The Financial Detective, 2005
Financial characteristics of companies vary for many reasons. The two most prominent drivers are industry economics and firm strategy. Each industry has a financial norm around which companies within the industry tend to operate. Each company within industries has different financial characteristics and strategies which can produce striking differences in financial results for firms in the same industry. Health Products Industry
Health Products are categorized as highly differentiated products that enjoy high pricing freedom. The companies in this industry can benefit from high gross profit margin of an average of 80%. Company A – is the world’s largest prescription-pharmaceutical company. In recent years, the company has divested several of its nonpharmaceutical businesses, and it has come to be seen as the partner of choice for licensing deals with other pharmaceutical and biotechnology company. Statement of Problem: Comparing to Company B, the major strength of Company A is its assets management to generating sales or revenue. Its weakness is the ability in controlling its costs to improve its Gross Profit. This might be because Company A has started to invest in nonpharmaceutical businesses which has caused lower gross margin. Company B – is a diversified health-products company. Brand development and management are a major element of this company’s mass-market-oriented strategy. Statement of Problem: Comparing to Company A, the major competitive advantage of Company B is its benefit of high gross margin. With this advantage, even though the company has spent almost 50% of its sales for SG&A expense, it still earned a higher net profit margin. Also, even though the company has been aggressive in financing its growth with debt for its brand development and management, it has a higher debt management in paying the interest on outstanding debt. Beer Industry
Beer Products are subject to strong price competition with an average gross margin of 50%. Company C – is a national brewer of mass-market consumer beers sold under a variety of brand names. It also owns a number of beer-related businesses. Statement of Problem: Comparing to Company D, Company C is more mature and its earning is better support the dividend payout. It also has a higher ability in controlling its SG&A expenses; as well as, more ability to manage its inventory and account receivable. The problem of Company C is its very high long-term debt from financing in several beer-related businesses. Company D – produces seasonal and year-round beers with smaller production volume and higher prices. It has recently undergone a major cost-savings initiative to counterbalance the recent surge in packaging and freight costs. Statement of Problem: Comparing to Company C, Company D’s investment of fixed assets is more effective and more efficiency at using its asset in generating sales or revenue. It has more ability to payback it short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables) which means it is in a better position. The problem of company D is its ability to control its high SG&A which probably came from its outsource for brewing activity. Computers Industry
Computers are subject to strong price competition with an average gross margin of 25% Company E – focuses exclusively on mail-order sales of build-to-order PCs. The company is in assembler of PC components manufactured by its suppliers. Statement of Problem: Comparing to Company F, Company E, with higher “Interest Coverage After Tax”, “Net Profit Margin”, “Asset Turnover”, and “Return Equity” ratios, this can be analyzed that it has a stronger ability in paying interest on outstanding debt. Even though it has a higher net profit margin, its gross margin is still lower than its competitor. Therefore, It should focus more in controlling its cost. It might need to consider eliminate other...
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