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The case provides financial statement data of 9 different companies from Standard & Poor’s
Capital IQ Net Advantage financial database. Those companies are liquor producer and distributor,
discount airline, commercial bank, computer software company, large integrated oil and gas company,
mobile phone service operator, R&D-based pharmaceutical manufacturer, retail grocery company, and
R&D-based semiconductor manufacturer. A financial statement analysis analyzes a company’s financial
statements to render better decisions and earn income going forward. The statements provided within the
case were a common-size income statement, a common-sized balance sheet, and selected financial ratios.
The company I felt fit with company number 1 was the research and development-based
pharmaceutical manufacturer. This is a high technology industry since it is high in research and
development (R&D) which develops new products and discovers/creates new knowledge. The company
has a low inventory of 0.4% because it is a research and development company, not much inventory is
needed. In addition, it has a high gross plant, property and equipment of 98.2% since it has noncurrent
assets which are long-term investments that are not expected to become cash and will be used during the
research process of the pharmaceutical manufacturer. It also has high intangible assets of 47.6% which are
assets basically controlled with no physical substance. Having a high intangible asset percentage reports
high spending in research and development efforts. Lastly, the pharmaceutical manufacturing costs are
high as it loses money in the manufacturing process and these costs are included in the costs of sales;
therefore, the cost of goods sold is 42.9% and the gross profit is 57.1%.
The liquor producer and distributor company fits best with company number 2. Company 2 is
considered a capital-intensive industry which means it requires a big amount of capital expenditures. It
has a net plant, property and equipment of 12.2% which implies it has heavy equipment to produce the
liquor. Consequently, it has 21.6% of inventory. It takes time to produce and distribute liquor hence the
percentage of inventories is decent since it includes the raw materials, work in process, and finished
goods. Company 2 also has a high gross profit of 69.7% which shows that the company is being efficient.
In addition, the cost of goods sold which is the accumulated total of all costs used to create the product
that has been sold is at 30.3% which looks like the company is doing well selling the liquor.
The research and development-based semiconductor manufacturer can potentially be company
number 3. Just like the pharmaceutical manufacturer, the semiconductor manufacturer is also a high
technology industry since it is high in research and development (R&D). Research and development
companies tend to have a low debt ratio and high return on sales. Company 2 has a long-term debt to
stockholders’ equity set to 0.01 meaning that it barely has any debt and is financed from the equity.
Additionally, this type of industry tends to have a high return on sales which is set to 0.21 and it shows
the company’s operational efficiency. The company has a cost of goods sold of 25.2% which is good for a
high technology company. Moreover, the net plant, property and equipment expense is high at 33.5%.
Research and development companies typically have the latest and greatest capital assets since they need
to innovate new products.
Company number 4 seems to go the best with the computer software company. A computer
software company is considered a high technology industry. A computer software company does not have
a physical inventory like the other companies since it is a software industry and nowadays most software
is downloadable. Company 4 shows a low inventory of 7.6%. The cost of goods sold is 15.6% which is
also relatively low since for software the production cost such as materials and labor cost is not much
applied. A software company mostly requires personnel to come up with the coding to produce the
software. As for the net plant, property and equipment, it is set to 22.7%. This is also low since a software

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company truly does not really need heavy machinery and assets like other companies and it is mostly
computers.
The mobile phone service operator may be company number 5. According to Rankine (2014),
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 devalue
quickly. The net receivables are at 12.2% which shows how the company tends to receive payments from
its customers which will result in a higher portion of the total assets. Additionally, company 5 has a cash
value of 51.9%. People will most probably pay their monthly bill statements in cash. As far as their
inventory, it is low at 1.3% since it is a service industry and has no physical inventory.
Company number 6 could be the discount airline. Just like company 3, a large integrated oil and
gas company, a discount airline is also considered a capital-intense industry. The main costs are composed
of investments in equipment, machinery, and/or other expensive capital assets. Plane parts are not cheap;
therefore, I strongly believe company 6 is a discount airline due to the gross plant, property and
equipment totals 104.8% and 68.3% in net plant, property and equipment. The cost of goods sold is
77.3% and a gross profit of 22.7%. This company offers discounted flights making it have a high cost of
goods sold but a low gross profit that the airline company is earning. Furthermore, it has a low asset
turnover at 0.90 which indicates it is not efficiently using its assets to generate any sales.
The commercial bank goes best with company number 7. A finance industry such as a
commercial bank will have high receivables/loans and payables (deposits/other loans). Company 7 shows
a day’s receivable set to 3,208.07 on the financial ratios along with a net receivable of 55.1% on the
balance sheet. A commercial bank’s balance sheet is a tad different than other companies. Under the assets
category, you will see most of the loans and investments and in the liabilities category, you will see the
deposits and borrowings. As previously mentioned, company 7 has a high net receivable due to the loans
and investments the bank has. Additionally, under the liabilities, company 7 has the highest total of 88.9%
which makes up all the deposits and borrowings. When you pay your mortgage to a bank, you pay them
the interest and principal for the life of the loan; therefore, your payment is an income for the bank.
Company number 8 was better paired with the retail grocery company. Retail companies tend to
have a high inventory since they are selling goods to the customers and a low gross profit percentage.
Company 8 has a high inventory of 21.5% on its balance sheet which is needed since they are selling
goods to the customer. Retailer grocery stores require varied inventory to satisfy all the customers’
demands. In addition, it has a high cost of goods sold of 73.6% and a low gross profit of 26.4%. The cost
of goods sold is derived by adding the beginning inventory and purchased inventory and then subtracting
the ending inventory. Grocery stores need a high cost of goods since they are the retailers of the
goods/products. A contributing factor to lower profit margins is having a higher inventory cost associated
with a high asset turnover. Asset turnover measures how efficient a company is at using its assets to
generate revenue. For company 8, it is high at 2.31.
Lastly, company number 9 fits with the large integrated oil and gas company since it has a high
net plant, property and equipment set to 67.7%. An oil and gas company needs heavy machinery and a lot
of its money will go towards those capital assets. This company is a perfect example of a capital-intensive
company which means it requires massive amounts of capital expenditures in order to make a profit. It
also has a high cost of goods sold which is 80.7% and a net income of 9.5% which seems low for the
company. Furthermore, the company has a 49.3% of total liabilities which indicates that money was
borrowed to get the oil and gas company running.

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References

Rankine, G (2014). Identify the Industry - Analysis of Financial Statement Data. TB0385. Thunderbird
School of Global Management.

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