19 September, 2012
Business Tools – PMBA
“The Case of the Unidentified Industries – 2006”
“The Case of the Unidentified Industries” challenges the reader to match 14 firms operating in 14 different industries with 14 sets of financial data from the year ending in 2005. This section aims to enlighten the reader about the methodology used to derive the responses shown in the subsequent section.
First, the industries are placed in one of the following groups: service industry, manufacturing, and retail. Several sub-groups are also created to better compartmentalize the problem (i.e. online retailer or food service).
Second, some basic financial information is deduced for each group (and/or sub-group). For example, we expect most of the service businesses to have zero inventories (excluding the food service industry). We expect online retailers, restaurants and grocery stores to have high inventory turnovers. We expect the accounts receivable collection period to be longer for wholesalers than for retailers. We expect the majority of retailers to have high sales volumes with small margins. We should also be able to predict, based on the state of the economy in 2005, which businesses should have been more profitable. All these financial trends are used to establish relationships between the financial data and the industry groups established earlier.
Third, the unique characteristics specific to each business are used to differentiate the businesses with similar balance sheets (i.e. low inventory turnover in a book store, high other assets for a pharmaceutical manufacturer, high profitability with low inventory for a software developer, long accounts receivable period for an H.M.O or advertising agency, etc…). This information should be sufficient for a preliminary matching of each business with a unique set of financial data.
Finally, wherever possible, a 2005 corporate financial statement was obtained and cross-referenced with the benchmark values presented in the case study to verify the selection.
SELECTIONS AND JUSTIFICATION:
A) Online bookseller (Amazon.com Inc.)
The key identifiers that A) was an online retailer were the relatively low inventory with a high turnover, low P&E, short AR collection period and high asset turnover with low profit margins. What was unique to this account was the large amount of cash and LT debt as well as the low amount of equity. This was explained in the MD&A and ‘Notes to Consolidated Financial Statements’ of Amazon.com Inc.’s 2005 annual report (which it turns out was the company used in this exercise). The large amount of cash is explained by the company’s focus on growth in free cash flow through increasing operating income while limiting capital expenditures. The large debt and low equity exist because the company issued close to $2 billion (between 1999 and 2000) in notes and securities (due between 2009 and 2010) that can be converted at the holder’s option to common stock.
B) Bookstore chain (Barnes & Noble Inc.)
The key indicators that B) was a retailer were the high inventory, large P&E, short receivable collection period as well as high asset turnover with low profit margins. The key to identifying this account as a bookstore chain was the low inventory turnover typical of a large retailer incorporating hundreds of stores with miles of shelves stocked full of books. In this case, the company was Barnes & Noble Inc.
C) Online direct factory to customer personal computer vendor (Dell Inc.) It was surmised that C) was an online retailer because of the low inventory, low P&E, and the high asset turnover with low profit margins. The low P&E and remarkably low inventory fit perfectly with an online distributor that ships directly from a factory. The high accounts payable is explained through the outsourcing of manufacturing. Furthermore, the long AR...