Drivers of Industry Financial Structure
Executive summary Ratios of ten companies are presented in this study. The companies are all headquartered in the United States and the financial statements are the most recent annual financials for the respective fiscal years ending in 1999 or 2000. The companies are: 1. Developer of prepackaged software 2. On-line retailer 3. Warehouse club for food and general merchandise 4. Major passenger airline 5. International hotel chain 6. Temporary staffing agency 7. Supermarket grocery retailer 8. Pharmaceutical company 9. Manufacturer of electronic communications equipment 0. Manufacturer and marketer of consumer products Analysis 1. Innovation is extremely important in the software industry and it requires investments. The gross margin is very high: 90. 7%. Office buildings and computers are the services needed. High R&D/Sales: 19. 8%. The Net Plant & Equipment is low: 8. 6% 2. Receivables are unimportant for an online retailer. No R&D since the company sells goods and products from others and it has zero R&D expense. 3. Warehouse Club for food and general merchandise has high Net Plant & Equipment 44. % and zero Unearned Revenue. The Inventory is high 41. 6% comparing with a supermarket grocery retailer. 4. Major passenger airline has some Accounts Payable 13. 0%, high Unearned Revenue as a result of prepaid ticket purchases for future air travel 11. 0%. 5. International hotel chain has high Goodwill: 25. 1% 6. Temporary staffing agency has a relatively low percent of Net Plant. The temporary workers are the main resource of a staffing agency. Because it is a service industry, there is no Inventory and R&D is not necessary so they are 0.
A high Asset Turnover: 4. 130. 7. Supermarket grocery retailer is similar with warehouse club for food and general merchandise but the supermarket gross margin in higher 26. 5% and net profit margin is lower. High inventory 21. 9% and high Net Plant &Equipment 46. 1%. 8. Pharmaceutical company has a low inventory 8. 0% and a medium size of Net Plant & Equipment 27. 2%. The Gross Margin is pretty high 46. 4%. A common use of the Gross Margin is to estimate a company’s breakeven sales volume. (Higgins,2012) 9.
Manufacturer of electronic communications equipment has the lower Profit Margin and longer Accounts Receivable characteristic of a firm effectively bidding for government contracts. 10. Manufacturer and marketer of consumer products have a small size of Inventory 10. 4% and its Net Plant & Equipment is 39. 3%. The Unearned Revenues is zero and R&D/Sales is also 0. Conclusions ?Service Industries: Temporary staffing agency, hotel and airline: balance sheets are C, D & I. I is the temporary staffing agency D is expected to be the airline C remains as the hotel R&D Based Firms: Software, On-Line Retailing, Pharmaceutical and Communication Equipment. Financial statement candidates would be A, F, G & J. J is the software firm A is clearly the on-line retailer since it is losing. G is the communication equipment firm because it has the lower Profit Margin and higher Accounts Receivable. F remains the pharmaceutical firm because it has higher Margins due to the capacity to keep high drug prices. It also spends a significant amount on R&D while the competition is always coming up with a new product. Consumer or Retail Based: Warehouse Club, Supermarket and Consumer Products firm. Remaining financial statements are B, E & H. B & H have low Accounts Receivable, Margins and high Inventory turnover so must be the warehouse club and the supermarket. E must be the consumer product company. B must be the grocery chain since it has the higher markup and higher expenses relative to H. H, by process of elimination, is the warehouse club. References: Higgins, Robert C. (2012) Analysis for Financial Management, 10th edited by The McGraw-Hill Companies, Inc