Question 6.KC.3: Best Buy can be considered a. An overtrader. b. An undertrad...
Best Buy can be considered
a. An overtrader.
b. An undertrader.
c. A company with a collection period problem.
d. All of the above.
a. Correct. Best Buy is an overtrader, so answer a. is correct. The trading ratio has increased from 7.75 to 9.65 in an industry that has a trading ratio of 4.56. Other evidence of overtrading is a large and growing ratio of fixed assets to net worth and a small profit margin.
b. Incorrect. Because the trading ratio has increased, Best Buy is not an undertrader. An undertrader has a decreasing trading ratio.
c. Incorrect. Because the collection period has not grown, there does not seem to be a collection period problem.
d. Incorrect. A company cannot be an overtrader and an undertrader at the same time.
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