Case Analysis of Unidentified Industries--2006

Topics: Balance sheet, Security, Stock Pages: 12 (1985 words) Published: November 21, 2011
`Case analysis of Unidentified Industries--2006

Although different industries have their own characteristic, we can see some common features in certain industries. Thus we divide them into 4 kinds: Service, retail trade, manufacturer and online seller. List as below:

Classification of Different Industries and their features

1. Service (Table 1)
Advertising agency (AG)
Commercial bank
Health maintenance organization (HMO)
→Their services are based on human resources. They do not need a lot of PP&E or inventories and lots of money (like long-term debt). Since they provide their service first and the customers always pay at the end of the service, their account should be high. So now we want to find an industry that is zero inventories, low PP&E, high accounts receivable and low long-term debt. See the table 1, we find E, G and N each has a very high accounts receivable, low inventories and PP&E. It shows that they are all service industries.

Now we have to look deeply to find the difference among these three industries. First, N has an extremely high accounts receivable (90%) and the longest receivables collection period (4,071 days). And their biggest part of liabilities is notes payable. It really meets the features of Commercial bank. So N is Commercial bank.

What the different between E and G? We find that their percentages of balance sheets are almost the same. So we have to find some clues from selected financial data. It shows that their Receivables collection period and Revenue/total assets are pretty difference. With common sense, we know that HMO will have a longer Receivables collection period (They provide the service first and wait for the insurance company to pay for their service fee) and lower Revenue/total assets (Since AG is a pretty low cost industries, all we need is idea and time) when compares with AG. So G is AG and E is HMO. Result:

Advertising agency (AG) G
Commercial bank→ N
Health maintenance organization (HMO) → E

→ Both of them need certain PP&E and their accounts receivable will not so high, which is not the same as the other three. Since air planes are very expensive, so the Airline Company maybe has a very high PP&E, and certain long-term debt (to buy the airplanes). What is more, they do not have inventories, which is totally different from Family restaurant chain.

So we look at the table and try to find a company that has high PP&E, zero inventories, middle or high long-term debt. Only M meets the requirement. So M is Airline.

Airline → M

2. Retail trade (Table 2)
Bookstore Chain
Retail drug chain
Retail grocery chain
Department store chain
Certain PP&E, high inventories, high inventory turnover. →B, I, J, K It is hard to tell the different among them. In common sense, Retail drug chain always has a high Common stock. And Department store chain may have a high PP&E. Department has a long Receivables collection period(Because they use their “own brand” charge card). So we can guess that

Bookstore Chain→ B
Retail drug chain→ K
Retail grocery chain→ I
Department store chain→ J

3. Manufacturer (Table 3)
Pharmaceutical manufacturer(PM)
Electric and gas utility(EG)
High PP&E, Low inventories→D and L
PM have a longer Receivables collection period (because they will not receive the money until their drugs can be sold by the drug retailer)., high level of receivable collection, and high price(drugs are always expensive) EG may have a higher PP&E (since most of their products are relying on the PP&E), and their receivables collection period should be around 31 days (just like the electric bills), so 40 days just meet it. So L should be EG. We can guess H is Electric and gas utility and L is Pharmaceutical manufacturer. Result:

Pharmaceutical manufacturer(PM)→D
Electric and gas utility(EG)→L

4. Online seller (Table 4)
Online bookseller
Online direct factory to customer personal...
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