Financial Statement Analysis

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For the exclusive use of G. NEVIOUS

TB0069
August 9, 2007

Graeme Rankine

Financial Statement Analysis—
Identify the Industry
Since opportunities and constraints tend to be different across industries, companies in different industries tend to make different investment, dividend, and financing decisions. Thus, firms in different industries exhibit different financial characteristics, and, hence, report different financial ratios. For example, “old economy” businesses with large amounts of tangible assets may have higher leverage ratios. Service or trading firms may have large amounts of intangible assets such as knowledge assets or a large and loyal customer base, and, hence, have low leverage ratios because “growth options” can evaporate. On the other hand, companies within the same industry tend to exhibit similar financial characteristics, as measured by financial ratios. With some knowledge of the different operating, investing, and financing decisions across industries, financial ratios can be used to identify an industry (see Exhibit 1 for the definition of ratios used).

Balance sheets and income statements for the most recent three years are provided for 10 companies from 10 different industries. Common-sized balance sheets (all items scaled by total assets), common-sized income statements (all items scaled by net sales), and selected financial ratios for the most recent three years are also provided. Since unusual deviation from target values may occur in any given year, the values for the items were averaged over three years. The three-year average common-sized balance sheet, common-sized income statement, and financial ratios are reported in Exhibits 2, 3, and 4, respectively.

The 10 companies are drawn from the following 10 different industries: •










Commercial airline
Commercial banking (items fitted into the same categories as the non-financial firms) Computer software
Integrated oil and gas
IT service provider
Liquor producer and distributor
Mobile phone service provider
Pharmaceutical preparations
Retail grocery stores
Semiconductor manufacturer

Assignment
Using the financial statement data provided in Exhibits 2, 3, and 4, match the companies with their industry.
Copyright © 2007 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor Graeme Rankine for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

This document is authorized for use only by Garrett Nevious in FIN469/BA536-spring13 taught by Wanli Wanli from January 2013 to May 2013.

For the exclusive use of G. NEVIOUS

Exhibit 1

Definitions of Some Key Financial Ratios

LIQUIDITY RATIOS:
Cash & Marketable Securities To Total Assets
Acid Test Ratio
Current ratio

1.
=
=
=

(Cash + Market Securities) / Total Assets
(Cash + Market Securities + Receivables) / Current Liabilities Current Assets / Current Liabilities

ASSET MANAGEMENT
Day’s Receivables
Day’s Inventory
Asset Turnover

=
=
=

365/ (Sales / Receivables)
365/ (Cost of Sales / Inventory)
Sales / Total Assets

FINANCIAL LEVERAGE
Long-term Debt to Total Assets

=

Long-term Debt to Stockholders’ Equity

=

Coverage Ratio

=

(Convertible Debt + Long-term Debt + Non-current Capital
Leases + Non-current Long-term Debt) / Total Assets
(Convertible Debt + Long-term Debt + Non-current Capital
Leases + Non-current Long-term Debt) / Stockholders’
Equity
(Income Before Tax + Interest Expense) / Interest Expense

=
=
=
=
=

Gross Profit / Sales
Net Income / Sales
Net Income / Total Assets
(Net Income + Interest Expense) / Total Assets
Net Income / Stockholders’ Equity

=
=

Return on Sales * Asset Turnover * Leverage
(Net Income / Sales) x (Sales / Assets) x (Assets /
Stockholders’ Equity)

PROFITABILITY
Gross Margin Ratio
Return on Sales
Return on Assets (1)
Return on Assets...
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