The Unidentified Industries Case

Introduction
Industries differ on both internal and external dimensions. Internal issues such as
culture and operating models are often specific to industries, while the external issues of
the marketplace and competition will vary from industry to industry. Financial accounting
provides managers with the tools to quantify these issues, and financial ratio analysis
can provide the astute manager with insights into these industry differences. In this
case, you are given a list of nine industries and a table of nine sets of common sized
statements and financial ratios. Your task is first to consider each industry—the typical
operating models of the business, the market and customer factors, and the competitive
nature of the industry, and how these characteristics might manifest themselves in the
selected financial ratios. Starting with these qualitative issues, then match the industries
with the appropriate column of financial information. Please note that not every general
industry characteristic will apply to every company in that industry. Why?

Required
1. Match each industry described to a set of financial statement information (company
letters A through I); and
2. Write your answers down in bullet point format, three reasons for each industry,
addressing why you matched that industry to a particular set of financial information.

Industry
Retail Stores
Pharmaceuticals
Home Builders
Grocery Stores
Semiconductor Manufacturers
Electric Utilities
Apparel Manufacturers
Steel Industry
Automobile Manufacturers
Exhibit 1: Common Size Financial Statements
INCOME STATEMENT
A B C D E F G H I
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 75.5% 60.4% 89.1% 80.9% 34.9% 75.6% 21.4% 64.9% 65.7%
Depreciation & Amortization 7.2% 11.1% 5.7% 0.7% 9.1% 1.4% 7.4% 5.3% 3.5%
Gross Profit 17.3% 28.5% 5.2% 18.4% 56.0% 23.0% 71.2% 29.8% 30.8%
R&D Expense 0.0% 0.0% 0.0% 0.0% 8.7% 0.0% 16.2% 0.0% 0.0%
Selling, Gen'l & Admin Exp 8.9% 1.8% 2.3% 10.5% 11.1% 19.5% 27.1% 15.4% 27.3%
Other Operating Expense 0.0% 6.4% 9.9% 1.1% 0.0% 0.0% 0.0% 1.1% 0.0%
Operating Income 8.4% 20.2% (7.0%) 6.8% 36.2% 3.4% 27.9% 13.3% 3.4%
Non-Operating Income (0.8%) 0.0% 0.1% 0.5% 1.9% 0.0% 3.7% (1.5%) 2.9%
Interest Expense 3.5% 6.4% 1.1% 2.6% 0.1% 1.2% 3.9% 4.2% 0.9%
Pretax Income 4.1% 13.8% (8.0%) 4.7% 38.1% 2.3% 27.6% 7.6% 5.5%
Taxes 1.1% 5.3% (1.4%) 1.0% 13.3% 0.9% 6.9% 1.4% 2.2%
Other Income 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Net Income 3.0% 8.5% (6.6%) 3.7% 24.7% 1.4% 20.7% 6.2% 3.3%

BALANCE SHEET

Assets
Cash 10.0% 0.2% 2.7% 1.4% 33.7% 0.0% 6.7% 0.7% 1.0%
Receivables 28.9% 7.2% 6.1% 3.0% 15.7% 5.6% 12.1% 6.6% 26.4%
Inventories 5.4% 1.5% 19.9% 74.9% 5.4% 29.4% 6.2% 24.3% 26.6%
Other Current Assets 0.0% 1.2% 0.4% 12.6% 2.8% 5.4% 2.2% 1.5% 2.6%
Total Current Assets 44.2% 10.1% 29.1% 91.9% 57.7% 40.4% 27.2% 33.1% 56.7%
Net Property, Plant & Equip 30.4% 79.3% 47.4% 0.0% 35.8% 52.6% 30.1% 35.3% 42.6%
Other Long Term Assets 25.3% 10.6% 23.5% 8.1% 6.6% 7.0% 42.7% 31.6% 0.7%
Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Liabilities
Short Term Debt 38.4% 8.2% 1.0% 4.5% 1.6% 0.4% 8.5% 0.7% 8.0%
Accounts Payable 6.4% 3.6% 8.0% 10.2% 4.1% 28.3% 5.8% 4.4% 11.5%
Other Current Liabilities 0.0% 4.4% 9.7% 7.6% 14.8% 17.9% 15.2% 7.7% 9.7%
Total Current Liabilities 44.8% 16.2% 18.7% 22.3% 20.5% 46.6% 29.5% 12.8% 29.1%
Long Term Debt 0.0% 28.4% 9.7% 38.3% 3.1% 62.8% 17.6% 34.1% 12.2%
Other Long Term Liabilities 44.7% 22.2% 52.6% 0.0% 5.4% 10.9% 10.3% 11.3% 4.2%
Total Liabilities 89.5% 66.8% 81.1% 60.6% 28.9% 120.3% 57.4% 58.2% 45.5%
Stockholders' Equity
Minority Interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Preferred Stock 0.0% 5.4% 0.3% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0%
Common Shareholders Equity 10.5% 27.8% 18.6% 39.1% 71.1% (20.3%) 42.6% 41.8% 54.5%
Total Liabilities and Stockholders' Equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Exhibit 2: Selected Financial Information
KEY RATIOS
A B C D E F G H I
Net Profit Margin 3.02% 8.49% -6.60% 3.71% 24.74% 1.40% 20.74% 6.18% 3.31%
Asset Turnover 0.74 0.45 0.92 1.26 0.88 4.32 0.51 0.96 1.65
Return on Assets 2.23% 3.80% -6.04% 4.66% 21.73% 6.06% 10.65% 5.94% 5.46%
Return on Equity 21.19% 11.43% -31.97% 11.82% 30.57% -29.85% 24.98% 14.20% 10.01%
Current Ratio 0.99 0.62 1.55 4.13 2.81 0.87 0.92 2.58 1.95
Quick Ratio 0.87 0.53 0.49 0.76 2.55 0.24 0.71 0.69 1.03
Operating Cash Flow/Current Liabilities 0.19 0.59 0.36 -0.19 1.80 0.18 0.47 1.57 0.32
A/R Days Sales Outstanding 142.62 58.69 24.31 8.59 65.18 4.70 86.30 24.95 58.57
Inventory Days on Hand 31.99 17.48 83.69 266.40 51.50 32.27 151.87 131.34 85.26
A/P Days Outstanding 41.89 48.64 35.94 36.60 48.61 31.63 192.20 25.71 38.73
Financial Leverage 9.49 3.01 5.29 2.54 1.41 -4.93 2.35 2.39 1.83
Total Debt/Common Equity 3.64 1.31 0.57 1.09 0.07 -3.11 0.61 0.83 0.37
Interest Coverage 2.41 3.14 NMF 2.64 302.12 2.89 7.09 3.14 3.89
Operating Cash Flow/Capital Expenditures 1.88 1.75 1.32 -14.95 2.89 0.65 4.49 11.54 1.22

MARKET DATA
P/E Ratio 9.09 11.67 NMF 9.75 23.97 19.86 NMF 15.94 30.22
Equity Beta 0.79 0.53 0.79 1.38 1.49 0.44 1.23 0.26 1.32
Fiscal Year End December December December December December December December December January