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UV0002

THE FINANCIAL DETECTIVE

The financial statements of no two companies are alike. Industries differ, and each has a
financial norm around which companies within the industry operate. An airline, for example, would
naturally be expected to have high fixed assets (airplanes), while a consulting firm would not. A
paper company would be expected to have a lower gross margin than an automobile manufacturer,
because its product is more like a commodity.

Similarly, companies within industries have different financial characteristics, in part,

because of varied strategies. The following paragraphs describe two participants in each of a
number of different industries. Their strategies and market niches provide clues to the financial
condition and performance one would expect of them. The companies’ common-sized financial
statements and operating data, which have been put in a standardized format, are provided in
Exhibit 1. It is up to you to match the financial data with the company descriptions.

Health Products

Of companies A and B, one manufactured pharmaceuticals and a variety of low-margin

hospital supplies, and both product lines were marketed primarily through direct sales to doctors and
hospitals. The firm had recently acquired a large hospital supply company and therefore had
significant goodwill on its books. The other firm manufactured and nationally mass-marketed a
broad line of name-brand toiletries, nonprescription drugs, and consumer and baby-care products,
through 165 decentralized subsidiaries.

Household Appliances

The two home-appliance manufacturers are companies C and D. One focused on marketing
high-quality washers, dryers, dishwashers, and refrigerators under its own name. The other
company attempted to segment the market for the same products by selling under its own name and
under three other brand names. The second firm had a contract to sell one brand solely as a
private-label item through a large department-store chain.

This case was prepared by Casey S. Optiz, under the supervision of Professor Robert F. Bruner. It was written as a basis
for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright ©
1988 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order
copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 1/89.

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Computers

Companies E and F manufactured computers. One had a highly focused product line:
supercomputer systems for scientific applications. Most of these computers were used for physical
research such as that related to weather, energy, and defense. Although the output of these units was
relatively small, the price tag was the highest in the industry. The other firm manufactured large
main-frame computers and had an emerging position in the supercomputer segment; it also
developed and marketed related software and provided financial and insurance services as well.
Computer and software sales were responsible for about two-thirds of the company’s revenues, and
financial services for the remaining one-third.

Retailing

Companies G and H were two retailers with different market emphases. One company was a
large, national chain of department stores that sold largely on credit everything from automotive
equipment and services to clothing and household items, through its (primarily) leased properties. It
also marketed its products through a catalogue and provided a variety of financial services.
Merchandise sales were responsible for about 60 percent of revenues, and insurance sales for about
32 percent. The other firm was a rapidly growing chain of discount department stores and wholesale
clubs that owned a large portion of its outlets. As a discounter, it provided little or no credit to
customers.

Electronics

Two electronics companies are shown as companies I and J. Both produced semiconductors,
but one specialized in their manufacture and also produced small desk-top and hand-held computing
equipment. About half its electronic components were sold to the defense industry. The other firm
was financially conservative. It specialized in radio and television equipment and made
semiconductors as a secondary, but increasingly important, line of business (over 30 percent of
revenues).

Hotels

Companies K and L were both large hotel/motel chains. In addition, one company owned
one of the largest food-service contractors in the country, a large chain of family restaurants, and a
large chain of fast-food restaurants. This firm financed its hotels via off-balance-sheet limited
partnerships. The company had significant assets in the form of food service and hotel management
contracts. Hotel revenues accounted for about 40 percent of the total, and contract services for about

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45 percent. The other firm operated a worldwide chain of high-quality hotels and motels in addition
to a smaller line of casinos.

Newspapers

Companies M and N owned newspapers. One had a large flagship newspaper that was sold
around the country and around the world. Because the company was centered largely around one
product, it had strong central controls. This company’s second most important line of business was
periodicals (16 percent of revenues). The other firm owned a number of small newspapers
throughout the Mid-West. Broadcasting was its secondary line of business and accounted for about
27 percent of total revenues. This company had a significant amount of goodwill stemming from
acquisitions.

Transportation

Of transportation companies O and P, one was a large, national trucking and freight-
forwarding company. The other was primarily a railroad, although 20 percent of its revenues were
derived from real estate and exploitation of natural resources.

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Exhibit 1
THE FINANCIAL DETECTIVE
Common-Sized Financial Data

Health Products Appliances Computers Retailing Electronics Hotel Newspapers Transportation

“A” “B” “C” “D” “E” “F” “G” “H” “I” “J” “K” “L” “M” “N” “O” “P”
PERCENTAGE OF TOTAL ASSETS
Cash & equivalents 11.3% 0.7% 1.8% 3.7% 15.4% 19.3% 0.2% 15.6% 5.8% 15.6% 14.1% 0.3% 8.5% 4.4% 1.8% 0.9%
Receivables 14.6 16.7 23.9 13.4 18.7 10.7 1.9 34.7 20.7 19.9 7.3 9.2 8.7 9.0 6.5 18.7
Inventory 17.8 16.7 30.5 25.8 22.7 21.4 51.7 5.5 17.1 17.4 Nav. 3.5 4.5 2.1 1.5 3.9
Other current assets 6.3 2.0 4.9 2.8 9.1 0.6 2.8 0.0 7.3 7.3 Nav. 4.1 2.6 3.1 0.9 1.3

