DARDEN UVA-F-1486 Version 2. BUSINESS PUBLISHING UNIVERSITY/VIRGINIA THE FINANCI

Question

DARDEN UVA-F-1486 Version 2. BUSINESS PUBLISHING UNIVERSITY/VIRGINIA THE FINANCIAL DETECTIVE, 2005 Financial characteristics of companies vary for many reasons. The two most prominent drivers are industry economics and firm strategy. Each industry has a financial norm around which companies within the industry tend to operate. An airline, for example, would naturally be expected to have a high proportion of fixed assets (airplanes), while a consulting firm would not. A steel manufacturer would be expected to have a lower gross margin than a pharmaceutical manufacturer because commodities such as steel are subject to strong price competition, while highly differentiated products like patented drugs enjoy much more pricing freedom. Because of unique economic features of each industry, average financial statements will vary from one industry to the next. Similarly, companies within industries have different financial characteristics, in part, Executives choose strategies that will because of the diverse strategies that can be employed. posi tion their company favorably in the competitive jockeying within an industry. Strategies Ily entail making important choices in how a product is made (e.g, capital intensive versus how it is marketed (e.g., direct sales versus the use of distributors), and how the is financed (e.g. the use of debt or equity). Strategies among companies in the same differ dramatically. Different strategies can produce striking differences in financial company i results for firms in the same industry. The following paragraphs describe pairs of participants in a number of different industries. ies and market niches provide clues as to the financial condition and performance that would expect of them. The companies' common-sized financial statements and operating data, 2005, are presented in a standardized format in Exhibit 1. It is up to you to match the financial data with the company descriptions. Also, try to explain the differences in financial results one as of early across industries. This case was prepared by Sean Carr, under the direction of Robert F. Bruner. It was writen as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright O 2005 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mol to sales@dardenpublishing.com. No part of this publication may be reprodiced stored in a retrieval system, ansed n a spreadsheet, or transmited in any form or by ar meons-elecironic, mechanical, photocopying, recording or otherwise-without the pernission of the Darden School Foundation

Explanation / Answer

Health care- A: 2nd company; B: 1st company

Since 1st company is investing higher amount in R&D, it will have higher patents. Hence, it can charge higher prices for its products. Therefore, it has higher gross margins. ALso, its intagnible assets are very high which proves higher R&D expenses and hence higher patents.

Beer

D is 2nd company since its debt is low as mentioned in the question and it has higher gross margins due to higher prices

Computers

F is 2nd firm since it has higher sga expenses depicting aggressive sales strategy

Books

G is 2nd company since it is on a acuisition spree and hence, its debt is high as acquisition have been done through debt. ALso, cash component is high which means that the company likes to keep large cash so that it can acquire other companies easily.

H is 1st company as its operating profit is lower (S,G & O expenses higher since it has offline model)

Paper products

I is 1st company. Higher gross margins depicting efficient operations. Large debt depicting initiative taken by the company to improve efficiency and therefore it would have taken additional debt

Hardware

K is a 2nd company. Higher debt means fianancing provided to customers

Retail

N is 2nd company as SGO expenses are higher (higher discounts) and receivable are also higher (higher credit)

Newspapers

O is 2nd company- Higher intangibles

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