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Ratios Tell a Story

Essay by   •  February 18, 2017  •  Case Study  •  1,022 Words (5 Pages)  •  9,558 Views

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1 - Supermarket (grocery) Chain: Company 1 holds a very small ROS of only 0.7%, this usually happens in companies that sell convenience products as there are a lot of competitors in the market, resulting in a low ROS. Thus, we pick #1 as the supermarket (grocery) chain company. In addition to a low ROS, Inventory is high at 21.8% which is a big factor in the grocery chain.

2 - Computer software development: Company 2 has a 17.5% R&D ratio which is very high compared to the other companies, indicating that the company requires a lot of research, innovation and testing. Company 2 also has no inventory because computer software is developed on computers using coding techniques, there is no physical inventory for that industry. Also, Company 2 has a zero dividend payout ratio and high gross margin, which means that the industry has a growing trend and the company tends to reinvest all of its earnings into its business.

3 - Airline: Company 3 and Company 5 have very high net PP&E, this usually happens in the airline and railroad industries, which require high initial investments into their property like airplanes, railroads, trains, etc. The financial leverage of Company 3 is a key indicator of an

airline in addition to its high ROE which helps ensure there are no structural downfalls in the company, ROE also increases with the increased financial leverage. Airlines are a lot less predictable (fuel prices, bad weather etc) in how they operate and have a lot of big bills to pay as opposed to railways who can better manage their cash flow and therefore don’t need to have excess reserve cash on hand.

4 - Advertising agency services: Company 4 has a high receivable collection period of 175 days and most of the company’s sales are made on account. Company 4 also has a high percentage of goodwill in assets, this usually happens in advertising service agencies where one project may take up to a few months and the creativity and quality of the advertising determines the company’s future prospects, which results in goodwill if the company performs well.

5 - Railroad: Company 5 has a high net PP&E, this usually happens in the airline and railroad industries, which require high initial investments into their property like airplanes, railroads, trains, etc. Due to Company 3 being an airline, it is evident that Company 5 is a railroad based on their N/A Inventory turnover and very low current assets.

6 - Discount general-merchandise retail: Company 6 has roughly 58.1% of their assets as property plant and equipment and a very low receivable collection period of only 5 days. Company 6 has 10 times more cash flow from operating activities than Company 1.

7 - Fast-food restaurant chain: Company 7 has a high A/P which indicates having multiple suppliers. Company 7 also has an increased cash amount compared to other companies which indicates that it needs more raw materials to support its operations, therefore we think Company 7 is a Fast-food restaurant chain.

8 - Photographic equipment, printing & sales: Company 8 has a negative ROS, ROA and gross margin, indicating that the firm is making a loss. Due to the fact that more and more paper-based publishing, books, etc. are gradually being replaced by electronic versions, we believe this is reasonable for photographic equipment, printing & sales company. Also, company 8 has 4.55% of R&D costs, which are required as the company is developing new products for sale.

9 - Pharmaceuticals: Company 9 has the highest R&D ratio, which limits the select range to the two industries that require a lot of research, innovation and testing, pharmaceuticals and computer

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