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TB0069

August 9, 2007

Graeme Rankine

Financial Statement Analysis


Identify the Industry
Since opportunities and constraints tend to be different across industries, companies in different industries tend to make different investment, dividend, and financing decisions. Thus, firms in different
industries exhibit different financial characteristics, and, hence, report different financial ratios. For
example, old economy businesses with large amounts of tangible assets may have higher leverage
ratios. Service or trading firms may have large amounts of intangible assets such as knowledge assets or
a large and loyal customer base, and, hence, have low leverage ratios because growth options can
evaporate. On the other hand, companies within the same industry tend to exhibit similar financial
characteristics, as measured by financial ratios. With some knowledge 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 are provided for 10 companies from 10 different industries. Common-sized balance sheets (all items scaled by total assets), common-sized income statements (all items scaled by net sales), and selected financial ratios for the most
recent three years are also provided. Since unusual deviation from target values may occur in any given
year, the values for the items were averaged over three years. The three-year average common-sized
balance sheet, common-sized income statement, and financial ratios are reported in Exhibits 2, 3, and
4, respectively.
The 10 companies are drawn from the following 10 different industries:

Commercial airline
Commercial banking (items fitted into the same categories as the non-financial firms)
Computer software
Integrated oil and gas
IT service provider
Liquor producer and distributor
Mobile phone service provider
Pharmaceutical preparations
Retail grocery stores
Semiconductor manufacturer

Assignment
Using the financial statement data provided in Exhibits 2, 3, and 4, match the companies with their
industry.
Copyright 2007 Thunderbird School of Global 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.

Exhibit 1

Definitions of Some Key Financial Ratios

LIQUIDITY RATIOS:
Cash & Marketable Securities To Total Assets
Acid Test Ratio
Current ratio

1.
=
=
=

(Cash + Market Securities) / Total Assets


(Cash + Market Securities + Receivables) / Current Liabilities
Current Assets / Current Liabilities

ASSET MANAGEMENT
Days Receivables
Days Inventory
Asset Turnover

=
=
=

365/ (Sales / Receivables)


365/ (Cost of Sales / Inventory)
Sales / Total Assets

FINANCIAL LEVERAGE
Long-term Debt to Total Assets

Long-term Debt to Stockholders Equity

Coverage Ratio

(Convertible Debt + Long-term Debt + Non-current Capital


Leases + Non-current Long-term Debt) / Total Assets
(Convertible Debt + Long-term Debt + Non-current Capital
Leases + Non-current Long-term Debt) / Stockholders
Equity
(Income Before Tax + Interest Expense) / Interest Expense

=
=
=
=
=

Gross Profit / Sales


Net Income / Sales
Net Income / Total Assets
(Net Income + Interest Expense) / Total Assets
Net Income / Stockholders Equity

=
=

Return on Sales * Asset Turnover * Leverage


(Net Income / Sales) x (Sales / Assets) x (Assets /
Stockholders Equity)

PROFITABILITY
Gross Margin Ratio
Return on Sales
Return on Assets (1)
Return on Assets (2)
Return on Equity
DUPONT ANALYSIS
Return on Equity

TB0069

TB0069

Source: Thomson Banker One-Analytics

1
100.00
79.32
20.68
0.00
19.38
1.30
0.00
0.64
1.67
0.27
(0.09)
0.04
0.00
0.10
0.41
0.35
0.76

2
100.00
11.11
88.89
0.00
20.17
68.72
1.18
(19.23)
18.33
29.98
9.98
0.00
0.00
0.00
20.00
0.00
20.00

3
100.00
36.62
63.38
0.00
39.91
23.47
0.00
1.98
0.99
24.47
7.72
0.00
0.00
0.00
16.75
(1.85)
14.90

4
100.00
49.78
50.22
0.32
25.13
24.77
3.11
(5.09)
0.18
16.39
6.53
0.00
0.00
0.00
9.86
0.00
9.86

5
100.00
52.77
47.23
0.00
14.54
32.69
4.50
1.84
0.00
30.04
4.18
0.07
0.21
(0.21)
25.78
0.21
25.99

Common-Size Income Statement (percentage; averaged over three years)

NET SALES
COST OF GOODS
GROSS PROFIT
R & D EXPENDITURES
SELL GEN & ADMIN EXP
INC BEF DEP & AMORT
DEPRECIATION & AMORT
NON-OPERATING INC
INTEREST EXPENSE
INCOME BEFORE TAX
PROV FOR INC TAXES
MINORITY INT (INC)
INVEST GAINS/LOSSES
OTHER INCOME
NET INC BEF EX ITEMS
EX ITEMS & DISC OPS
NET INCOME

