Instruction

When we ask you to identify the companies, we want you to match the right company (e.g. in Airlines industry company A or B) with the information given on these two companies in one of the two paragraphs for each of 8 industries. In total, the case study Financial Detective has 8 industries with 16 paragraphs on 16 companies (one paragraph per company). You will get 1 mark for each correctly identified company.

You are also asked to Clearly and convincingly explain your decisions (32 marks in total). You need to identify and let us know in your submitted work 2 financial ratios or financial statements' items that are different for a pair of firms from the same industry (eg company A and B) to get 2 marks for each pair of companies (16 marks in total). These financial ratios and financial statements' items are in the excel file which is in the Financial Detective case study.

To get the remaining 16 marks for your section 1, you have to write a clear and convincing explanation. E.g., let us know why you believe that these 2 financial ratios which you selected, match with the paragraphs on company A and B in the Airline industry.

Financial characteristics of companies vary for many reasons. The two most prominent drivers are industry economics and firm strategy.

Each industry has a financial norm around which companies within the industry tend to operate. An airline, for example, would naturally be expected to have a high proportion of fixed assets (airplanes), while a consulting firm would not. A steel manufacturer would be expected to have a lower gross margin than a pharmaceutical manufacturer because commodities such as steel are subject to string price competition, while highly differentiated products like patented drugs enjoy much more pricing freedom. Because of each industry's unique economic features, average financial statements will vary from one industry to the next.

Similarly, companies within industries have different financial characteristics, in part of the diverse strategies that can be employed. Executives choose strategies that will position their company favorably in the competitive jockeying within an industry. Strategies typically entail making important choices in how a product is made (e.g. capital intensive versus labor intensive), how it is marketed (e.g., direct sales versus the use of distributors), and how the company is finances (e.g., the use of debt or equity). Strategies among companies in the same industry can differ dramatically. Different strategies can produce striking differences in financial results for firms in the same industry.

The following paragraphs describe pairs of participants in a number of different industries. Their strategies and market niches provide clues as to the financial condition and performance that one would expect of them. The companies' common-sized financial statements and operating data, as of early 2016, are presented in a standardized format in Exhibit 1. It is up to you to match the financial data with the company descriptions. Also, try to explain the differences in financial results across industries.

Airlines

Companies A and B are airline companies. One firm is a major airline that flies both domestically and internationally and offers additional services including travel packages and airplane repair. The company owns a refinery to supply its own jet fuel as a hedge to fuel-price volatility. In 2008, this company merged with one of the largest airline carriers in the United States.

The other company operates primarily in the United States, with some routes to the Caribbean and Latin America. It is the leading low-cost carrier in the United States. One source of operating efficiency is the fact that the company carries only three different aircraft in its fleet, making maintenance much simpler than for legacy airlines that might need to service 20 or 30 different aircraft models. This company's growth has been mostly organic?it expands its routes by purchasing new aircraft and the rights to fly into new airports.

Beer

Of the beer companies, C and D, one is a national brewer of mass-market consumer beers sold under a variety of brand names. This company operates an extensive network of breweries and distribution systems. The firm also owns a number of beer-related businesses?such as snack-food and aluminum-container manufacturing companies?and several major theme parks. Over the past 12 years, it has acquired several large brewers from around the globe.

The other company is the largest craft brewer in the United States. Like most craft brewers, this company produces higher-quality beers than the mass-market brands, but production is at a lower volume and the beers carry premium prices. The firm is financially conservative.

Computers

Companies E and F sell computers and related equipment. One company sells high-performance computing systems ("supercomputers") to government agencies, universities, and commercial businesses. It has experienced considerable growth due to an increasing customer base. The company is financially conservative.

The other company sells personal computers as well as handheld devices and software. The firm has been able to differentiate itself by using its own operating system for its computers and by creating new and innovative designs for all its products. These products carry premium prices domestically and globally. The company follows a vertical integration strategy starting with owning chip manufacturers and ending with owning its own retail stores.

Hospitality

Companies G and H are both in the hospitality business. One company operates hotels and residential complexes. Rather than owning the hotels, this firm chooses to manage or franchise its hotels. The company receives its revenues each month based on long-term contracts with the hotel owners, who pay a percentage of the hotel revenues as a management fee or franchise fee. Much of this company's growth is inorganic?the company buys the rights to manage existing hotel chains and also the rights to use the hotel's brand name. This company has also pursued a strategy of repurchasing a significant percentage of the shares of its own common stock.

The other company owns and operates several chains of upscale, full-service hotels and resorts. The firm's strategy is to maintain market presence by owning all of its properties, which contributes to the high recognition of its industry-leading brands.

