The Case of the Unidentified Ratios Phil Clark pounded his desk in despair. It was 2...

  
 
 

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The Case of the Unidentified Ratios Phil Clark pounded his desk in despair. It was 2 a.m. on February 15, 2012, at the offices of Golden Sacks, a major investment bank. Clark, a recent graduate of Harvard Business School, had been working for the past nine hours on a presentation that his boss's boss, the legendary investment banker Ebenezer Sikes, was to make over breakfast the next morning to a major sovereign wealth fund. Sikes had asked him - via an e-mail that arrived moments before Clark was to head out to take his fiancé to dinner - to prepare a presentation comparing the financial statements and selected ratios of 10 firms, to illustrate the relationships between balance sheet items, profit, and operations. Clark had chosen from the latest annual financials for several firms. The companies he chose were: A warehouse shopping club A supermarket chain A hotel chain ● ● ● ● ● ● • A temp agency A pharmaceutical manufacturer A software firm A major investment bank A manufacture of electronic communications equipment An express delivery firm A consumer products company All had gone well until a few minutes ago, when an e-mail arrived, seemingly from his fiancé, entitled "I LUV U." When he had opened the attachment, however, it turned out to be a computer virus, which wiped out the PowerPoint file he was working on. It was too late to repeat the laborious downloads that had occupied much of his evening. Rather, working from his surviving notes (see Exhibit 1), he somehow had to figure out which financial statements went with which firm. The one certainty was that if the presentation were not ready by 6 a.m., it would be ugly: Sikes - who barely knew how to turn on a computer himself--would have little sympathy for Clark's e-mail mishap. TOTAL LIABILITIES & EQUITY SELECTED RATIOS Gross Margin R&D/Sales Net Income/Sales Days of Receivables Inventory Turnover Fixed Asset Turnover Total Asset Turnover Net Income/Assets Net Income/Equity Assets/Equity Debt/Equity LT Debt/Total Capital Source: Casewriter. 100.0% 49.2% 18.2% 1941.0 0.1 4.09 0.05 0.01 0.11 11.78 7.29 0.71 100.0% 31.1% 1.4% 5.0 11.0 4.07 2.73 0.04 0.12 3.03 0.97 0.46 Note: "_" = category not reported separately on financial statements. 100.0% 22.8% 0.0% 9.4% 41.2 4.9 1.52 0.55 0.05 0.19 3.96 1.36 0.56 100.0% 24.9% 3.7% 42.5 71.5 2.63 1.50 0.05 0.10 1.80 0.11 0.10 100.0% 61.4% 1.6% 14.2% 37.8 4.9 4.32 1.40 0.20 0.82 4.18 1.28 0.50 100.0% 81.6% 14.1% 12.2% 81.2 1.2 3.24 0.33 0.04 0.09 2.22 0.50 0.30 100.0% 39.6% 14.4% 5.4% 137.2 4.3 22.23 0.80 0.04 0.09 1.96 0.22 0.14 100.0% 13.5% 0.0% 1.6% 4.0 12.5 7.49 3.52 0.05 0.12 2.23 0.19 0.10 100.0% 16.8% 0.5% 59.8 42.84 3.71 0.02 0.04 2.19 0.13 0.00 100.0% 87.7% 16.5% 16.5% 23.0 7.19 0.75 0.12 0.24 1.95 0.38 0.16 Exhibit 1 Common-Sized Financial Statements ASSETS Cash & Equivalents Net Receivables Inventories Prepaid Expenses Other Current Assets Total Current Assets. Gross Plant, Property & Equip. Accumulated Depreciation Net Plant, Property & Equip. Investments at Equity Other Investments Intangibles Deferred Charges Other Assets TOTAL ASSETS LIABILITIES Current Long-Term Debt Notes Payable Accounts Payable Taxes Payable Accrued Expenses Other Current Liabilities Total Current