The Financial Detective, 2016

• Financial characteristics of companies vary due to

a. Industry economics
b. Managerial strategy

• Industry economics
• Asset intensity  asset structure: airline vs. paper
• Rate of technological change  reinvestment / dividend yield:
newspaper vs. tech
• Competition (market structure, industry cycle)  margin, IS
structure: telecommunication vs. retail
• Managerial strategy
• Operating efficiency
• Financing decision

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• The Case provides
1) 8 Pairs of companies (16 companies) in different industries
• Airlines, Beer, Computer, Paper, etc.
• Description of their industries and managerial strategies
provided as clues to their financial condition and performance
2) Financial Statements (in %) & Ratios

Air B/S B/S

Com I/S I/S B/S B/S
1 2 I/S I/S
1 2 (A) (B)
(C) (D)
Beer
1 2 B/S B/S
I/S I/S
(E) (F)

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2. Find similarities between two companies in the same
category based on industry characteristics.
3. Differentiate each company’s managerial choices based on
financial profile and match each financial statement with
the most relevant description.

Air B/S B/S

Com I/S I/S B/S B/S
1 2 I/S I/S
1 2 (A) (B)
(C) (D)
Beer
1 2 B/S B/S
I/S I/S
(E) (F)

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 1. Airlines

• Similarities based on industry characteristics

• Fixed assets-intensive industry  high % of fixed assets

• High sensitivity to market movement / macro cycles  high

beta

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 1. Airlines

• Differences based on financial profile

• Major airline to fly internationally • Leading low-cost carrier
and domestically • operating efficiency from simpler
• Merger with the largest airline in maintenance
2008  High turnover ratios
 High GW and intangible assets,
Less reinvestment (higher dividend%)
• offers additional services including
travel packages and airplane repair &
owns a refinery as a hedge
 Other Revenues

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 1. Airlines

• Differences based on financial profile

A B
Long-Term Marketable Securities 0 1
Goodwill & Intangibles 28 1

Other Revenue 3 0

Dividend Payout (%) 7.9 0.0

Inventory Turnover 37.0 85.4

Receivables Turnover 16.5 43.3

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 1. Airlines

• Differences based on financial profile

• Major airline to fly internationally • Leading low-cost carrier
and domestically • operating efficiency from simpler
• Merger with the largest airline in maintenance
2008  High turnover ratios
 High GW and intangible assets,
Less reinvestment (higher dividend%)
• offers additional services including
travel packages and airplane repair &
owns a refinery as a hedge
 Other Revenues

 Company A  Company B

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 2. Beer

• Similarities based on Industry Economics

• Low sensitivity to market movement / macro cycles  Low
beta

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 2. Beer

• Differences based on financial profile

• Mass-market consumer beers under
a variety of brand names
 High GW and intangible assets
• Other beer-related business (snack,
aluminum manufacturing, theme
parks)
 Other revenue
• Smaller product volume and higher
prices
 High gross profit
• Financially conservative
 High cash, liquidity ratios, lower
debt ratios

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 2. Beer

• Differences based on financial profile

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 2. Beer

• Differences based on financial profile

• Mass-market consumer beers under
a variety of brand names
 High GW and intangible assets
• Other beer-related business (snack,
aluminum manufacturing, theme
parks)
 Other revenue
• Smaller product volume and higher
prices
 High gross profit ??
• Financially conservative
 High cash, liquidity ratios, lower
debt ratios

 Company C  Company D

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 3. Computers

• Similarities based on industry economics

• High growth opportunities  High R&D expenses, low
dividend payout
• Industry in the growth phase  low dividend payout

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 3. Computers

• Differences based on financial profile

• high-performance computing systems
(“supercomputers”) to government
agencies, universities, and
commercial businesses
 Higher inventory, lower inventory
T/O
• considerable growth due to an
increasing customer base
 Higher reinvestment, lower
dividend payout
• financially conservative
 Higher cash, liquidity ratios,
leverage ratios
• personal computers as well as
handheld devices and software
• Differentiable by its own operating
system and innovative designs
 Higher gross profit margin
• vertical integration strategy
 Higher gross profit margin, higher
PPE

