This article explains that companies with certain industries tend to have similar financial make-ups. This is because companies within an industry face many of the same economic forces. Some of those economic forces would include government regulation, consumer sentiment towards the product or service, consumer demographics, and international appeal and competition. However, when you take a deeper look at the companies within the industry you will see differences in their financial statements because companies must tailor a competitive strategy to differentiate them from others within the industry. This article asks us match a description of two companies within the same industry with two sets of financial statement data.
Health Products. The world largest prescription-pharmaceuticals company (LPPC) is related to the B set of financial statements for several reasons. First, LPPC has cost of goods sold of 11.1% compared to the other companies cost of goods sold of 23.9%. LPPC has divested its non-pharmaceutical businesses which would be manufacturing in nature. On the other hand, the other company focus is on non-pharmaceutical sales, consumer health and beauty product, and medical devices which would lead to larger degree of manufacturing products and higher cost of goods sold. Second, LPPC is the partner of choice for licensing deals with other firms in the same industry. This would imply the higher level of Intangibles of 46.1% compared to the other company with 22.2%. Finally, LPPC is the largest firm in the world in this type of industry which would imply it is a very mature firm. Typically large, mature firms pay high level of dividends. This would explain the higher dividend payout ratio of 46.28% compared to the other companies of 38.21%.
Beer. The national brewer of mass-market consumer beer (NBCB) is shown by C set of financial statements and the other company is shown by D set of financial statements. First, NBCB operates an extensive network of breweries and distribution systems which would be very capital intensive. This would explain that it net fixed assets is 54.7% compared to the other companies fixed assets of 16.0%. Further, the other company outsources its brewery activity which would mean it would not have the fixed assets associated with brewing beer on its balance sheet. Second, NBCB would likely require debt financing to expand its operations in to aluminum can production and snack goods. Naturally, the long-term debt of 51.2% would characterize NBCB while the long-term debt of 0.0% would characterize the other company.
Computers. The company that focuses on built-to-order PC’s (BTOPC) is shown as E set of financial statements. First, BTOPC is exclusively mail-order sales with no brick and mortar locations for displaying products. This would lead to a much lower SG&A expense of 9.7% compared to an SG&A expense of 23.1% for the other company. Second, BTOPC is simply an assembler of components manuafacted and supplied by various companies. This would lead on to believe that company BTOPC negotiated credit terms with its suppliers and would have a high level of short term debt on its balance sheet. The short term debt of 60.9% of the balance sheet of E is much greater than the short term debt of F. Finally, it mentions that the other company has proprietary software. As there are intangible assets of 1.2% on F it would lead me to believe that the other companies financial statements are F.
Books and Music. The company the focuses on selling through its vast retail store presence (VRS) is the H set of financials. First, the other company sells exclusively throught the internet which means its fixed asset cost and SG&A expense would be lower. VRA has a higher fixed assets cost of 24.4% (compared to 7.6%) and a higher SG&A expense of 21.8% (compared to 16.9%). Second, the other company has an agreesive strategy of acquisitions which would explain the higher amount of cash on hand of 54.8% compared to VRA’s cash of 16.2%. It is important that companies with an acquisition strategy to high levels of cash so it’s ready if an acquisition target comes along and its time sensitive. Finally, the other company just recently became profitable. It is obvious that the other company relates to G because it’s income taxes are -3.4% which would imply a net loss carry forward.
Paper Products. The company with the largest maker of paper (LMP) is associated with financial statements J. First, LMP is likely higher in fixed assets as it is vertically integrated while the other company purchases its raw materials from the open market. This is shown as J has fixed assets of 62.5% while the other company has fixed assets of 50.8%. Second, the other company markets its products under brand labels which would imply it maintains intangible assets for these brands unlike LMP. The intangible assets of 1.9% (compared to 14.6%) are likely associated with LMP. Finally, it explains that LMP is implementing cost cutting techniques which typically target SG&A expense. The lower SG&A expense of 7.3% is likely associated with LMP compared to 12.0% which is likely associated with the other company.
Hardware and Tools. The company that is a global Manufacturer (GM) is associated with the L financial statements. First, the other company finances franchise options and large customer purchases. This would imply that the other company has a large degree of debt financing on its books to support this side of the business. Long-term debt of 8.9% characterizes GM while long-term debt of 21.7% characterizes the other company. Finally, GM seems to a large mature firm. As mentioned earlier large mature firms tend to have a higher dividend payout and L’s payout of 70.62% (compared to 15.30%) seems more representative of GM.
Retailing. The company that carries nationally advertised general merchandise (NAGM) is the M financial statements. First, NAGM does not offer credit to customers. Because of this its AR would be close to zero. The receivables of 1.4% (compared to 17.0%) best characterize NAGM. Second, NAGM’s strategy is low prices which means it would have to make money via volume sales. This would imply a low gross profit margin. The gross profit margin of 24.7% (compared to 22.5%) best characterizes NAGM. Finally, NAGM’s volume strategy would require high volume and quickly moving inventory. The receivables turnover of 192.73% (compared to 8.31%) best characterizes NAGM.
Newspapers. The company that is a diversified media company (DMC) is the P financial statements. First, the other company is said to have a large amount of goodwill on its books due to acquisitions. The intangibles of 37.1% (compared to 76.8%) better characterize company DMC. Further, DMC recently built a large office building which would imply a large amount of fixed assets on its books. The fixed asset amount of 34.6% (compared to 14.1%) best characterizes DMC company. Finally, the other company is said to work of decentralized decision making which would lead to less bureaucracy in the organization. This lower level of bureaucracy is shown in SG&A expense of 23.0% (compared to 39.7%).
This article required an in depth look at the financial statements and how company operations is translate into financial measures. It is important to look at companies within an industry differentiate themselves from other within the industry. This differentiation is important because it provides clues into competitive strategy and allows the financial analyst to make a decision whether that strategy will lead to growth.
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Topic: The Financial Detective
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