Case 6 The Financial Detective, 2005
Company A has a much higher ratio of Cash & Short Term Investments, Receivables, and Inventories (24.2%, 12.8%, 7.0%) as compared to Company B (16.1%, 8.1%, 5.4%) which is lower in every asset category ratio besides Intangibles and Investments & Advances, 46.1% to 22.2% and 3.1% to .1%. This proves that Company A has cash on hand from the sale of side divisions and that they have a large production facility. Company B is a more diverse company in terms of production, which has a larger ratio of their assets in Intangibles such as patents and proprietary rights from the mass amount of products they sell. On the liability side, both Company A and Company B are nearly identical with only slight differences in their ratios. Company B has Debt in Current Liabilities that is 18.2x than Company A. Additionally, Company B decided to defer amount of taxes, 10.2% compared to .8%. This shows that Company B defers taxes to take advantage of extra capital for production and as a float, showing that the cash ratio and short term investments are actually smaller than shown because much of that money is earmarked for deferred taxes. It is easy to say that Company A has a higher ratio of cost of goods sold because of their substantial budget for research and development which is normal in a pharmaceutical company who creates their own products from research as opposed to Company B whose cost of goods sold is significantly lower, 11.1% to 23.9% because their over the counter and common products have no needed research.
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