Financial statements and ratios can reveal industry-specific differences in financial and operational strategies. Within an industry,...

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Financial statements and ratios can reveal industry-specific differences in financial and operational strategies. Within an industry, companies often have similar-looking financials. For example, manufacturing companies tend to have higher PPE than those in service industries. The average period of time it takes to collect accounts receivable should be higher for banks than non-financial firms because banks offer long-term loans, whereas most companies selling goods/services require payment in 30-90 days. The goal of this assignment is to improve your understanding of financial statement analysis and ratio analysis by recognizing industry differences. Financial information for 5 companies operating in 5 different industries will be provided - including common size balance sheets (Exhibit 1), income statements (Exhibit 2), and financial ratios (Exhibit 3). These companies are well-known, publicly traded, U.S. corporations. Their financial information reflects characteristics typical of their industries. You will need to identify which of the below industries each company operates in. Industry Description Bookstore Chain Operates retail bookstore chains; also sells and rents new and used print and digital books Pharmaceutic Discovers, develops, mass-produces, markets, and sells biopharmaceutical products globally; serves wholesalers, retailers, hospitals, clinkcs, pharmacies, government, and agenices al Tech - Software Grocery Chain Bank Develops, licenses, and supports software solutions worldwide; provies consulting services to assist clients in developing, deploying, and managing server and desktop solutions; trains and certifies information technology professionals operates retail food and drug stores that offer a full line of grocieries, meat, and produce as well as cosmetic and drug products Provides comprehensive banking services, including investment banking, retail banking, commercial banking, financial transaction processing, and asset management 1.) For each company (A - E), identify which industry it operates in, and explain your reasoning. Ex: Company X - Restaurant Chain. Company X is most likely a restaurant chain because, relative to the other companies, it has very low inventory (0.25% of total assets) and fast inventory turnover (20 times per year, an average of 18 days per year to sell inventory). This fits a restaurant chain because their inventory consists primarily of perishable foods that have very short shelf lives. Since they cannot store inventory for long periods of time, they must sell it quickly, and would not want to keep too much on hand (to reduce spoilage costs). Company X also has a large gross profit margin (63%), which fits the restaurant industry - menu prices typically include a large mark-up over cost. Additionally, Company X has no R&D expense, which makes sense, since their business model does not require them to invest large sums of money into developing products. Company X's PPE comprises a moderate amount of their total assets (34%), which is consistent with their operations. They have physical spaces and equipment for their restaurants, but they do not need large manufacturing or inventory storage needs. They also have a significant amount of lease obligations (13% of assets), which also fits the restaurant industry - rather than buying all the property and buildings for their restaurants, they probably lease a lot of it. Company Exhibit 1: Common-Size Balance Sheet (% of Total Assets) A B C D E Current Assets Cash and Cash Equivalents Other Short-Term Investments Accounts Receivable Inventory Prepaid Assets Other Current Assets 22.80 1.48 3.96 0.78 1.13 5.01 42.74 5.09 3.10 33.97 9.71 10.30 4.95 4.17 0.00 49.39 0.72 7.21 17.96 1.91 1.55 1.79 3.54 1.57 0.44 Non-Current Assets PPE, Net 0.93 11.60 15.30 8.34 56.76 Goodwill 1.91 0.50 14.67 35.02 8.10 Other Intangible Assets 20.61 2.70 21.12 3.30 Investments 25.04 0.26 0.92 10.23 Other Non-Current Assets 4.54 