Exhibit 2
6
100.00
43.81
56.19
14.61
16.01
25.58
0.00
2.15
0.09
27.64
8.12
0.00
0.00
0.00
19.51
0.00
19.51

7
100.00
23.20
76.80
20.01
35.77
21.03
0.00
0.37
0.87
20.52
5.96
0.00
0.00
0.00
14.57
(0.05)
14.52

8
100.00
17.03
82.97
17.18
33.02
32.77
0.00
5.94
0.00
38.71
11.57
0.00
0.00
0.00
27.14
0.00
27.14

9
100.00
68.43
31.57
0.00
15.56
16.01
4.26
(1.61)
0.90
9.24
3.40
0.00
0.00
0.00
5.84
0.00
5.84

10
100.00
58.46
41.54
0.00
57.69
(16.14)
16.72
22.45
2.37
(12.78)
8.17
0.99
0.00
0.00
(21.94)
(3.83)
(25.78)

TB0069

2.88
15.26
4.57
0.38
6.70
0.01
5.34
35.15
0.18
1.33
1.31
25.09
6.93
6.83
76.82
0.31
2.28
1.81
63.20
(44.84)
0.00
0.42
22.87
100.00

NOTES PAYABLE
ACCOUNTS PAYABLE
CUR LONG TERM DEBT
CUR PORT CAP LEASES
ACCRUED EXPENSES
INCOME TAXES
OTHER CURRENT LIAB
TOTAL CURRENT LIAB
MORTGAGES
DEFERRED CHARGES/INC
CONVERTIBLE DEBT
LONG TERM DEBT
NON-CUR CAP LEASES
OTHER LONG TERM LIAB
TOTAL LIABILITIES
MINORITY INT (LIAB)
PREFERRED STOCK
COMMON STOCK NET
CAPITAL SURPLUS
RETAINED EARNINGS
TREASURY STOCK
OTHER EQUITIES
SHAREHOLDER EQUITY
TOT LIAB & NET WORTH

Source: Thomson Banker One-Analytics

1
6.01
0.00
10.16
11.78
(0.24)
0.00
12.02
0.00
12.50
40.44
37.33
0.00
37.33
5.29
0.29
3.13
12.98
0.54
100.00

23.36
50.78
0.68
0.00
3.03
0.00
0.00
77.86
0.00
0.00
0.00
8.17
0.00
5.26
91.28
0.00
0.08
3.81
0.00
5.31
0.00
(0.48)
8.72
100.00

2
2.66
20.51
45.93
16.49
0.00
0.00
0.00
0.00
0.00
85.59
0.64
0.00
0.64
0.08
0.00
0.00
4.66
9.03
100.00

3.45
3.38
3.51
0.00
7.32
1.79
0.70
20.16
0.00
5.18
0.00
17.54
0.00
6.17
49.06
0.00
0.00
0.74
1.37
54.55
5.60
(0.11)
50.94
100.00

3
10.47
1.96
12.61
20.12
11.13
3.88
5.10
0.00
6.25
51.41
33.72
15.99
17.73
0.63
0.00
1.66
20.87
7.70
100.00

0.85
11.68
0.26
0.00
2.51
4.04
2.85
22.18
0.00
11.86
0.00
2.74
0.13
8.79
45.69
1.82
0.00
2.51
0.00
78.79
28.07
(0.74)
52.49
100.00

4
14.27
0.00
13.13
4.74
0.73
0.00
4.01
0.00
1.43
33.57
119.29
66.32
52.97
9.45
0.00
0.74
0.00
3.27
100.00

0.00
0.09
0.00
0.00
8.86
5.44
12.55
26.94
0.00
0.00
0.00
0.00
0.00
0.00
26.94
0.24
1.07
1.38
12.93
57.19
0.00
0.25
72.82
100.00

5
35.47
0.00
19.77
0.00
0.00
0.00
0.00
0.00
6.81
62.05
21.80
0.00
21.80
14.83
0.00
0.71
0.61
0.00
100.00

0.44
4.45
0.04
0.00
8.19
3.40
1.26
17.78
0.00
1.26
4.37
(1.16)
0.00
0.74
23.00
0.00
0.00
0.01
13.94
62.90
0.00
0.15
77.00
100.00

6
15.42
12.17
6.64
6.94
0.97
3.54
2.44
0.00
2.69
43.88
90.48
55.62
34.85
8.50
0.00
0.23
9.41
3.13
100.00

2.25
3.13
1.79
0.00
2.30
4.46
11.73
25.65
0.00
1.87
0.00
19.14
0.00
7.39
54.06
0.00
0.00
2.98
14.11
43.22
0.43
(13.94)
45.94
100.00

