Rev. Oct. 17, 2012
RATIOS TELL A STORY—2011
Financial results and conditions vary among companies for a number of reasons. One reason for the variation can be traced to the characteristics of the industries in which companies operate. For example, some industries require large investments in property, plant, and equipment (PP&E), while others require very little. In some industries, the competitive productpricing structure permits companies to earn significant profits per sales dollar, while in other industries the product-pricing structure imposes a much lower profit margin. In most low-margin industries, however, companies often experience a relatively high rate of product throughput. A second reason for some of the variation in financial results and conditions among companies is the result of management philosophy and policy. Some companies reduce their manufacturing capacity to match more closely their immediate sales prospects, while others carry excess capacity to be prepared for future sales growth. Also, some companies finance their assets with borrowed funds, while others avoid that leverage and choose instead to finance their assets with owners’ equity. And some corporate management teams choose to not pay dividends to their owners, preferring to reinvest those funds in the company. Of course, another reason for some of the variation in reported financial results among companies is the differing competencies of management. Given the same industry characteristics and the same management policies, different companies may report different financial results simply because their managements perform differently. And last, one other reason is that some industries are more susceptible to macroeconomic conditions than others. This can be true when macroeconomic conditions (e.g., foreign exchange rates, interest rates, and taxes) are weak and deteriorating as well as when they are strong and improving. Or this can also be true when such conditions are stable versus volatile. Those differences in industry characteristics, in company policies, in management performance, and in responsiveness to the macroeconomic environment are reflected in the financial statements published by publicly held companies. Furthermore, they can be highlighted through the use of financial ratios. Exhibit 1 presents balance sheets, in percentage form, and
This case was prepared by Professor Mark E. Haskins, Darden Graduate School of Business Administration, and has benefited from collaborations with various colleagues over the years on earlier versions. It was written as a basis for discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2012 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to firstname.lastname@example.org. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊
selected financial ratios computed from fiscal year 2011 balance sheets and income statements for 13 companies from the following industries: airline railroad pharmaceuticals commercial banking photographic equipment, printing, and sales discount general-merchandise retail electric utility fast-food restaurant chain wholesale food distribution supermarket (grocery) chain Internet retailing advertising agency services computer software development
Study the balance sheet profiles and the financial ratios listed for each of the 13 companies as presented in Exhibit 1.1 Your assignment is to use your intuition, common sense, and basic understanding of the unique attributes of each industry listed above to match each column in the exhibit with one of the...