive sentiment in the economy gives a big stimulus to software companaies in higer business projection on account of its dependency on overall busines outlook leading to heavy surge in its stock prices.

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