The Case of the Unknown Industries
The Case of the Unknown Industries
In the Case of the Unknown Industries, we matched several industries with their corresponding balance sheets. We used several different methods to come up with our conclusion. An important factor we had to remember was the economic state industries were in their respective year.
A. Online Retailer
This set of data belongs to the online retailer industry. The most significant categories that helped with our decision was the low inventory for a retail business and the relatively high inventory turnover. The reasoning behind the high inventory turnover was because the goods were allowed to sit in storage until sold because of the online aspect of the business. We were also able to research the balance sheet from a well-known online retailer business in Amazon.com, and noticed similarities. Some similarities are the high amount of cash, and high long-term debt. We concluded that the high long-term debt is high due to the company trying to expand.
B. Bookstore Chain
B represents the bookstore chain. They carry large amount of inventories as the books are their main assets. Even though this industry is a retail business, their inventory turnover is low compared to other retail industries. It is because these days, consumers tend to read books and other paper materials online. As a result, they sell less and replenish their stocks less.
C. Online direct factory to customer PC vendor
We determined that online direct factory to customer personal computer vendor represented C. Using Exhibit 1 the two key figures that gave us this indication was the high inventory turnover ratio, above average accounts receivable. As an online business normally inventories move fast due to the item being shipped as soon as it has been sold. In using dell computers as an example we saw a similar high turnover ratio. As being a supplier for business as well as personal computers the account receivable figure would also match this industry as business make various purchases on accounts payable.
D. Pharmaceutical Manufacturer
We determined that D stands for pharmaceutical manufacturer. We came to this conclusion as this industry has the highest other assets figure seen in exhibit 1. In manufacturing pharmaceuticals it is often a very expensive process which ultimately produces valuable assets in intellectual property and patents. These assets are intangible and hence in financials put as other assets.
E. Parcel Delivery Service
We chose Parcel Delivery Service for the letter E based on the having an above average plant equipment and zero inventory turnover. As a parcel delivery service company there would not be an inventory ratio as parcel companies do not have any inventory as they are a delivery service. We came to this conclusion using UPS as an example as they to contain an n/a on inventory turnover as well as an above average plant equipment figure.
F. Computer Software Developer
Computer software developer reflects F. Companies in this industry tend to have low inventories as this is more of a service industry. Besides, their EBITDA/revenue ratio which is a profitability measure, is the second highest among the 14 industries as this is a high-tech industry.
G. Social Media Network
Social media network is matched with G. We came to this conclusion with the analysis of Exhibit 1. Social media networks are typically financed through investment banks. The investment banks are given stocks in exchange for capital to fund social media networks. Therefore, the common stock under G is rather large compared to the rest of the industries. Also, they do not have any inventory because they do not sell a product for consumers to consume.
H. Restaurant Chain
This set of data belongs to the restaurant chain industry. The data in this industry shows very high inventory turnover because of the perishable nature if their products such as meats, fruits, and vegetables. Another distinguishing factor is the low receivables collection period because the restaurants only accept cash or credit. The last factor that stood out was the relatively high plant and equipment due to restaurant chains needing kitchen appliances, and the many buildings needed for the chain.
I. Retail Grocery Chain
Retail grocery chain reflects I on Exhibit 1. The reasons for this conclusion are the high and wide varieties of inventory that are sold to consumers and the high plant and equipment are used to store, move, and facilitate the inventory. Another reason was the receivable collection period (days). Retail grocery chains have a low collection period because they are paid by cash or by card. Either method of payment is received within a few days. Also, the high revenue/total assets indicates the high volume of sales a retail grocery chain would have.
J. Department Store Chain
J reflects department store chain. This industry is a retail business; therefore, there is a large amount of inventories. This industry also has high accounts receivable because usually customers pay with credit cards which are billed at the end of the month. However, sometimes, customers forget to pay their bills on time, and the bills are brought to next month. Therefore, the collection period is approximately 2 months.
K. Retail Drug Chain
Retail drug chain matches with K. It also has a similar balance sheet as retail grocery chain; however, some of the financing retail drug chains have received is through the sale of stocks, which shows are the large amount in common stock. Another distinction between retail grocery chain is the larger amount of accounts receivable and receivable collection days retail drug chain has. It has a larger amount of other assets because it has to bill insurance companies, government agencies, and consumers, thus resulting in a larger accounts receivable and receivable collection period.
L. Electric and Gas Utility Industry
This set of data belongs to the electric and gas utility industry. From the case we were told that the electric and gas utility receive 80% of their revenue from electricity sales, and 20% of their revenue from natural gas sales. Electricity utility companies do not usually have inventory because electricity cannot be stored and sold, but this company also sells natural gases which can be stored and sold. This explains the why the electricity company has inventory while pure electricity companies normally would not. The only other data that pops out is the high plant and equipment due to the infrastructure needed by the electricity companies, and the 51 day receivables collection period because of how they collect their money.
Airline is represented by M. Their fixed assets are the highest compared to other industries as the planes are very expensive. Moreover, the inventory for the airlines is very low which could be ignored. Then, the ROE for this industry is very low due to the competitiveness of the industry.
N. Commercial Bank
N corresponds to commercial bank. The accounts receivable for this industry is very high compared to other industries because the nature of the business is giving out loans. Consequently, this industry has a very long collection period of 8047 days because of the long-term loans. On the other hand, their clients would save money which lead to a relatively high accounts payable, and businesses would invest in fixed investments would lead to a high notes payable.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 22 September 2016
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