The Case Of The Unidentified Industries-2006 Case Solution

The case of the unidentified industries gives the financial data on 14 industries. Out of these industries, some are service providers such as a family restaurant, computer software development, health maintenance organization and advertising agency. Airlines also come under service industry, but it has capital intensive operations as compared to others. One industry is a financial institution, a commercial bank while the remaining industries are retail and manufacturing. All of these industries differ in terms of their operations thus each industry has different asset and financing requirements. These differences will allow help to identify the firms of different industries.

First of all the financial institution is looked for as it has a distinct capital structure and asset requirements. The financial institution is expected to have high receivables from clients to whom it has extended loans. It is expected to have huge long term investments to earn return to be able to meet interest expense on deposits. Financial institution is expected to have very low or no inventory. It is expected to have a high leverage and high receivable collection period. Firm “N”, “G”, and “E” can be a bank when assets are compared. Comparative analysis of the data given for three firms is as below:

As a percentage of total assets AR of the three firms are high and inventory in none. The notes payable of “N” are 73% of total liabilities and net worth. Bank must have issued a lot of notes payables thus “G” and “E” are not expected to be banks. Furthermore, bank has high leverage and receivable collection days. The data for firm “N” shows that it has only 7% of common stock and has 4,071 days of AR collection period. Thus, it is concluded that “N” is a commercial bank.

After elimination of “N”, three firms are left with zero inventories. These are “E”, “G”, and “M” which are expected to be service providers. Airlines will have zero inventory but huge PPE. It will have low AR as sales are mostly on cash. The comparison of financial data is as below:

PPE of 66% and inventory of 0% of total assets clearly shows that “M” is airlines. Furthermore, “M” has 18% of cash, and only 2% AR, and low collection days for AR; thus, “M” is an airline.

Now, “E” and “G” are left as service providing firms. One has to be an advertising agency. The 201 days in AR suggest that “E” is an ad agency. Furthermore, according to hint the purchases for clients in an ad agency are made according to revenue. Thus, AR and AP should be similar. For firm “E” Account Receivables are 37 and accounts payables are 39; thus, it is concluded that “E” is an ad agency.

The only left firm with 0 inventories is “G”, so it is expected to be HMO. The HMO should have low profit margin as it is human welfare organization. “G” has profit/revenue of 0.022 thus it can be concluded that “G” is HMO.