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FINANCIAL ANALYSIS-IDENTIFYING THE INDUSTRY Companies within an industry face similar opportunities and constraints, and consequently, they often make similar operating, investing and financing decisions. Therefore, companies within the same in- dustry tend to exhibit similar financial characteristics, as measured by financial ratios. For example, "old economy" businesses with large amounts of tangible assets may have higher leverage ratios than "new economy" businesses with large amounts of intangible assets such as knowledge assets or a large and loyal customer base. On the other hand, since opportunities and constraints tend to be different across industries, companies in different industries tend to exhibit different financial ratios. With some know edge of the different operating, investing and financing decisions across industries, financial ratios can be used to identify an industry (see Exhibit 1 for the definition of ratios used) Balance sheets and income statements for the most recent three years were gathered for 12 compa- nies from 12 different industries. Common-sized balance sheets (al tems scaled by total assets), com- mon-sized income statements all items scaled by net sales), and selected financial ratios for the most recent three years were prepared. Since unusual deviation from target values may occur in any given year the values were averaged over three years. The three-year average common-sized balance sheet, com- mon-sized income statement, and financial ratios are reported in Exhibits 2, 3, and 4, respectively The 12 companies are members of the following 12 different industries: Airline Commercial banking (items fitted into the same categories as the non-financial firms) Computer software development Department store chain (with its own in-store credit card) Electric utility (producer and distributor) Liquor (producer and distributor) Oil and gas (upstream explorer and producer) Retail drug Retail grocery Sporting (organized as a master limited partnership (MLP), hence no corporate taxes) Assignment Using the financial statement data provided in Exhibits 2, 3, and 4, match the companies with their industry. EXHIBIT1 Definitions of Some Key Financial Ratios LIQUIDITY RATIOs Cash & Marketable Securities to Total Assets Acid Test Ratio Current ratio (Cash + Market Securities) / Total Assets = (Cash + Market Securities + Receivables) / Current Liabilities Current Assets / Current Liabilities ASSET MANAGEMENT Day's Receivable Day's Inventory Asset Turnover 365/ (Sales / Receivables) SalesTotal Assets (Convertible Debt Long-term DebNon-current - 365/ (Cost of Sales/ Inventory) FINANCIAL LEVERAGE Long-term Debt to Total Assets Capital LeasesOther Long-term Liabilities) Total Assets (Convertible Debt Long-term DebtNon-current Leases Long-term Debt to Stockholders' Equity Other Long-term Liabilities) Stockholders' Equity Coverage Ratio = (Income Before Taxes + Interest Expense) / Interest Expense - Gross Profit (Net IncomeInterest Expense)/Total Assets PROFITABILITY Gross Margin Ratio Return on Sales Return on Assets (1) Return on Assets (2) Return on Equity Sales Net Income/Sales Net Income /Total Assets Net Income / Stockholders' Equity Return on Sales * Asset TurnoverLeverage DUPONT ANALYSIS Retur on Equity (Net Income/Sales) x (Sales/Assets) x (Assets/ Stockholders Equity) 10 056 3.0 CASH MRK TABLE SECURITIES 967776 28.164.53 0.0022.70 0.00 184 674 0.00 24.43 0.00 6.19 2.2558.13 1436 16.62 40,2 4.1 11.40 INVENTORIES RAW MATERIALS WORK IN PROGRESS FINISHED GOODS NOTES RECEIVABLE OTHER CURRENT ASSETS 30.79 3.03 40.96 0.00 0.00 0.00 0.00 0.00 0.00 0.00 031 3.99 5745 63.93 62.02 19.91 1194 .79 8.7 77 2035 17.88 PROR PLANT&FQUIP .00 12.98 20.77 4.85 82.40 32.13 67.64 65.77 45.30 39.81 0.00 0.00 46 23.14 4.85 8240 747 44.51 5.774530 2685 0.0012.96 NET PROP &EQUIIP INVEST & ADV TO SUBS OTHER NON-CUR ASSETS 640 786 11.84 0.00 0.00 0.61 0.00 INTANGIBLES DEPOSITS & OTH ASSET TOTAL ASSETS 0.00 3034 7.00 13.02 2.61 100.00 10000 100.00 100.00 100.00 100.00 100.00 10a00 100.00 100.00 100.00 100.00 0.00 0.00 15.0347.1 4898 2.58 417 2298 12.88 00 18.95 139 CUR LONG TERM DEBT CUR PORT CAP LEASES ACORUED EXPENSES INCOMETAXES OTHER CURRENT LIAB TOTAL CURRENT LIAB MORIGAGES DEFERRED CHARGES/INC CONVERIIBLE DEBT 0.00 0.00 0.00 0.00 0.00 0.00 1546 28 78.576323 18.17 2237 19.0 392 2437 17.71 15.37 3241 2265 0.00 0.00 0.00 0.00 50.34 335 0,00 34.05 3364 36.95 29.29 NON-CUR CAP LEASES OTHER LONG TERM LIAB TOTAL LLABILITIES 3.68 14.24 743744.77 9237 80.06 49.08 24.23 1.57 785 7059 64.71 0.00 0.001131 PREFERRED STOCK 0.00 COMMON STOCK NET 7.89 38.74 0.03 CAPITAL SURPLUS .00 37.83 9.5720.98 3.991655 644 5645 0.00 5.98 15. 43.02 34.73 0.47 1596 2044 23.5 53.58 6591 TREASURY STOCK OTHER EQUTTIES 0.00 0.00 0.00 122) (082) 75.77 3833 175 29.41 (4.62 (0.58) 002 G36) 2640 58.90 38.17 TOT LAB &NET WORTH 10000 10000 10000 10000 10000 100,00 100.0100.00 10000 100AH) 1000 10000 Exhibit 4 Selected Financial Ratios (averaged over three years) 2 10 11 12 LIQUIDITY RATIOS Cash & Market Sec to Total Assets Acid Test Ratio Current Ratio 0.263 0.101 0.0T8 0.59 0.045 09 0.00 0.030 0.857 0.921 0.524 2.557 0.462 1537 0.107 0.814 1.050 1.010 0.658 2.782 0.563 1.991 0.836 1.011 0.053 0.630 0.889 0.928 2.054 0.084 0.018 0.186 0.309 1317 1.625 1.800 ASSET MANAGEMENT Day's Reccivables 80.691 50.271 2,258.313 311.543 7.496 42.696 28.201 194.066 3.654 59.651 37.712 189.468 2,655.291 9.810 45.595 NM 9.923NM 14.403 73.070 4119 13.602 67.493 59.059 0.198 1.206 0.065 0.55 0.856 0.545 0.296 1.094 2.030 0.708 3.043 0.925 3 3 ys Inventory Asset Turnover FINANCIAL LEVERAGE Long-term Debt o Total Assets 0.535 0.089 Long-term Debt to Stock. Equity 3.643 0.62 .93 0.657 0.2630.000 1.031 2.251 1.510 1.6560.122 0.244 0.138 0.126 0133 0.000 0.395 0.394 0.437 0.4350.072 0.093 0 0 0 NM .618 14.791 NM 1.180 2.671 5.883 3.885 2,175.621 NM Coverage Ratio 1.855 26.270 PROFITABILITY Cross Margin Ratio 0.677 1.000 0.510 0855 0.49 0.345 0.294 0.289 0.272 0.463 0.296 0.509 0.099 0.100 0.202 0.070 0.104 0.366 0.017 0.032 0.034 0.046 0.035 0.181 0.020 0.120 0.013 0.040 0.089 0.194 0.005 0.035 0.068 0.036 0.106 0.167 0.059 0.128 0.131 0.218 0.186 0.21 0.174 0.257 0.014 0.195 0.234 0.134 0.181 0.438 Return on Assets (1) Return on Assets (2) Return on Equity 0.013 0.050 0.099 0.194 0.042 0070 0.093 0.058 0.107 0.167 DUPONT ANALYSIS Return on Equity- Return on Sales x Asset Turnover 0.186 0.21 0.174 0.257 0.014 0,195 0.234 0.134 0.180.438 0.035 0.181 0.13 0.218 0.099 0.100 0.198 1.206 0.065 0.55 0.856 0.545 0.296 1.094 2.030 0.708 3.043 0.925 6.793 1.813 14.294 5.244 1.964 1.32 2.609 5.688 3.435 3.800 0.202 0.070 0,104 0.366 0.017 0.032 0.034 0.046 1.698 2.623 