5.14 2.66 3.50 Other Investments 8.55 3.05 Total Assets 100.00 100.00 100.00 100.00 100.00 Current Liabilities Accounts Payable 56.06 32.61 5.25 4.36 15.90 Pension and Post-Retirement Benefits 8.89 2.38 1.62 0.00 Current Debt 1.47 10.57 1.92 9.67 8.28 Other Current Liabilities 8.60 0.00 14.66 6.62 13.27 Non-Current Liabilities Long-Term Debt 13.17 3.54 23.26 21.47 31.67 Long-Term Capital Lease Obligations 1.57 0.00 12.49 7.24 0.00 Other Non-Current Liabilities 0.87 5.66 4.31 11.14 10.33 Total Equity 9.38 47.63 35.71 37.88 20.55 Total Liabilities and Equity 100.00 100.00 100.00 100.00 100.00 Exhibit 2: Common-Size Income Statement (% of Revenue) Company A B D E Total Revenue 100.00 100.00 100.00 100.00 100.00 Cost of Goods Sold 18.88 74.06 34.10 19.75 78.32 Gross Profit 81.12 25.94 65.90 80.25 21.68 Operating Expenses 37.76 24.07 31.76 53.35 19.52 Selling, General, and Administrative 41.13 20.83 18.35 27.73 17.49 Research and Development - - 13.41 16.71 2.03 Other Operating Expenses -3.36 3.24 8.91 Operating Income 43.36 1.87 34.14 26.90 2.16 Non-Operating Interst Expenses 0.00 0.48 2.13 2.60 0.51 Other Expenses 4.83 3.23 2.71 9.87 1.64 Earnings before Taxes 38.53 -1.84 29.30 14.43 0.01 Taxes 7.02 -0.64 3.53 2.67 0.74 Net Income 31.51 -1.20 25.77 11.76 -0.73 Exhibit 3: Financial Ratios Company A B D E Formula Liquidity Ratios Cash Ratio 0.23 0.01 0.04 0.01 0.01 Acid Test Ratio 0.76 0.26 0.59 0.26 0.14 Current Ratio 0.85 1.45 2.53 0.88 0.76 Cash and Cash Equivalents/Total Assets (Current Assets - Inventory)/Current Liabilities Current Assets/Current Liabilities Efficiency Ratios Accounts Receivable Days 2988 16 86 58 5 Accounts Receviable/Average Day's Sales Inventory Turnover 3 21 1 14 COGS/Average Inventory Days Sales in Inventory 113 18 431 26 365/Inventory Turnover Asset Turnover 0.04 2.15 0.44 0.31 3.18 Net Sales/Total Assets Financial Leverage Ratios Debt to Total Assets 0.15 0.14 0.25 0.31 0.40 Total Debt/Total Assets Debt to Equity 1.56 0.30 0.71 0.83 1.93 Total Debt/Shareholders' Equity Profitability Ratios Gross Margin (%) 81 26 66 80 22 (Revenue-COGS)/Revenue Return on Sales 0.39 -0.02 0.29 0.14 0.00 Operating Income/Net Sales Financial statements and ratios can reveal industry-specific differences in financial and operational strategies. Within an industry, companies often have similar-looking financials. For example, manufacturing companies tend to have higher PPE than those in service industries. The average period of time it takes to collect accounts receivable should be higher for banks than non-financial firms because banks offer long-term loans, whereas most companies selling goods/services require payment in 30-90 days. The goal of this assignment is to improve your understanding of financial statement analysis and ratio analysis by recognizing industry differences. Financial information for 5 companies operating in 5 different industries will be provided - including common size balance sheets (Exhibit 1), income statements (Exhibit 2), and financial ratios (Exhibit 3). These companies are well-known, publicly traded, U.S. corporations. Their financial information reflects characteristics typical of their industries. You will need to identify which of the below industries each company operates in. Industry Description Bookstore Chain Operates retail bookstore chains; also sells and rents new and used print and digital books Pharmaceutic Discovers, develops, mass-produces, markets, and sells biopharmaceutical products globally; serves wholesalers, retailers, hospitals, clinkcs, pharmacies, government, and agenices al Tech - Software Grocery Chain Bank Develops, licenses, and supports software solutions worldwide; provies consulting services to assist clients in developing, deploying, and managing server and desktop solutions; trains and certifies information technology professionals operates retail food and drug stores that offer a full line of grocieries, meat, and produce as well as cosmetic and drug products Provides comprehensive banking services, including investment banking, retail banking, commercial banking, financial transaction processing, and asset management 