Ratio: Balance Sheet and Financial Results
UVA-C-2332
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
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