FINANCIAL ANALYSIS-IDENTIFYING THE INDUSTRY Companies within an industry face similar opportunities and constraints, and consequently, they often make similar operating, investing and financing decisions. Therefore, companies within the same in- dustry tend to exhibit similar financial characteristics, as measured by financial ratios. For example, "old economy" businesses with large amounts of tangible assets may have higher leverage ratios than "new economy" businesses with large amounts of intangible assets such as knowledge assets or a large and loyal customer base. On the other hand, since opportunities and constraints tend to be different across industries, companies in different industries tend to exhibit different financial ratios. With some know edge of the different operating, investing and financing decisions across industries, financial ratios can be used to identify an industry (see Exhibit 1 for the definition of ratios used) Balance sheets and income statements for the most recent three years were gathered for 12 compa- nies from 12 different industries. Common-sized balance sheets (al tems scaled by total assets), com- mon-sized income statements all items scaled by net sales), and selected financial ratios for the most recent three years were prepared. Since unusual deviation from target values may occur in any given year the values were averaged over three years. The three-year average common-sized balance sheet, com- mon-sized income statement, and financial ratios are reported in Exhibits 2, 3, and 4, respectively The 12 companies are members of the following 12 different industries: Airline Commercial banking (items fitted into the same categories as the non-financial firms) Computer software development Department store chain (with its own in-store credit card) Electric utility (producer and distributor) Liquor (producer and distributor) Oil and gas (upstream explorer and producer) Retail drug Retail grocery Sporting (organized as a master limited partnership (MLP), hence no corporate taxes) Assignment Using the financial statement data provided in Exhibits 2, 3, and 4, match the companies with their industry. EXHIBIT1 Definitions of Some Key Financial Ratios LIQUIDITY RATIOs Cash & Marketable Securities to Total Assets Acid Test Ratio Current ratio (Cash + Market Securities) / Total Assets = (Cash + Market Securities + Receivables) / Current Liabilities Current Assets / Current Liabilities ASSET MANAGEMENT Day's Receivable Day's Inventory Asset Turnover 365/ (Sales / Receivables) SalesTotal Assets (Convertible Debt Long-term DebNon-current - 365/ (Cost of Sales/ Inventory) FINANCIAL LEVERAGE Long-term Debt to Total Assets Capital LeasesOther Long-term Liabilities) Total Assets (Convertible Debt Long-term DebtNon-current Leases Long-term Debt to Stockholders' Equity Other Long-term Liabilities) Stockholders' Equity Coverage Ratio = (Income Before Taxes + Interest Expense) / Interest Expense - Gross Profit (Net IncomeInterest Expense)/Total Assets PROFITABILITY Gross Margin Ratio Return on Sales Return on Assets (1) Return on Assets (2) Return on Equity Sales Net Income/Sales Net Income /Total Assets Net Income / Stockholders' Equity Return on Sales * Asset TurnoverLeverage DUPONT ANALYSIS Retur on Equity (Net Income/Sales) x (Sales/Assets) x (Assets/ Stockholders Equity) 10 056 3.0 CASH MRK TABLE SECURITIES 