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 3. Computers

• Differences based on financial profile

E F
Inventory 1 16
Inventory Turnover 62.8 3.9

Dividend Payout (%) 21.8 0.0

Cash & ST Investments 14 41

Current Ratio 1.11 3.50
Quick Ratio 0.90 2.45
Total Debt/Total Assets (%) 58.9 29.1
LT Debt/Shareholders’ Equity (%) 44.8 0.0

Net Property, Plant, & Equipment 8 4

Gross Profit 40 31

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 3. Computers

• Differences based on financial profile

• high-performance computing systems
(“supercomputers”) to government
agencies, universities, and
commercial businesses
 Higher inventory, lower inventory
T/O
• considerable growth due to an
increasing customer base
 Higher reinvestment, lower
dividend payout
• financially conservative
 Higher cash, liquidity ratios,
leverage ratios
• personal computers as well as
handheld devices and software
• Differentiable by its own operating
system and innovative designs
 Higher gross profit margin
• vertical integration strategy
 Higher gross profit margin, higher
PPE

 Company F  Company E
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 4. Hospitality

• Similarities based on industry economics

• High sensitivity to market movement or macro cycles  high
beta

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 4. Hospitality

• Differences based on financial profile

• manages or franchises the hotels, rather
than owning them (revenue as % of
management/franchise fee)
 Lower PPE, higher operating efficiency
• percentage of the hotel revenues as a
management fee or franchise fee
 Higher PM
• Inorganic growth based on
management/name rights
 Higher goodwill & intangibles, high debt
• Stock repurchase
 Lower (or even negative) equity
• operates several chains of upscale,
full-service hotels and resorts
• maintains market presence by
owning all of its properties
 Higher PPE
• high recognition of its industry-
leading brands
 Higher valuation

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 4. Hospitality

• Differences based on financial profile

G H
Net Property, Plant, & Equipment 53 17
Inventory Turnover 109.7 nmf
Receivables Turnover 8.8 13.1

Gross Profit 37 74

Goodwill & Intangibles 9 39

Stockholders’ Equity 53 (59)

Price/Earnings 59.8 24.0

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 4. Hospitality

• Differences based on financial profile

• manages or franchises the hotels, rather
than owning them (revenue as % of
management/franchise fee)
 Lower PPE, higher operating efficiency
• percentage of the hotel revenues as a
management fee or franchise fee
 Higher PM
• Inorganic growth based on
management/name rights
 Higher goodwill & intangibles, high debt
• Stock repurchase
 Lower (or even negative) equity
• operates several chains of upscale,
full-service hotels and resorts
• maintains market presence by
owning all of its properties
 Higher PPE
• high recognition of its industry-
leading brands
 Higher valuation

 Company H  Company G
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 5. Newspapers

• Similarities based on industry economics

• Low inventory, High inventory turnover

• High reinvestment  high dividend payout, high cash

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 5. Newspapers

• Differences based on financial profile

• owns and operates two newspapers
in the southwestern United States
• acquires firms in more profitable
industries
 High goodwill & intangibles
• Introduced cost controls to address
cost-structure issues (personnel
expenses)
 high costs, but low SG&A
expenses
• renowned for its highly circulated
newspaper offered both in print and
online formats
 High goodwill & intangibles, high
inventory turnover
• sold and distributed domestically as well
as around the world
 High SG&A expenses
• Focused largely on one product, has
strong control
• Remains profitable despite fierce
competition
 High net profit margin, ROE

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 5. Newspapers

• Differences based on financial profile

I J
Goodwill & Intangibles 5 19

Cost of Goods Sold (39) (101)

SG&A Expense 45 0

Inventory Turnover nmf 61.2

Net Profit Margin (%) 4.0 (6.6)

Return on Equity (%) 8.1 (14.8)

