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 Lend 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 knowle edge of the different operating , investing and financing decisions across industries , financial ratios can be used to identify an industry ( see Exhibit I for the definition of ratios used) . Balance sheets and income statement for the most recent three years were gathered for 12 compa- lies from 12 different industries . Common - sized balance sheets (all items scaled by total assets) , com- man- sized income statements fall items scaled by net sales ) , and selected financial ratios for the most recent three year 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 - man - sized income statement , and financial ratios are reported in Exhibit 2. 3, and A, respectively. The 12 companies are members of the following 12 different industries ; Advertising Airline* Commercial banking (items fitted into the same categories as the non - financial firms ) _omputer 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 ) Pharmaceutical Retail drug Retail grocery Sporting ( organized as a master limited partnership ( ML P ; , hence no corporate lates) Assignment Using the financial statement data provided in Exhibits 2 , 3, and {, match the companies with their industry* .*EXHIBIT I Definitions of Some Key Financial Ratios LIQUIDITY RATIOS Cash & Marketable Securities to Total Assets = ( Cash + Market Securities ) !"Total Assets* Acid Test Rating = [ Cash + Market Securities + Receivables ) !' Current Liabilities* Current ratio = Current Assets !' Current Liabilities ASSET MANAGEMENT Day's Receivable = 365/' (Sales !' Receivables) Day's Inventory = 365/ [ Cost of Sales / Inventory* Asset Turnover = Sales !"Total Assets FINANCIAL LEVERAGE Long-term Debt to Total Assets = ( Convertible Debt + Long-term Debt + Non - current* Capital Leaves + Other Long-term Liabilities ) / Total Assets Long-term Debt to Stockholders" Equity = ( Convertible Debt + Long-term Debt + Non-current Leases + Other Long-term Liabilities ) I Stockholders" Equity* Coverage Katic = (Income Before laver + Interest Expense ! ! Interest Expense PROFITABILITY" Gross Margin Ratio = Gross Profit ! Sales Heturn on Sales = Net Income ! Sales Rehim on Area ( ! = Net Income ! Toul Assets* Return on Assets (2) = ( Net Income + laterest Expense ) ! Total Assets Return on Equity = Net Income ! Stockholders" Equity DUPONT ANALYSIS ReTum on Equity = Return on Sale* Asset Turnover*" Leverage = ( Net Income / Sales ) * [Sales ! Assets; * ( Auck ! Stockholders" Equity !RECEIVABLES 1.TE 27. 7.0 1 }9 1. 75. $3.13 11.51 0. 00 1.17 16. 14 1. 71 7:53 WORK IN PROK RE S` NOTES RECEIVABLE 1.00 0.00 IED OTHER CURRENT ASSETS 0.00 THINL CURRENT ASSETS 11.14 201.75 ACCUMULATED OFF* NET PROP & EQUIP* 6. 5H 12.01 INVEST KATY TO STIR'S 19:$1 BEE OTHER NON- CUR ASSETS 0.0.0 0.00 0.00 0.00 0.59 0.00 INTANGIBLES* 19 ^ TOTAL ASSETS ACCOUNTS MIYAME IN. HE OUR LONG TERM BEAT 1.01 OUR DON'T CAR LEASES ACCRUED EXPENSES 175 1. 71 INCOME TAXES 1 . 24 0.09 OTHER CURRENT LINE 1 . 1 4 TOTAL CURRENT LIAH 24. 1 1 21.17 19/1 1 1. 96 MORTGAGES D.DO 11.1.0 7.74 LONG TERM DOHERTY 0.`` MON CUR CAP I F ASH'S 9:01.14 OTHER LONG TERM L LAH 0.00 0.00 TOTAL LIABILITIES* 0.00 1. 60 MINORIT Y" INT IT LAR 49.05 24. 21 PREFERRED STOCK 10. 