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Financial Statement Analysis- Identify the Industry Case Solution

Solution Id Length Case Author Case Publisher
695 2057 Words (6 Pages) Graeme Rankine Thunderbird School of Global Management : TB0069
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Financial statement analysis usually involves an analysis of the income statement, balance sheet, cash flow statement and several ratios that are calculated from those statements. An exceptional analysis involves the comparison of an individual company with the industry averages to give a sense of how those companies are performing. Each industry has its unique set of values that differs them from other industries. An airline company, for example, has a lot of debt borrowings, whereas, grocery stores do not generally use debt financing to raise capital. This essay will look at several companies and try to pair each industry with a company using financial statements and several ratios.

The financial statements show 10 different company's profiles and each corresponds with an industry. Company 1 is most likely to be an integrated oil and gas company. Many factors led to the pairing of these numbers to the company. Oil and Gas Company is most likely to have a high cost of goods sold and a less net income value. From the balance sheet, one can say that oil and gas company is most likely to have a higher value in finished goods and a relatively higher property, plants and equipment. The company is most likely to have the highest long term debt among all companies with a high capital surplus. Negative retained earnings might also be justified because of the high initial costs that these kinds of companies face. The numbers show that company 1 has a cost of goods of 79.32%, which is a high value, and a net income of 0.76% of sales, which shows a low profit for the company. The balance sheet suggests that the company has 12.02% of total assets as finished goods, and 37.33% of property, plant, and equipment. In the liabilities section, the company has a very high long term debt of 25.09% of total liabilities and equity which suggest that the money was borrowed to start up the enterprise. The company also has a very high capital surplus and negative retained earnings which suggest that the company is facing losses over the past years which have accumulated as retained earnings. All the ratios also suggest that the company is most likely to be an integrated oil and gas company.

Financial Statement Analysis Identify the Industry Solution

The second company is most likely to be a mobile phone service provider. The company has 11.11% of sales is the cost of goods which suggest that the company is not a manufacturing company but a services company. The company has a high value of account receivables of 43.93% of total assets, suggesting that the company believes in credit sales. The company has a very low amount for property, plant, and equipment enforcing the theory that the company is a service company and does not require significant investments in property or plant. The financing of the assets is mainly done through credit purchases as notes payable and accounts payable account for almost 74% of total liabilities and equity. The company's shareholders equity is a mere 8.72% of total liabilities and net worth. The company has extremely high days in receivables suggesting that it takes a lot of time for customers to pay the amount that is due to them. All the numbers and ratios suggest that the company is a service provider company and most likely mobile phone service provider.

The third company's number can be paired with a liquor producer and distributor. The company has a high gross profit of 63.4% of sales. The highest percentage of inventories suggests that the company is a liquor producer and distributor along with a high general and administrative expensive suggesting that the company is producing as well as distributing the product. It takes a lot of time to produce liquor and then more to distribute it hence the percentages of inventories and finished goods is relatively high. The company has a high value of long term debt which is 17.54% of total liabilities and net worth. The assets are mainly financed through the long term debt and retained earnings as most of the manufacturing companies do. The company has a 2.61 value of current assets, and a 1.25 value for the acid test ratio, this suggests that the company has a high value of inventories which when removed from the current ratio result in a lower acid test ratio. The days in inventories are 261 days, which suggest that it takes 261 days to sell off the inventory and fill it with a new one. This means that the process takes time to produce and then to distribute the product enforcing the fact the company is a liquor producer and distributor.

The fourth company in the exhibit of the case is a semiconductor manufacturer. The cost of goods for the company is around 50% of sales, and selling, general and administrative expenditure is also significant at 25% of sales which result in a net income of 9.86% of sales. The semiconductor manufacturing companies generally have values for inventories, work in progress and finished goods as current assets. They also have a high value of property, plant, and equipment suggesting that the process takes a lot of investment. The numbers suggest the same with 120% of total assets going to property, plant, and equipment. Due to the nature of the company, the plant and equipment are depreciated at a higher rate which according to the numbers is accumulated at 66.32% of total assets. The company's assets are financed through accounts payables, deferred charges and retained earnings all of which have significant values. The retained earnings alone are around 79% of total liabilities and net worth. The company's assets are barely financing the liabilities as suggested by the current and acid test ratios. The company is a manufacturing company hence it does not have to pay a lot of interest and its coverage ratio is around 135 which mean that the operating profit has to decrease by 135 times for it to cover the interest expenses.

The retail grocery store is paired with the fifth company in the exhibit. Grocery stores have a high cost of goods as suggested by around 52% of sales. In the balance sheet, the grocery stores have little or no inventories, raw materials, and finished goods because they are not manufacturing but merely selling goods bought from the whole sellers. These companies maintain a high value of cash and some receivables. The numbers suggest that the company maintains 36% of total assets as cash and around 20% of total assets as receivables. The property, plant, and equipment of these companies are most of the land and some equipment on which is required to run the grocery store. Land usually has no depreciation as suggested by the numbers. Property, plant and equipment, take around 22% of total assets with no accumulated depreciation. Retail grocery stores generally deal with cash purchases and sometimes on credit. Their assets are not financed by borrowings as the numbers suggest but through retained earnings, which are carried forward each year to be reinvested in the business. The company has no borrowing hence it has no leverage ratios; however, it has a good return on equity as do most of the companies in this industry.

The sixth company in the exhibit can be paired with pharmaceutical preparations company. It is a manufacturing company, and the financial statements show the same. The income statement suggests that the company has research expenditure as well as selling and administrative expenditure. A pharmaceutical company usually requires huge investments, which last for a long period of time and the depreciation are not done every year, hence, the depreciation expense for this year is zero. The company earns 2.15% of sales as operating income and incurred 0.09% of sales as interest expenses. The balance sheet of the company suggests that the company has liquid cash, and also invested in marketable securities to earn income. It has a significant portion of total assets as property, plant and equipment and accumulated depreciation. Retained earnings are generally used to finance these kinds of investments once the long term debt is paid in full, as the numbers also suggest. The company has the highest coverage ratio among all companies and feasible liquidity ratios.

The seventh company is a service sector company. It is an IT service provider company. It has a low cost of goods suggesting that the company deals in services rather than goods. It also has significant research and development expenditure of around 20% of sales suggesting that companies in the technology industry need to come up with bright ideas to survive and thrive in the market. Administrative expenditures of such companies are also high due to higher salaries being paid to professionals working in the company. In the balance sheet of the company, a significant portion is attributed to property, plant and equipment, more specifically the equipment which is expensive and needs to be depreciated at a higher rate. Significant long, term debt is taken to finance the purchase of assets which stand at around 19.1% of total liabilities and net worth. All the financial ratios also point to the company being a service providing company, and after thorough analysis, IT service provider company.

Computer software house can be attributed to the numbers provided by the eighth company. Once again the cost of goods is extremely low as a percentage of sales suggesting that the company is not a manufacturing company and deals with services. This claim is further strengthened by the higher administrative expenses which include salaries to the professionals which take up 33% of sales. As a service company, the business has to pay higher taxes to the state. In the balance sheets, the company has invested in, liquid marketable, securities to earn some extra income as cash is not required for the running of the company. Also, the major asset of such companies is the computer systems that are used to create computer software. The assets of such companies are generally financed by common stock, which means that either the owners invest the money into the business, or they issue common stock.

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