Newspapers

Companies I and J are newspaper companies. One company owns and operates two newspapers in the southwestern United States. Due to the transition of customer preference from print to digital, the company has begun offering marketing and digital-advertising services and acquiring firms in more profitable industries. The company has introduced cost controls to address cost-structure issues such as personnel expenses.

Founded in 1851, the other company is renowned for its highly circulated newspaper offered both in print and online formats. This paper is sold and distributed domestically as well as around the world. Because the company is focused largely on one product, it has strong central controls that have allowed it to remain profitable despite the fierce competition for subscribers and advertising revenues.

Pharmaceuticals

Companies K and L manufacture and market pharmaceuticals. One firm is a diversified company that sells both human pharmaceuticals as well as health products for animals. This company's strategy is to stay ahead of the competition by investing in the discovery and development of new and innovative drugs.

The other company focuses on generic pharmaceuticals and medical devices. Most of this company's growth has been inorganic?the growth strategy has been to engage in highly leveraged acquisitions, and it has participated in more than 100 during the past eight years. The goal of acquiring new businesses is to enhance the value of the proven drugs in the company's portfolio rather than gamble on discoveries of new drugs for the future.

Power

Companies M and N are in the power-generation industry. One company focuses on solar power. This includes the manufacturing and selling of power systems as well as maintenance services for those systems.

The other company owns large, mostly coal-powered electric-power-generation plants in countries around the world. Most of its revenues result from power-purchase agreements with a country's government that buy the power generated. Some of its U.S. assets include regulated public utilities.

Retail

Companies O and P are retailers. One is a leading e-commerce company that sells a broad range of products, including media (books, music, and videos) and electronics, which together account for 92% of revenues. One-third of revenues are international and 20% of sales come from third-party sellers (i.e., sellers who transact through the company's website to sell their own products rather than those owned by thecompany). A growing portion of operating profit comes from the company's cloud-computing business. With its desire to focus on customer satisfaction, this company has invested considerably in improving its online technologies.

The other company is a leading retailer in apparel and fashion accessories for men, women, and children. The company sells mostly through its upscale brick-and-mortar department stores.

