A friend of yours has received a scholarship and wants to invest the funds for a year, because she earned enough money in her summer job to pay for her current academic year. She explains to you that she went to an online investing site that had lots of ratios calculated for companies and she has selected the company with the highest ROE to invest in. She has asked your advice on if there is any information other than ratios she should be considering and what you think of her decision to select based on ROE.

Required

a. Explain to your friend that, although ratio analysis provides a good indication as to a company’s financial strength, there is much more information available that an informed investor should consider before making any investment decisions. Provide her with several examples of additional information to consider.

b. Comment on your friend’s choice of ROE as the sole criterion.