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 knowl- 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 (all items 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: Advertising 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) Pharmaceutical 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. Copyright 2001 Thunderbird, The American Graduate School of International Management. All rights reserved. This case was prepared by Professor Graeme Rankine for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.