Total current assets 50.0 36.1 61.1 45.7 65.9 52.0 56.6 55.8 50.9 60.2 23.1 17.1 24.3 18.6 10.7 24.8
Net property, plant, & equip. 34.4 23.3 31.0 32.3 23.1 42.2 41.8 6.4 45.9 35.7 49.5 48.0 14.0 56.2 82.3 73.3
Other assets 15.6 40.6 7.9 22.0 11.0 5.8 1.6 37.8 3.2 4.1 27.4 34.9 61.7 25.2 7.0 1.9

Total assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Accounts payable 14.1% 15.1% 11.3% 12.1% 9.5% 2.1% 21.4% 8.6% 10.3% 25.0% 8.9% 9.5% 5.4% 6.2% 12.0% 5.1%
Other current liabilities 12.8 9.5 16.3 21.2 31.0 16.5 12.6 31.1 21.0 4.3 0.9 11.4 9.7 11.9 1.4 21.0

Total current liabilities 26.9 24.6 27.6 33.3 40.5 18.6 34.0 39.7 31.3 29.3 9.8 20.9 15.1 18.1 13.4 26.1
Long-term debt 11.2 21.5 16.5 6.8 14.6 12.0 3.6 12.8 6.5 11.4 21.6 46.5 25.6 19.6 14.5 13.7
Other liabilities 8.7 5.3 7.3 3.3 4.4 1.7 18.4 29.4 5.7 6.5 14.3 17.5 7.9 14.1 27.4 17.7

Total liabilities 46.8 51.4 51.4 43.4 59.5 32.3 56.0 81.9 43.5 47.2 45.7 84.9 48.6 51.8 55.3 57.5
Minority interest 0.0 0.0 0.0 2.7 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.0
Equity 53.2 48.6 48.6 53.9 39.7 67.7 44.0 18.1 56.5 52.8 54.3 15.1 51.4 48.2 44.3 42.5

Total liab. & equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

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PERCENTAGE OF SALES
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 36.9 64.0 72.8 79.3 69.7 35.7 77.0 Nav. 60.5 78.3 41.0 92.1 45.9 54.2 Nav. 82.4

Gross profit 63.1 36.0 27.2 20.7 30.3 64.3 23.0 100.0 39.5 21.7 59.0 7.9 54.1 45.8 100.0 17.6
SG&A (all oper. exp. for H & O) 40.3 21.7 13.3 14.4 29.4 16.3 16.3 97.1 24.7 17.8 33.8 1.1 28.6 28.6 86.1 7.6
R&D expense 7.7 3.2 Nav. Nav. Nav. 15.8 Nav. Nav. Nav. Nav. Nav. Nav. Nav. Nav. Nav. Nav.
Interest expense 1.4 3.4 0.6 0.6 1.9 1.3 0.7 Nav. 1.2 0.4 6.5 1.4 2.3 1.4 2.5 0.5
Other expense (income) -1.2 0.5 -0.4 -0.4 -2.7 0.0 -0.7 -1.1 7.4 -3.9 0.7 -0.7 -11.8 -0.1 0.0 5.8

Income before taxes 14.9 7.2 13.7 6.1 1.7 30.9 6.7 4.0 6.2 7.4 18.0 6.1 35.0 15.9 11.4 3.7
Taxes 4.5 1.9 5.7 1.5 1.1 9.5 2.8 0.6 1.6 1.9 4.4 2.7 14.4 6.4 4.5 1.4

Net income 10.4% 5.3% 8.0% 4.6% 0.6% 21.4% 3.9% 3.4% 4.6% 5.5% 13.6% 3.4% 20.6% 9.5% 6.9% 2.3%
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Exhibit 1 (continued)

Health Products Appliances Computers Retailing Electronics Hotel Newspapers Transportation

“A” “B” “C” “D” “E” “F” “G” “H” “I” “J” “K” “L” “M” “N” “O” “P”

OPERATING & CONDITION RATIOS

Sales/assets 122% 82% 223% 173% 128% 76% 311% 65% 126% 131% 55% 121% 73% 99% 46% 191%
Return on assets 13 4 18 8 1 16 12 2 6 7 8 4 15 9 3 4
Return on equity 24 12 37 15 2 24 28 12 10 18 14 28 29 19 7 11
Quick ratio 96 71 93 51 84 162 6 127 81 121 218 45 114 74 62 75
Current ratio 186 147 221 137 163 280 167 141 162 206 236 82 161 103 80 95
Days sales outstanding 43 75 39 28 54 51 2 196 60 55 49 28 43 33 52 36
Receivables turnover (X) 8.41 4.87 9.33 12.92 6.81 7.09 166.37 1.86 6.09 6.60 7.52 5.41 8.48 11.01 7.08 10.18
Inventory turnover (X) 6.88 4.87 7.32 6.69 5.62 3.56 6.02 11.77 7.38 7.57 Nav. 13.21 16.24 47.28 30.97 49.22
Long-term debt/equity 21% 44% 34% 13% 37% 18% 8% 70% 11% 22% 40% 308% 50% 41% 33% 32%

MARKET DATA
Dividend payout ratio 33% 49% 50% 43% 0% 0% 11% 46% 27% 24% 21% 10% 33% 20% 46% 42%
Price/earnings 17.9 22.1 13.5 13.5 32.0 21.5 27.7 11.0 22.7 19.6 17.8 21.8 20.9 20.7 20.9 23.3
Market/book value 4.44 2.09 5.16 1.91 1.21 5.05 8.02 1.11 2.15 2.43 2.53 5.13 4.58 3.98 1.52 2.42
Beta 1.05 1.10 1.05 1.15 1.25 1.40 1.30 1.20 1.45 1.40 0.95 1.10 0.90 1.10 Nav. 1.30

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