HBS - The Case of the Unidentified Industries -2006
With The Case of Unidentified Industries, William E. Fruhan Jr. wants us to visualize the balance sheets belonging to fourteen unknown companies and connect them with the suitable industries. In order to determine which balance sheets belong to which industry, we studied several companies in those industries. Using a number of different sources such as Yahoo Finance, Google Finance, Wikipedia and Investopedia, we were able to the link the unidentified firms balance sheets with their associated industries.
In order to give structure to our analysis, we will have two main parts. In part one we will analyze the Service oriented companies and in the second part we will turn towards the Product oriented companies.
I. Service Oriented Companies
We were able to distinguish the Service oriented companies by looking at their Inventories. Being those kinds of companies they showed zero inventories and “not applicable” (NA) inventory turnover.
The first service-oriented company was E, the advertising agency. We were able to see that the accounts receivable and the accounts payable were almost equal. Which reflects how advertising agencies do business and what Lamar Advertising & Co (LAMR) had. Advertising agencies are usually paid for their services when the campaign or assignment is done. And they usually pay their media buys or media buying companies at the end of the assignment. Furthermore, LAMR also showed a big percentage of their assets as intangible ones. Which is logical for a service company like an advertising agency and is what company E shows on its balance sheet. Their sustainable competitive advantage is based on their human resources creativity, which could be kept as assets in the form of patents (e.g. design patents).
The second company was company G, the Health Maintenance Organization (HMO). We noticed that the accounts receivable represent 51%, which explains perfectly the complexity of the medical billing system between the patients, the HMOs and the health insurance companies (e.g. AETNA, Medicare, Medicaid, Blue Shield). Furthermore, the low complexity of medical care relevant to an HMO can also be seen by the low percentage attributed to the PP&E. The other interesting financial data are the return on assets (line 23) and the two profit ratios (line 24, 25). We can see that the ROA shows very high earnings generated from the invested capital. However, the two profit ratios show low profit margins that are linked to a HMOs business plan. Which explains why HMOs are usually relying on grants and loans from the U.S. Department of Health and Human Services to operate.
Another service-oriented business would be company M, an Airline. From all the other service businesses, the only difference shown in this company is the high percentage of assets that are being put into PP&E (airplanes and other aviation vehicle). The airline industry being very competitive, and primarily based on price strategy, explains the very low returns on net worth (ROE). Seeing as the accounts receivables are very low, we can understand that clients pay either by cash or credit card. Which is concurrent with an airlines’ business plan.
The last service business is the company N, which is a commercial bank. The most noticeable financial data is the receivables collection period, which is 4,071 days. In other words, it will take over eleven years for the company to get its money back. This data combined with the accounts receivables (90% of total assets) confirms that this company is a commercial bank issuing loans to its customers: loans that will be repaid in approximately eleven years. In addition, the notes payables’ high percentage (73%) are concurrent with the banks way of making money by “borrowing” their clients money to generate more money (through investments).
II. Products Oriented Companies
The company A could be an online...
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