Please READ THIS FIRST

The 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 strong price competition, while highly

differentiated products like patented drugs enjoy much more pricing freedom. Because of each industrys

unique economic features, average financial statements will vary from one industry to the next.

Similarly, companies within industries have different financial characteristics, in part because 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 financed (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 companys growth has been

mostly organicit 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 businessessuch as snack-food and aluminum-container

manufacturing companiesand 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 companys growth is inorganicthe

company buys the rights to manage existing hotel chains and also the rights to use the hotels 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 firms

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 companys 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 companys

growth has been inorganicthe 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 companys 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 countrys 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 companys website to sell their own products rather than those owned by the

company). A growing portion of operating profit comes from the companys 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

AFTER YOU READING Please fill the table

Review the Financial data for the various Industries in the Case Study. Identify the respective companies as described. Identify and explain the Key Ratio observations for each of the companies : (20 MARKS)

		OBSERVATIONS	OBSERVATIONS
	AIRLINES	COMPANY A: _____________ * * *	COMPANY B: ________________ * * *
	COMPUTERS	COMPANY E: _____________ * * *	COMPANY F: _____________ * * *
	NEWSPAPERS	COMPANY I: _____________ * * *	COMPANY J: _____________ * * *
	POWER	COMPANY M: _____________ * * *	COMPANY N: _____________ * * *

MARKET DATA Beta 1.20 1.10 0.95 0.95 0.95 1.20 1.15 1.15 1.15 0.95 1.15 0.75 1.15 1.50 1.05 1.00 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 3.9 2.4 4.2 3.9 5.0 2.8 0.3 nmf 2.7 0.8 5.5 6.1 1.8 1.2 25.5 6.4 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 Price Earnings Price to Book Dividend Payout (%) LIQUIDITY Current Ratio Quick Ratio ASSET MANAGEMENT Inventory Turnover Receivables Tumorer 0.52 0.60 0.64 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 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 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 16.5 43.3 13.0 25.3 13.6 5.3 8.8 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 79.6 62.9 66.0 28.5 58.9 29.1 159.0 65.7 45.7 87.7 59.0 83.0 24.2 79.5 88.7 Total Debt/Total Assets (%) LT Debt/Shareholders' Equity (%) Interest Coverage 47.4 26.2. 62.4 43.5 95.2 0.1 44.8 0.0 nmf 29.3 0.0 501.9 54.6 292.5 5.2 61.5 320.9 13.6 10.0 6.5 nmf 97.2 namf 4.8 8.1 4.2 nmf 1.7 23.2 1.9 74.1 4.9 10.2 DuPONT ANALYSIS 11.1 10.6 19.0 10.3 22.8 3.8 4.9 30.1 4.0 12.1 2.0 15.3 0.6 4.2 Net Profit Margin (%) Asset Tumover Return on Equity (%) (6.6) 1.0 (2.8) 0.3 0.8 0.8 0.3 1.5 0.9 1.1 0.3 2.4 0.6 0.6 0.4 0.5 1.8 1.7 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 Net Income & Sta: 2 MARKET DATA Beta 1.20 1.10 0.95 0.95 0.95 1.20 1.15 1.15 1.15 0.95 1.15 0.75 1.15 1.50 1.05 1.00 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 3.9 2.4 4.2 3.9 5.0 2.8 0.3 nmf 2.7 0.8 5.5 6.1 1.8 1.2 25.5 6.4 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 Price Earnings Price to Book Dividend Payout (%) LIQUIDITY Current Ratio Quick Ratio ASSET MANAGEMENT Inventory Turnover Receivables Tumorer 0.52 0.60 0.64 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 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 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 16.5 43.3 13.0 25.3 13.6 5.3 8.8 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 79.6 62.9 66.0 28.5 58.9 29.1 159.0 65.7 45.7 87.7 59.0 83.0 24.2 79.5 88.7 Total Debt/Total Assets (%) LT Debt/Shareholders' Equity (%) Interest Coverage 47.4 26.2. 62.4 43.5 95.2 0.1 44.8 0.0 nmf 29.3 0.0 501.9 54.6 292.5 5.2 61.5 320.9 13.6 10.0 6.5 nmf 97.2 namf 4.8 8.1 4.2 nmf 1.7 23.2 1.9 74.1 4.9 10.2 DuPONT ANALYSIS 11.1 10.6 19.0 10.3 22.8 3.8 4.9 30.1 4.0 12.1 2.0 15.3 0.6 4.2 Net Profit Margin (%) Asset Tumover Return on Equity (%) (6.6) 1.0 (2.8) 0.3 0.8 0.8 0.3 1.5 0.9 1.1 0.3 2.4 0.6 0.6 0.4 0.5 1.8 1.7 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 Net Income & Sta: 2