Case Study: Identify the Industry

In this case, you will need to go step by step in narrowing down which company most likely

belongs to which industry. As with most puzzles, you start with the edge or border pieces first

and then start to look for unusual characteristics within sets of the pieces that remain. We will

work our way down across various industry categories, from most unique or distinctive to least.

For each industry category, the discussion should surround the question of what makes that

industry $($or industry category$)$ unique compared to all of the remaining industry categories. The

especially in terms of the operating characteristics, types of assets held, and capacity for using

debt financing for the companies in each of the industry categories, and which of the remaining

$($non$-$pared down$)$ companies is$/$are most consistent with these characteristics.

Question $1$ Financial Industry

The first industry category is the Financial Industry, within which our sample company is a

commercial bank. Note that the accounting statement categories tend to be different for banks

than for companies in other industries, so the bank's loans are categorized in these statements

are accounts receivable, demand, savings, and other types of deposits are categorized as

accounts payable, and the equivalent of sales or revenues for banks would be their interest

income. So the key question to consider is$,$ how would a bank's asset and liability structure, and

ratios of income statement quantities relative to the asset structure quantities, be different for

the bank compared to those for the other eight company $/$ industry $/$ industry category

combinations to which the bank is being compared in this case?

Question $2$ Retail Industry

Once the bank has been identified $($assuming it's been identified correctly!$),$ the next industry

category to look at is the Retail Industry, for which the sample company covers general retail

but has significant grocery operations and has asset and liability structures and a profit

structure $($e$.$g$.,$ in terms of its gross and net profit margins$)$ that are all similar to those of typical

grocery stores. So the key question here is$,$ how would these numbers and ratios be different

for grocery stores than they are for companies in the remaining industry categories $($High

Technology, Service, and Capital$-$Intensive$)?$ Think about the actual types of assets a grocery

store would have, where those assets are located, and how often and under what

circumstances the grocery store would part with and then replace those assets. Which of the

eight remaining companies has ratios that are most consistent with these operational

characteristics?

Question $3$ High Technology Industries

Once you have identified the bank and the grocery store, the next industry category to try to

pick out are the High Technology industries, including, more specifically, a computer software

company, an R&D$-$based pharmaceutical manufacturer, and an R&D$-$based semiconductor

manufacturer. What is a key type of asset that these types of companies are likely to have, and

how might this type of asset affect their financial ratios? What is it that's unique about these

companies $($as compared to the two remaining industry categories of Service or Capital$-$

Intensive $($non$-$R&D$-$based$)$ industries$),$ and how might these differences be reflected in their

respective financial statements?

Question $4$ Service Industry

The company in the $4$th industry category, the Service industry, is the mobile phone service

provider. The key question to think about here is$,$ what would the relative distribution of its

asset base $($e$.$g$.,$ the amount of accounts receivable versus inventory versus fixed assets$)$ and

the relative levels of turnover for these asset categories look like for a mobile phone service

provider as compared to the other three remaining $($Capital$-$Intensive$)$ companies $--$ the liquor

producer and distributor, the discount airline, and the large integrated oil and gas company?

Question $5$ Capital$-$Intensive $($non$-$R&D$-$based$)$ Industries

And, finally, once you have pared down the list to have only the Capital$-$Intensive companies

remaining $--$ again, the liquor producer and distributor, the discount airline, and the large

integrated oil and gas company $--$ how do you distinguish between these three? Which of these

is likely to have more debt? Which is likely to have the least debt? With regard to the

breakdown of sales, which is likely to have a greater proportion of SG&A $($selling$,$ general, and

administrative$)$ expenses $($would they all have to invest the same amount in marketing, for

example$)?$ Which would likely have more inventory? Ditto for accounts receivable? What would

their respective accounts receivable and inventory turnovers look like? Which of the companies

would turn them over much more frequently? Which would turn them over more slowly?