Liabilities Long-Term Debt Deferred Taxes Investment Tax Credit Minority Interest Other Liabilities TOTAL LIABILITIES EQUITY Preferred Equity Common Equity TOTAL EQUITY A 30.9% 26.8% 39.2% 0.0% 0.0% 96.9% 2.1% 0.9% 1.2% 0.2% 0.6% 0.0% 1.1% 100.0% 5.5% 35.7% 26.4% 0.2% 0.0% 67.8% 20.7% 0.0% 0.0% 0.1% 3.0% 91.4% 0.8% 7.7% 8.5% B 5.1% 3.7% 17.3% 1.8% 27.9% 133.6% 68.1% 65.4% 1.2% 0.0% 2.8% 0.0% 2.6% 100.0% 3.5% 0.0% 16.7% 0.0% 7.6% 0.6% 28.5% 28.4% 1.0% 0.0% 0.0% 9.1% 67.0% 33.0% 33.0% C 8.2% 5.9% 8.2% 1.3% 23.6% 61.1% 27.1% 34.0% 8.7% 21.1% 0.9% 11.7% 100.0% 1.4% 0.0% 1.4% 19.3% 22.1% 32.9% 0.3% 0.0% 0.0% 19.3% 74.6% 25.3% 25.3% D 8.5% 16.7% 1.6% 3.4% 30.3% 123.0% 66.3% 56.8% 0.0% 0.0% 8.6% 0.0% 4.4% 100.0% 0.1% 0.0% 6.2% 0.0% 11.5% 0.0% 17.8% 6.1% 4.9% 0.0% 0.0% 15.6% 44.4% 55.6% 55.6% E 5.0% 14.4% 10.9% 0.0% 3.0% 33.4% 64.1% 31.0% 33.1% 0.2% 2.0% 28.6% 0.0% 2.8% 100.0% 5.0% 0.4% 10.4% 2.4% 15.1% 0.0% 33.4% 25.2% 1.0% 0.0% 0.0% 15.3% 74.8% 23.9% 23.9% F 14.4% 7.7% 4.3% 0.0% 4.6% 31.0% 16.6% 6.8% 9.8% 5.0% 52.1% 0.0% 2.1% 100.0% 1.8% 1.1% 2.1% 0.5% 1.1% 8.2% 14.7% 19.7% 9.6% 0.0% 0.0% 10.8% 54.7% 45.0% 45.0% G 28.7% 30.4% 11.8% 0.0% 70.9% 3.8% 2.1% 2.8% 14.5% 1.3% 4.6% 100.0% 2.8% 9.0% 22.8% 34.6% 8.3% 0.8% 0.0% 0.0% 4.5% 48.2% 51.0% 51.0% H 21.0% 3.6% 24.8% 0.0% 1.8% | 51.2% 68.6% 22.2% 46.5% 0.0% 0.0% 0.3% 2.1% 100.0% 3.4% 0.0% 24.5% 0.5% 8.0% 8.7% 45.0% 5.3% 1.4% 0.0% 0.0% 1.2% 53.0% 44.8% 44.8% I 6.0% 59.3% 0.0% 4.8% 70.1% 23.3% 15.7% 7.6% 0.0% 3.3% 5.6% 0.0% 13.4% 100.0% 4.5% 1.2% 13.3% 4.0% 20.2% 43.2% 0.0% 0.2% 0.0% 0.0% 11.0% 54.4% 45.6% 45.6% J 27.8% 4.8% 0.0% 11.5% 44.1% 29.8% 18.8% 11.0% 0.0% 1.2% 40.4% 0.0% 3.2% 100.0% 9.8% 0.0% 2.5% 0.0% 4.6% 18.4% 35.3% 9.8% 0.0% 0.0% 0.0% 3.7% 48.8% 51.2% 51.2% The Case of the Unidentified Ratios Phil Clark pounded his desk in despair. It was 2 a.m. on February 15, 2012, at the offices of Golden Sacks, a major investment bank. Clark, a recent graduate of Harvard Business School, had been working for the past nine hours on a presentation that his boss's boss, the legendary investment banker Ebenezer Sikes, was to make over breakfast the next morning to a major sovereign wealth fund. Sikes had asked him - via an e-mail that arrived moments before Clark was to head out to take his fiancé to dinner - to prepare a presentation comparing the financial statements and selected ratios of 10 firms, to illustrate the relationships between balance sheet items, profit, and operations. Clark had chosen from the latest annual financials for several firms. The companies he chose were: A warehouse shopping club A supermarket chain A hotel chain ● ● ● ● ● ● • A temp agency A pharmaceutical manufacturer A software firm A major investment bank A manufacture of electronic communications equipment An express delivery firm A consumer products company All had gone well until a few minutes ago, when an e-mail arrived, seemingly from his fiancé, entitled "I LUV U." When he had opened the attachment, however, it turned out to be a computer virus, which wiped out the PowerPoint file he was working on. It was too late to repeat the laborious downloads that had occupied much of his evening. Rather, working from his surviving notes (see Exhibit 1), he somehow had to figure out which financial statements went with which firm. The one certainty was that if the presentation were not ready by 6 a.m., it would be ugly: Sikes - who barely knew how to turn on a computer himself--would have little sympathy for Clark's e-mail mishap. TOTAL LIABILITIES & EQUITY SELECTED RATIOS Gross Margin R&D/Sales Net Income/Sales Days of Receivables Inventory Turnover Fixed Asset Turnover Total Asset Turnover Net Income/Assets Net Income/Equity Assets/Equity Debt/Equity LT Debt/Total Capital Source: Casewriter. 