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 5. Newspapers

• Differences based on financial profile

• owns and operates two newspapers
in the southwestern United States
• acquires firms in more profitable
industries
 High goodwill & intangibles
• Introduced cost controls to address
cost-structure issues (personnel
expenses)
 high costs, but low SG&A
expenses
• renowned for its highly circulated
newspaper offered both in print and
online formats
 High goodwill & intangibles, high
inventory turnover
• sold and distributed domestically as well
as around the world
 High SG&A expenses
• Focused largely on one product, has
strong control
• Remains profitable despite fierce
competition
 High net profit margin, ROE

 Company J  Company I
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 6. Pharmaceuticals

• Similarities based on industry economics

• High R&D expenses

K L
R & D Exp. (3) (24)

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 6. Pharmaceuticals

• Differences based on financial profile

• manufacture and market
pharmaceuticals
• sells both human pharmaceuticals
as well as health products for
animals (diversified)
 Lower beta
• invests in the discovery and
development of new and innovative
drugs
 higher R&D
• generic pharmaceuticals and medical
devices
• Inorganic growth
 High goodwill & intangibles, high
debt
• enhance the value of the proven
drugs in the company’s portfolio
rather than gamble on discoveries of
new drugs
 Low R&D

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 6. Pharmaceuticals

• Differences based on financial profile

K L
Beta 1.15 0.75

R & D Exp. (3) (24)

Goodwill & Intangibles 85 26

Long-Term Debt 62 22

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 6. Pharmaceuticals

• Differences based on financial profile

• manufacture and market
pharmaceuticals
• sells both human pharmaceuticals
as well as health products for
animals (diversified)
 Lower beta
• invests in the discovery and
development of new and innovative
drugs
 higher R&D
• generic pharmaceuticals and medical
devices
• Inorganic growth
 High goodwill & intangibles, high
debt
• enhance the value of the proven
drugs in the company’s portfolio
rather than gamble on discoveries of
new drugs
 Low R&D

 Company L  Company K
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 7. Power

• Similarities based on industry economics

• High PP&E

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 7. Power

• Differences based on financial profile

• focuses on solar power
 Higher beta, higher R&D
• Manufactures and sells power
system, and provides maintenance
service
 Higher SG&A
• owns large, mostly coal-powered
electric-power-generation plants in
countries around the world
• revenues result from power-purchase
agreements with a country’s
government
• U.S. assets include regulated public
utilities
 Higher PPE

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 7. Power

• Differences based on financial profile

M N
Beta 1.15 1.50

R & D Exp. 0 (4)

SG&A Expense (1) (7)

Net Property, Plant, & Equipment 62 19

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 7. Power

• Differences based on financial profile

• focuses on solar power
 Higher beta, higher R&D
• Manufactures and sells power
system, and provides maintenance
service
 Higher SG&A
• owns large, mostly coal-powered
electric-power-generation plants in
countries around the world
• revenues result from power-purchase
agreements with a country’s
government
• U.S. assets include regulated public
utilities
 Higher PPE

 Company N  Company M
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 8. Retail

• Similarities based on industry economics

• High competition  low net profit margin

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 8. Retail

• Differences based on financial profile

• leading e-commerce company that
sells a broad range of products
including media and electronics
• 1/3 of revenues are international
and 20% of from third-party sellers
• cloud computing business is
growing
 Lower inventory
• Improvement in online tech
 Higher R&D
• leading retailer in apparel and
fashion accessories for men,
women, and children
• sells mostly through its upscale
brick-and-mortar department
stores
 Higher inventory, PPE, SG&A
expenses

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 8. Retail

• Differences based on financial profile

O P
Inventory 16 25

R & D Exp. (12) 0

Net Property, Plant, & Equipment 33 49

SG&A Expense (19) (28)

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 8. Retail

• Differences based on financial profile

• leading e-commerce company that
sells a broad range of products
including media and electronics
• 1/3 of revenues are international
and 20% of from third-party sellers
• cloud computing business is
growing
 Lower inventory
• Improvement in online tech
 Higher R&D
• leading retailer in apparel and
fashion accessories for men,
women, and children
• sells mostly through its upscale
brick-and-mortar department
stores
 Higher inventory, PPE, SG&A
expenses

 Company O  Company P
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