7
15.99
6.75
11.26
9.07
0.59
5.90
2.58
0.00
3.50
46.56
55.18
21.95
33.23
4.03
0.00
3.02
0.53
12.62
100.00

Common-Size Balance Sheet (percentage; averaged over three years)

CASH
MRKTABLE SECURITIES
RECEIVABLES
INVENTORIES
RAW MATERIALS
WORK IN PROGRESS
FINISHED GOODS
NOTES RECEIVABLE
OTHER CURRENT ASSETS
TOTAL CURRENT ASSETS
PROP, PLANT & EQUIP
ACCUMULATED DEP
NET PROP & EQUIP
INVEST & ADV TO SUBS
OTHER NON-CUR ASSETS
DEFERRED CHARGES
INTANGIBLES
DEPOSITS & OTH ASSET
TOTAL ASSETS

Exhibit 3

0.00
2.98
0.00
0.00
3.46
2.93
14.61
23.98
0.00
2.22
0.00
0.00
0.00
5.52
31.71
0.00
0.00
76.62
0.00
(9.99)
0.00
1.66
68.29
100.00

8
3.10
52.44
9.92
1.09
0.31
0.00
0.78
0.00
4.80
71.34
8.75
5.37
3.38
13.91
0.00
3.05
5.20
3.11
100.00

0.00
4.06
2.07
0.07
9.24
1.98
5.06
22.47
2.83
15.45
0.00
8.82
0.50
2.07
52.14
0.00
0.00
6.20
4.70
33.37
1.17
4.76
47.86
100.00

9
11.87
3.17
1.93
1.20
1.20
0.00
0.00
0.00
3.14
21.31
99.65
26.90
72.75
1.56
0.00
0.00
0.16
4.21
100.00

0.02
1.93
1.79
0.01
6.11
0.00
0.93
10.79
0.00
3.41
0.00
9.66
0.08
1.42
25.36
0.62
0.43
3.04
86.45
(36.41)
3.56
24.08
74.02
100.00

10
2.90
0.00
3.60
0.28
0.00
0.00
0.28
0.00
0.31
7.09
11.64
0.00
11.64
16.70
0.05
0.30
61.39
2.83
100.00

TB0069

0.21
0.01
0.02
0.05
0.07

0.07
0.01
2.24
4.43

PROFITABILITY
Gross Margin Ratio
Return on Sales
Return on Assets (1)
Return on Assets (2)
Return on Equity

DUPONT ANALYSIS
Return on Equity =
Return on Sales
* Asset Turnover
* Leverage

Source: Thomson Banker One-Analytics

1.01
4.05

1.71
0.76

0.15
0.20
0.07
11.53

0.89
0.20
0.01
0.03
0.15

0.09

2,540.75
#DIV/0!
0.07

0.38

16.66
24.18
2.24

0.23
0.89
1.10

FINANCIAL LEVERAGE
Long-term Debt to Total Assets
Long-term Debt to Stockholders'
Equity
Coverage Ratio

ASSET MANAGEMENT
Day's Receivable
Day's Inventory
Asset Turnover

0.06
0.47
1.15

0.22
0.15
0.78
1.98

0.63
0.15
0.11
0.12
0.22

0.43
23.92

0.21

59.22
260.56
0.78

0.12
1.25
2.61

Selected Financial Ratios (averaged over three years)

LIQUIDITY RATIOS
Cash & Market Sec to Total Assets
Acid Test Ratio
Current Ratio

Exhibit 4

0.31
0.10
1.63
1.91

0.50
0.10
0.16
0.16
0.31

0.06
134.15

0.03

29.54
21.55
1.63

0.14
1.24
1.51

0.36
0.26
1.01
1.38

0.47
0.26
0.26
0.26
0.36

0.00
#DIV/0!

0.00

71.39
#DIV/0!
1.01

0.35
2.13
2.40

0.19
0.20
0.75
1.30

0.56
0.20
0.15
0.15
0.19

0.04
358.14

0.03

32.25
76.73
0.75

0.28
1.94
2.48

0.20
0.15
0.62
2.18

0.77
0.15
0.09
0.10
0.20

0.46
35.70

0.21

66.25
230.14
0.62

0.23
1.33
1.83

0.23
0.27
0.53
1.49

0.83
0.27
0.15
0.15
0.23

0.00
#DIV/0!

0.00

67.01
40.77
0.53

0.56
3.01
3.26

0.07
0.06
0.59
2.09

0.32
0.06
0.03
0.04
0.07

0.24
18.15

0.11

11.99
10.79
0.59

0.15
0.76
0.95

(0.09)
(0.26)
0.21
1.36

0.42
(0.26)
(0.06)
(0.06)
(0.09)

0.16
(6.49)

0.12

62.12
8.37
0.21

0.03
0.61
0.67

10