100.0% 49.2% 18.2% 1941.0 0.1 4.09 0.05 0.01 0.11 11.78 7.29 0.71 100.0% 31.1% 1.4% 5.0 11.0 4.07 2.73 0.04 0.12 3.03 0.97 0.46 Note: "_" = category not reported separately on financial statements. 100.0% 22.8% 0.0% 9.4% 41.2 4.9 1.52 0.55 0.05 0.19 3.96 1.36 0.56 100.0% 24.9% 3.7% 42.5 71.5 2.63 1.50 0.05 0.10 1.80 0.11 0.10 100.0% 61.4% 1.6% 14.2% 37.8 4.9 4.32 1.40 0.20 0.82 4.18 1.28 0.50 100.0% 81.6% 14.1% 12.2% 81.2 1.2 3.24 0.33 0.04 0.09 2.22 0.50 0.30 100.0% 39.6% 14.4% 5.4% 137.2 4.3 22.23 0.80 0.04 0.09 1.96 0.22 0.14 100.0% 13.5% 0.0% 1.6% 4.0 12.5 7.49 3.52 0.05 0.12 2.23 0.19 0.10 100.0% 16.8% 0.5% 59.8 42.84 3.71 0.02 0.04 2.19 0.13 0.00 100.0% 87.7% 16.5% 16.5% 23.0 7.19 0.75 0.12 0.24 1.95 0.38 0.16 Exhibit 1 Common-Sized Financial Statements ASSETS Cash & Equivalents Net Receivables Inventories Prepaid Expenses Other Current Assets Total Current Assets. Gross Plant, Property & Equip. Accumulated Depreciation Net Plant, Property & Equip. Investments at Equity Other Investments Intangibles Deferred Charges Other Assets TOTAL ASSETS LIABILITIES Current Long-Term Debt Notes Payable Accounts Payable Taxes Payable Accrued Expenses Other Current Liabilities Total Current Liabilities Long-Term Debt Deferred Taxes Investment Tax Credit Minority Interest Other Liabilities TOTAL LIABILITIES EQUITY Preferred Equity Common Equity TOTAL EQUITY A 30.9% 26.8% 39.2% 0.0% 0.0% 96.9% 2.1% 0.9% 1.2% 0.2% 0.6% 0.0% 1.1% 100.0% 5.5% 35.7% 26.4% 0.2% 0.0% 67.8% 20.7% 0.0% 0.0% 0.1% 3.0% 91.4% 0.8% 7.7% 8.5% B 5.1% 3.7% 17.3% 1.8% 27.9% 133.6% 68.1% 65.4% 1.2% 0.0% 2.8% 0.0% 2.6% 100.0% 3.5% 0.0% 16.7% 0.0% 7.6% 0.6% 28.5% 28.4% 1.0% 0.0% 0.0% 9.1% 67.0% 33.0% 33.0% C 8.2% 5.9% 8.2% 1.3% 23.6% 61.1% 27.1% 34.0% 8.7% 21.1% 0.9% 11.7% 100.0% 1.4% 0.0% 1.4% 19.3% 22.1% 32.9% 0.3% 0.0% 0.0% 19.3% 74.6% 25.3% 25.3% D 8.5% 16.7% 1.6% 3.4% 30.3% 123.0% 66.3% 56.8% 0.0% 0.0% 8.6% 0.0% 4.4% 100.0% 0.1% 0.0% 6.2% 0.0% 11.5% 0.0% 17.8% 6.1% 4.9% 0.0% 0.0% 15.6% 44.4% 55.6% 55.6% E 5.0% 14.4% 10.9% 0.0% 3.0% 33.4% 64.1% 31.0% 33.1% 0.2% 2.0% 28.6% 0.0% 2.8% 100.0% 5.0% 0.4% 10.4% 2.4% 15.1% 0.0% 33.4% 25.2% 1.0% 0.0% 0.0% 15.3% 74.8% 23.9% 23.9% F 14.4% 7.7% 4.3% 0.0% 4.6% 31.0% 16.6% 6.8% 9.8% 5.0% 52.1% 0.0% 2.1% 100.0% 1.8% 1.1% 2.1% 0.5% 1.1% 8.2% 14.7% 19.7% 9.6% 0.0% 0.0% 10.8% 54.7% 45.0% 45.0% G 28.7% 30.4% 11.8% 0.0% 70.9% 3.8% 2.1% 2.8% 14.5% 1.3% 4.6% 100.0% 2.8% 9.0% 22.8% 34.6% 8.3% 0.8% 0.0% 0.0% 4.5% 48.2% 51.0% 51.0% H 21.0% 3.6% 24.8% 0.0% 1.8% | 51.2% 68.6% 22.2% 46.5% 0.0% 0.0% 0.3% 2.1% 100.0% 3.4% 0.0% 24.5% 0.5% 8.0% 8.7% 45.0% 5.3% 1.4% 0.0% 0.0% 1.2% 53.0% 44.8% 44.8% I 6.0% 59.3% 0.0% 4.8% 70.1% 23.3% 15.7% 7.6% 0.0% 3.3% 5.6% 0.0% 13.4% 100.0% 4.5% 1.2% 13.3% 4.0% 20.2% 43.2% 0.0% 0.2% 0.0% 0.0% 11.0% 54.4% 45.6% 45.6% J 27.8% 4.8% 0.0% 11.5% 44.1% 29.8% 18.8% 11.0% 0.0% 1.2% 40.4% 0.0% 3.2% 100.0% 9.8% 0.0% 2.5% 0.0% 4.6% 18.4% 35.3% 9.8% 0.0% 0.0% 0.0% 3.7% 48.8% 51.2% 51.2%

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