ZERO INVENTORIES: Typically industries that provide a service.
Advertising Agency: E
High receivable collection in days is indicative of advertising consulting firms i.e. projects are worked on and work is billed only after the work has been completed. In this case, ad campaigns are produced and run after which advertising firms then charge for services rendered. (CR) o
A large portion of their liabilities is devoted to accounts payable simply due to pending payments to various media outlets they utilize to run ad campaigns on behalf of their clients. (CR) o
Considering collection days, the largest proportion of their asset needs to be their account receivables as the agency allows it to grow and then charges back the customer. o
In addition very little asset is required in terms of plant and equipment as much of the consulting is rendered through representatives traveling on site. •
The airline industry is expected to have the lowest profit margin of the service industries in this group because the fixed costs are so low and the variable costs are so high. The classic example is a plane reaches its destination at less than full capacity while incurring the same costs to run the plane if it were full. (CR) o
Of the industries in this group, airline is the industry to spend a significant portion of their assets on plant and equipment through capital leases on their planes and ground equipment. o
Finally a less than 1 asset to liabilities ratio is consistent of the airline industry and the continual strive for airlines to avoid bankruptcy due to an inability to cover their costs. •
Commercial Bank: N
Very high receivable collection period indicates potential long term receivable such as mortgages, business or student loans. (CR) o
Banks tend to maintain very little cash on hand as most of it is tied up in loans and in investments so they can continue to earn interest and hence remain profitable. •
Health Maintenance Organization: G
HMO is essentially a network of doctors, hospitals and health care providers and therefore do not carry inventory and in addition would be expected to not have significant plant and equipment since they do not own hospitals and or equipment but rather simply contract out to them. (CR)
EXTREME ACCOUNTS RECEIVABLE: Typically industries that conduct point of sale transactions face to face involving mostly cash or credit transactions.
Family Restaurant Chain: H
Of the industries in this category, the family restaurant chain has the lowest receivable collection period in days due to frequent face-to-face cash/credit transactions. “Family” would indicate an affordable establishment and therefore frequent cash transaction. (CR) o
Due to almost all inventory being perishable goods to make the product offering, inventory turnover is the highest within this category. (CR) o
A significant portion of the restaurant chain’s assets is in the equipment used to produce the food. For example, a fast food restaurant would have a significant amount of equipment required to run the restaurant, i.e. the friers, ovens, industrial freezer, etc. •
Retail Grocery Store: I
While inventory turnover is not nearly as high as restaurant chains due to goods that are canned, boxed or dry foods and hence have longer shelf lives, they do have a higher inventory turnover then book chains simply because there is fresh food inventory including milk bread and vegetable and fruit produce that do perish quickly. (CR) o
Produce is highly susceptible to not only market but regional and weather conditions. The key is high turnover but as a result low profit margins. The profit margin is remarkably close to the industry average of 1.62%. (CR) o
Grocery stores, simply due to the size of their inventories, are required to maintain a reasonably large store facility with the ability to store equipment used to keep goods cool, wet and at correct temperatures, making them highly...
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