Exhibit 1 The Financial Detective, 2016 Common-Sized Financial Data and Ratios Boar Computers Hospitality Pown ASSETS (X1 G Cash & ST Investments Coment Assets-Other Current Assers-Total Net Property, Plant, & Equipment Long-Tomen Muchstable Securkiss Goodwill & Intangibler Asset:-Other Assets-Total Edbossumea LIABILITIES & EQUITY (%) Acounts Farable Debt in Cuersent Liabilities Current Liabilities-Other Current Liabilities Total Long-Tom Debt Dofeared Tix Liabilities-Othe Liabilities-Tow Stockholders' Equity Total Liabilities & Equity INCOME/EXPENSES () Resemrue Cost of Goods Sold (50) Komen Dir. Operating Exp. Intest Expense - Finance Division Gross Profit SGdca Expense R& D Esp. Deprecation & Amoct Other Operating Expense Earnings before Interest and Taxes Net Interest Expense Other Precas Income Income Tax Expense Eamings of Discontinued Op. Extramed Item & Account. Change Minority Int. in Bamings Net Income MARKET DATA Beta 1.20 1.10 10.0 109 0.95 0.9 3.15 19.2 Price to Book 42 39 Dividend Proout (7:) 382 21.8 LIQUIDITY Current Ratio 0.52 0.GO 0.64 2.01 1.1 3.50 1.04 1.5. 0.99 1.4 Quick Mario 0.31 0.44 0.41 1.33 0.90 1.0 0.63 1.49 1.77 0.20 ASSET MANAGEMENT Inventory Turnover 37.0 35.4 5.9 3.5 43.3 253 62. :09. 13. nof 13 enf $1.2 4.6 7.7 Receivables Tumors Fixed Assets Turners 1.9 220 24 0.6 2. DEBT MANAGEMENT Total Debt/Total Assets (% 28.5 29.1 174 159.0 05.7 45.7 83.0 242 79.5 BB.7 LT Debt/Shareholders' Equity (16) 624 43.5 95.2 44.8 0.0 29 0.0 925 61.5 3209 Interest Coverage 13.6 10.0 DuPONT ANALYSIS Net Profit Margin (36) 11.1 10.6 19.0 103 3.B 80.1 4.0 12. 153 0.5 0.6 0.8 0.6 0.G 17 Return on Equity (7:] 46.0 23.4 197 21.9 1.9 2.4 8.1 14.8 (5.01 16.1 112 10.4 342Retail Hospitality Newspapers Pharmaceuticals Power Airlines Beer Computers H I K L M N O D G 35 ASSETS (%) 14 Cash & ST Investments 10 14 11 10 Receivables 2 Inventory Current Assets-Other 84 56 35 23 23 33 Current Assets-Total 17 10 Net Property, Plant, & Equipment 42 Long-Term Marketable Securities 0 SOOSGINYU Goodwill & Intangibles 28 13 goNOR 100 100 100 100 100 100 100 Assets-Other Assets-Total 100 100 100 LIABILITIES & EQUITY (%) 52 38 24 GUN 20 Accounts Payable Debt in Current Liabilities Current Liabilities-Other 53 23 13 36 Current Liabilities-Total 33 26 63 10 SEONA 0 Long-Term Debt 13 16 18 0 12 N 14 15 0 14 9 M 0 3 Deferred Taxes 34 6 4 4 18 32 28 Liabilities-Other 66 24 59 guoongot 43 47 159 46 80 89 54 12 76 20 11 Liabilities-Total 80 63 66 37 34 41 71 53 (59) 34 100 100 100 100 100 Stockholders Equity 20 100 100 100 100 100 100 100 100 100 Total Liabilities & Equity100 LOO 100 100 100 INCOME/EXPENSES (%) 100 100 100 100 100 100 10O .00 100 Revenue 100 100 (70) (60) (39) 48 60 (69) 63 (39) (101) Cost of Goods Sold 0 0 0 0 Finance Div. Operating Exp. 0 0 Interest Expense - Finance Division 0 0 61 52 40 31 37 Gross Profit 30 SGSA Expense ( 4) R & D Exp. 0 Depreciation & Amort. (5) Other Operating Expense (5) Earnings before Interest and Taxes Net Interest Expense Other Pretax Income Income Tax Expense Earnings of Discontinued Ops. Extraord. Item & Account. Change Minority Int. in Earnings NOOGEC- gOOO ADOONACGROACHZOO Net IncomeMARKET DATA Beta 1.20 1.10 0.95 0.95 0.95 1.20 1.15 1.15 1.15 0.9 1.15 0.75 1.15 1.50 1.05 1.00 Price/ Earnings 10.0 10.9 24.2 34.0 12.8 22.0 59.8 24.0 34.9 nmf 18.3 22.9 27.2 9.7 nmf 19.2 Price to Book 3.9 2.4 4.2 3.9 5.0 2.8 0.3 rimf 2.7 0.8 5.5 6.1 1.8 1.2 25.5 6.4 Dividend Payout (%) 7.9 0.0 88.2 0.0 21.8 0.0 0.0 29.5 41.8 (39.4) 0.0 88.7 91.5 0.0 0.0 197.5 LIQUIDITY Current Ratio 0.52 0.60 D.64 2.01 1.11 3.50 1.02 0.43 1.53 3.17 1.04 1.53 0.99 3.48 1.08 1.04 Quick Ratio 0.31 0.44 0.41 1.35 0.90 2.45 0.72 0.37 1.45 2.82 0.62 1.03 0.63 2.49 0.77 0.30 ASSET MANAGEMENT Inventory Turnover 37.0 85.4 5.9 8.5 62.8 3.9 109.7 nmf nmf 61.2 2.3 1.6 17.6 4.6 7.7 4.9 Receivables Turnover 16.5 43.3 13.0 25.3 13.6 5.3 B.8 13.1 7.1 8.3 4.3 5.9 5.8 9.3 17.8 11.7 Fixed Assets Turnover 1.9 1.0 2.2 2.4 10.8 22.0 0.6 14.1 2.4 4.8 7.6 2.5 0.6 2.5 5.5 4.1 DEBT MANAGEMENT Total Debt/Total Assets (%) 79.6 62.9 66.0 28.5 58.9 29.1 47.4 159.0 65.7 45.7 87.7 59.0 83.0 24.2 79.5 88.7 LT Debt/Shareholders' Equity (%) 62.4 43.5 95.2 0.1 44.8 0.0 26.2 nmf 29.3 0.0 501.9 54.6 292.5 5.2 61.5 320.9 Interest Coverage 13.6 10.0 6.5 nmf 97.2 nmf 4.8 8.1 4.2 amf 1.7 23.2 1.9 74.1 4.9 10.2 DuPONT ANALYSIS Net Profit Margin (%) 11.1 10.6 19.0 10.3 22.8 3.8 4.9 30.1 4.0 (6.6) (2.8) 12.1 2.0 15.3 0.6 4.2 Asset Turnover 0.8 0.8 0.3 1.5 0.9 1.1 0.3 2.4 0.6 1.0 0.3 0.6 0.4 0.5 1.8 1.7 Return on Equity (%) 46.0 23.6 19.7 21.9 46.2 5.8 2.9 nmf 8.1 (14.8) (5.0) 16.1 11.2 10.4 4.9 36.2 nmf = not a meaningful figure