1.) For each company (A - E), identify which industry it operates in, and explain your reasoning. Ex: Company X - Restaurant Chain. Company X is most likely a restaurant chain because, relative to the other companies, it has very low inventory (0.25% of total assets) and fast inventory turnover (20 times per year, an average of 18 days per year to sell inventory). This fits a restaurant chain because their inventory consists primarily of perishable foods that have very short shelf lives. Since they cannot store inventory for long periods of time, they must sell it quickly, and would not want to keep too much on hand (to reduce spoilage costs). Company X also has a large gross profit margin (63%), which fits the restaurant industry - menu prices typically include a large mark-up over cost. Additionally, Company X has no R&D expense, which makes sense, since their business model does not require them to invest large sums of money into developing products. Company X's PPE comprises a moderate amount of their total assets (34%), which is consistent with their operations. They have physical spaces and equipment for their restaurants, but they do not need large manufacturing or inventory storage needs. They also have a significant amount of lease obligations (13% of assets), which also fits the restaurant industry - rather than buying all the property and buildings for their restaurants, they probably lease a lot of it. Company Exhibit 1: Common-Size Balance Sheet (% of Total Assets) A B C D E Current Assets Cash and Cash Equivalents Other Short-Term Investments Accounts Receivable Inventory Prepaid Assets Other Current Assets 22.80 1.48 3.96 0.78 1.13 5.01 42.74 5.09 3.10 33.97 9.71 10.30 4.95 4.17 0.00 49.39 0.72 7.21 17.96 1.91 1.55 1.79 3.54 1.57 0.44 Non-Current Assets PPE, Net 0.93 11.60 15.30 8.34 56.76 Goodwill 1.91 0.50 14.67 35.02 8.10 Other Intangible Assets 20.61 2.70 21.12 3.30 Investments 25.04 0.26 0.92 10.23 Other Non-Current Assets 4.54 5.14 2.66 3.50 Other Investments 8.55 3.05 Total Assets 100.00 100.00 100.00 100.00 100.00 Current Liabilities Accounts Payable 56.06 32.61 5.25 4.36 15.90 Pension and Post-Retirement Benefits 8.89 2.38 1.62 0.00 Current Debt 1.47 10.57 1.92 9.67 8.28 Other Current Liabilities 8.60 0.00 14.66 6.62 13.27 Non-Current Liabilities Long-Term Debt 13.17 3.54 23.26 21.47 31.67 Long-Term Capital Lease Obligations 1.57 0.00 12.49 7.24 0.00 Other Non-Current Liabilities 0.87 5.66 4.31 11.14 10.33 Total Equity 9.38 47.63 35.71 37.88 20.55 Total Liabilities and Equity 100.00 100.00 100.00 100.00 100.00 Exhibit 2: Common-Size Income Statement (% of Revenue) Company A B D E Total Revenue 100.00 100.00 100.00 100.00 100.00 Cost of Goods Sold 18.88 74.06 34.10 19.75 78.32 Gross Profit 81.12 25.94 65.90 80.25 21.68 Operating Expenses 37.76 24.07 31.76 53.35 19.52 Selling, General, and Administrative 41.13 20.83 18.35 27.73 17.49 Research and Development - - 13.41 16.71 2.03 Other Operating Expenses -3.36 3.24 8.91 Operating Income 43.36 1.87 34.14 26.90 2.16 Non-Operating Interst Expenses 0.00 0.48 2.13 2.60 0.51 Other Expenses 4.83 3.23 2.71 9.87 1.64 Earnings before Taxes 38.53 -1.84 29.30 14.43 0.01 Taxes 7.02 -0.64 3.53 2.67 0.74 Net Income 31.51 -1.20 25.77 11.76 -0.73 Exhibit 3: Financial Ratios Company A B D E Formula Liquidity Ratios Cash Ratio 0.23 0.01 0.04 0.01 0.01 Acid Test Ratio 0.76 0.26 0.59 0.26 0.14 Current Ratio 0.85 1.45 2.53 0.88 0.76 Cash and Cash Equivalents/Total Assets (Current Assets - Inventory)/Current Liabilities Current Assets/Current Liabilities Efficiency Ratios Accounts Receivable Days 2988 16 86 58 5 Accounts Receviable/Average Day's Sales Inventory Turnover 3 21 1 14 COGS/Average Inventory Days Sales in Inventory 113 18 431 26 365/Inventory Turnover Asset Turnover 0.04 2.15 0.44 0.31 3.18 Net Sales/Total Assets Financial Leverage Ratios Debt to Total Assets 0.15 0.14 0.25 0.31 0.40 Total Debt/Total Assets Debt to Equity 1.56 0.30 0.71 0.83 1.93 Total Debt/Shareholders' Equity Profitability Ratios Gross Margin (%) 81 26 66 80 22 (Revenue-COGS)/Revenue Return on Sales 0.39 -0.02 0.29 0.14 0.00 Operating Income/Net Sales