70 64.71 $0.52 3.70 H. H` 1 1.31 COMMON STOCK NEY 01.00 CAMTAL SURFLU'S 7.AS RETAINED EARNINGS 1.45 THEAS U KY STEVE K` 563, 45 3.37 5.54 19 61 47.012 EL'HE 1. 51 3.14 15.56 1 . 75 $ _ 513 10.`` TUT LUNA & NET WORTH 95.29 19:10 14. H` 79. 7 7 17^Exhibit 3 Common -sized Income Statement ( percentage averaged over three years ! Company NET SALES 1 K^ 100.00 100,00 10:0. 010 10:0.00 1010.00 101 LOD . DO 100. 00 100. 00 101.00 101 . 10 1 1 12 COST OF GOODS BE'CE GROSS PROFIT 70.36\\ $19. 14\\ 19.03 20. 64 19. 94 $1. 17\\ 65. 54 67. 72 100.0.0 50.97 70.57 $1.12 RED EXPENDITURES SELL GEN CCADMIN EXT 0.00 45. 52 20. 43 2M. M` 0.00 27. 14 1.93 16.87 46.34 35. 54 5. 87 INC REF DEF & AMORT 34.71 24.75 22015 27.71 24. 015 16. 15 23.35 32. 14 12.27 DEPRECIATION & AMORT* 15.72 3.10 22.21 21.54 15. 4 4 201. 412 NON_OPERATING INC 0.0.0 1. 12 11.11 7.19 5.21 14.41 1.0.0 5. 1^ 01. 31 4. 17 22.72 9.04 2.015 14. 41 INTEREST EXPENSE 0.51 1 .34 0.37 19.78 1.65 9. 70 1. $1 1.24 |0. 461 1. 70 Q13 5. 6H INCOME BEFORE TAX 16.97 15. 41 12.17 4.25 32.1 4 3.23 1.21 3.20 PROV FOR INC TAKES 12.72 3.26 17. 015 5.42 11. 17 5.19 2. 24 5.35 5. 42 26.47 MINORITY INTHINGY 1.31 6.59 19.72 1. 010 2.05 2. 42 3.76 INVEST GAINS/LOSSES 0.00 D.DO 1. 29 2.20 0. 13 0. 20 OTHER INCOME NET INC REF EXITEMS 0. 19 0.00 12. 40 1.09 201. 32 7.03 10.50 30.63 1.DO EXITEMS & DISC ORS 2. 014 3. 1 1 3.36 4.012 3. 50 18. 14 NET INCOME 12.55) 10.131 1.85 1.79 10.3 7 1 10.021 0. 00 201, 24 10.37 1. 54 36. 67 (0. 061 1 , 1 7 3. 15 3.36 $. 56 3. 50 18, 14Exhibit 4 Selected Financial Ratios (averaged over three years) Company N Nl IG ell LIQUIDITY RATIOS Cash & Market Sec to Total Assets 0.053 0.084 0.263 0.101 0.078 0.509 0.045 0.019 0.006 0.030 0.018 0.186 Acid Test Ratio 0.630 0.889 0.857 0.921 0.524 2.557 0.462 1.537 0.107 0.814 0.309 1.317 Current Ratio 0.928 2.054 1.050 1.010 0.658 2.782 0.563 1.991 0.836 1.011 1.625 1.800 ASSET MANAGEMENT Day's Receivables 80.691 50.271 2,258.313 311.543 7.496 42.696 28.201 194.066 3.654 59.651 9.810 45.595 Day's Inventory 37.712 189.468 2,655,291 NM 9.923 NM 14,403 73.070 41.199 13.602 67.493 59.059 Asset Turnover 0.198 1.206 0.065 0.565 0.856 0.545 0.296 1,094 2.030 0.708 3.043 0.925 FINANCIAL LEVERAGE Long-term Debt to Total Assets 0.535 0.089 0.138 0.126 0.133 0.000 0.395 0.394 0.437 0.435 0.072 0.093 Long-term Debt to Stock. Equity 3.643 0.162 1.931 0.657 0.263 0.000 1.031 2.251 1.510 1.656 0.122 0.244 Coverage Ratio 1.855 26.270 NM 8.618 14.791 NM 1.180 2.671 5.883 3.885 2,175.621 NM PROFITABILITY Gross Margin Ratio 0.296 0.509 0.677 1.000 0.510 0.855 0.489 0.345 0.294 0.289 0.272 0.463 Return on Sales 0.099 0.100 0.202 0.070 0.104 0.366 0.017 0.032 0.034 0.046 0.035 0.181 Return on Assets (1) 0.020 0.120 0.013 0.040 0.089 0. 194 0.005 0.035 0.068 0.036 0.106 0.167 Return on Assets (21 0.059 0.128 0.013 0.050 0.099 0.194 0.042 0.070 0.093 850'0 0.107 0.167 Return on Equity 0.131 0.218 0.186 0.211 0.174 0.257 0.014 0.195 0.234 0.134 0.181 0.438 DUPONT ANALYSIS Return on Equity = 0.131 0.218 0.186 0.211 0.174 0.257 0.014 0.195 0.234 0.134 0.181 0.438 Return on Sales 0.099 0.100 0.202 0.070 0.104 0.366 0.017 0.032 0.034 0.046 0.035 0.181 x Asset Turnover 0.198 1.206 0.065 0.565 0.856 0.545 0.296 1,094 2.030 0.708 3.043 0.925 x Leverage 6.793 1.813 14,294 5.244 1.964 1.321 2.609 5.688 3.435 3.800 1.698 2.623