The Financial Detective 2005

Abstract

Case analysis, "The Financial Detective, 2005" dwell on the differences in the financial characteristics from industry to industry or within a single industry. Such financial characteristics may be a result of macroeconomics of strategies employed. Eight different industries were analyzed namely; health products, beer, computers, books and music, paper products, hardware and tools, retailing and newspaper. In each industry, two similar companies financial performance were compared against strategies employed.

In the economic perspective, health care products have higher capital structure due to research and development cost and enjoy higher profit margin due to patents rights owned by companies. The beer industry has a low risk because entrants into this market in low. Reliance of debt is high because capital is needed to sustain activities to accommodate long production time. The computer industry is rapidly evolving causing constant obsolescence in inventory but yet yielding great profits. The Book and music is slowly fading away because of online retail. Traditional retail stores in this industry are likely to hold large volumes of inventory and have a high debt capacity to facilitate store expansions. The paper industry is a cyclical industry affected by economic factors such as demand for product and global warming. Typical companies in this sector have huge fixed assets to store the vast amount of forest products utilized for production. The tool industry is unlikely affected by economic fluctuations since more companies move towards reducing cost of labor. The retailing industry is said to be very competitive thus affecting companies' profits greatly whereas the newspaper industry enjoys higher profits due to its nature of mass production and low production cost. Not only were economic factors were taken into consideration, but also the comparison of how the strategies of two different companies in the same industry affected its financial statements.

Introduction

Financial characteristics of companies vary for many reasons. The two most common drivers are industry economics and firm strategy. Each industry has specific financial characteristics around which they operate. Such industry financial characteristics may be high fixed assets, lower gross margin, higher pricing, etc. Similarly, companies in same industry categories may have different financial characteristics because of differences in business strategies.

Problem

The financial characteristics of companies vary for different reasons. Variations occur from industry to industry and within a single industry. Variance from between industries is expected solely based on the nature of the industry and its operations, including but not limited to whether or not it is a commodity industry and the industry's other economic features. Within a company, corporate strategies can have a dramatic affect on the appearance of a company's financial statements, allowing for the differences within an industry.

The issue asked to address and understand in this case is how a particular strategy affects a company's financial statements. Given a set of characteristics, strategies, and a set of financial statements for two companies in a single industry, interpretation on how the companies' information affects their financial statements.

Analysis

A. Health Product Industry. Typically, healthcare companies enjoy greater profit margin than companies in other sectors mainly due to the patent rights that companies own. In terms of capital structure, healthcare companies have a tendency of relying more on equity finance, largely due to the difficulties in securing debt-finance for conducting Research & Development (R&D). In comparing both companies, Company A uses more cash and short term investment in its assets probably for investment in the future. In terms of asset management, Company A has a higher inventory, receivables and fixed assets turnover because of its well known trusted brand serving several partners and efficient stock management practices. In terms of debt management, Company B has higher ratios which may be attributed to its mass marketing strategy to facilitate distribution.

B) Beer. As illustrated in the market data in regards to beta, beer industry is shown as an industry with the lowest risk. The beer industry is said to be less competitive because of its significant high barriers of entry. Because longer production time is needed for beverage, thus requires greater capital in sustaining the company even before the profits may be realized. In regards to asset management, apparently there's a much lower result in fixed asset turnover for Company C. This probably due to the company has involved in several different sector businesses which consists of loads of fixed assets volume. Whereas,