967776 28.164.53 0.0022.70 0.00 184 674 0.00 24.43 0.00 6.19 2.2558.13 1436 16.62 40,2 4.1 11.40 INVENTORIES RAW MATERIALS WORK IN PROGRESS FINISHED GOODS NOTES RECEIVABLE OTHER CURRENT ASSETS 30.79 3.03 40.96 0.00 0.00 0.00 0.00 0.00 0.00 0.00 031 3.99 5745 63.93 62.02 19.91 1194 .79 8.7 77 2035 17.88 PROR PLANT&FQUIP .00 12.98 20.77 4.85 82.40 32.13 67.64 65.77 45.30 39.81 0.00 0.00 46 23.14 4.85 8240 747 44.51 5.774530 2685 0.0012.96 NET PROP &EQUIIP INVEST & ADV TO SUBS OTHER NON-CUR ASSETS 640 786 11.84 0.00 0.00 0.61 0.00 INTANGIBLES DEPOSITS & OTH ASSET TOTAL ASSETS 0.00 3034 7.00 13.02 2.61 100.00 10000 100.00 100.00 100.00 100.00 100.00 10a00 100.00 100.00 100.00 100.00 0.00 0.00 15.0347.1 4898 2.58 417 2298 12.88 00 18.95 139 CUR LONG TERM DEBT CUR PORT CAP LEASES ACORUED EXPENSES INCOMETAXES OTHER CURRENT LIAB TOTAL CURRENT LIAB MORIGAGES DEFERRED CHARGES/INC CONVERIIBLE DEBT 0.00 0.00 0.00 0.00 0.00 0.00 1546 28 78.576323 18.17 2237 19.0 392 2437 17.71 15.37 3241 2265 0.00 0.00 0.00 0.00 50.34 335 0,00 34.05 3364 36.95 29.29 NON-CUR CAP LEASES OTHER LONG TERM LIAB TOTAL LLABILITIES 3.68 14.24 743744.77 9237 80.06 49.08 24.23 1.57 785 7059 64.71 0.00 0.001131 PREFERRED STOCK 0.00 COMMON STOCK NET 7.89 38.74 0.03 CAPITAL SURPLUS .00 37.83 9.5720.98 3.991655 644 5645 0.00 5.98 15. 43.02 34.73 0.47 1596 2044 23.5 53.58 6591 TREASURY STOCK OTHER EQUTTIES 0.00 0.00 0.00 122) (082) 75.77 3833 175 29.41 (4.62 (0.58) 002 G36) 2640 58.90 38.17 TOT LAB &NET WORTH 10000 10000 10000 10000 10000 100,00 100.0100.00 10000 100AH) 1000 10000 Exhibit 4 Selected Financial Ratios (averaged over three years) 2 10 11 12 LIQUIDITY RATIOS Cash & Market Sec to Total Assets Acid Test Ratio Current Ratio 0.263 0.101 0.0T8 0.59 0.045 09 0.00 0.030 0.857 0.921 0.524 2.557 0.462 1537 0.107 0.814 1.050 1.010 0.658 2.782 0.563 1.991 0.836 1.011 0.053 0.630 0.889 0.928 2.054 0.084 0.018 0.186 0.309 1317 1.625 1.800 ASSET MANAGEMENT Day's Reccivables 80.691 50.271 2,258.313 311.543 7.496 42.696 28.201 194.066 3.654 59.651 37.712 189.468 2,655.291 9.810 45.595 NM 9.923NM 14.403 73.070 4119 13.602 67.493 59.059 0.198 1.206 0.065 0.55 0.856 0.545 0.296 1.094 2.030 0.708 3.043 0.925 3 3 ys Inventory Asset Turnover FINANCIAL LEVERAGE Long-term Debt o Total Assets 0.535 0.089 Long-term Debt to Stock. Equity 3.643 0.62 .93 0.657 0.2630.000 1.031 2.251 1.510 1.6560.122 0.244 0.138 0.126 0133 0.000 0.395 0.394 0.437 0.4350.072 0.093 0 0 0 NM .618 14.791 NM 1.180 2.671 5.883 3.885 2,175.621 NM Coverage Ratio 1.855 26.270 PROFITABILITY Cross Margin Ratio 0.677 1.000 0.510 0855 0.49 0.345 0.294 0.289 0.272 0.463 0.296 0.509 0.099 0.100 0.202 0.070 0.104 0.366 0.017 0.032 0.034 0.046 0.035 0.181 0.020 0.120 0.013 0.040 0.089 0.194 0.005 0.035 0.068 0.036 0.106 0.167 0.059 0.128 0.131 0.218 0.186 0.21 0.174 0.257 0.014 0.195 0.234 0.134 0.181 0.438 Return on Assets (1) Return on Assets (2) Return on Equity 0.013 0.050 0.099 0.194 0.042 0070 0.093 0.058 0.107 0.167 DUPONT ANALYSIS Return on Equity- Return on Sales x Asset Turnover 0.186 0.21 0.174 0.257 0.014 0,195 0.234 0.134 0.180.438 0.035 0.181 0.13 0.218 0.099 0.100 0.198 1.206 0.065 0.55 0.856 0.545 0.296 1.094 2.030 0.708 3.043 0.925 6.793 1.813 14.294 5.244 1.964 1.32 2.609 5.688 3.435 3.800 0.202 0.070 0,104 0.366 0.017 0.032 0.034 0.046 1.698 2.623

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