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Ratios Tell A Story

Financial results and conditions vary among companies for a number of reasons. One
reason for the variation can be traced to the characteristics of the industries in which
companies operate. For example, some industries require large investments in property,
plant, and equipment (PP&E), while others require very little. In some industries, the
competitive product-pricing structure imposes a much lower profit margin. In most lowmargin industries, however, companies often experience a relatively high rate of product
throughput.
A second reason for some of the variation in financial results and conditions among
companies is the result of management philosophy and policy. Some companies reduce
their manufacturing capacity to match more closely their immediate sales prospects, while
others carry excess capacity to be prepared for future sales growth. Also, some companies
finance their assets with borrowed funds, while others avoid that leverage and choose
instead to finance their assets with owners equity. And some corporate management
teams choose to not pay dividends to their owners, preferring to reinvest those funds in the
company.
Of course, another reason for some of the variation in reported financial results among
companies is the differing competencies of management. Given the same industry
characteristics and the same management policies, different companies may report
different financial results simply because their managements perform differently.
And last, one other reason is that some industries are more susceptible to
macroeconomic conditions than others. This can be true when macroeconomic conditions
(e.g., foreign exchange rates, interest rates, and taxes) are weak and deteriorating as well
as when they are strong and improving. Or this can also be true when such conditions are
stable versus volatile.
Those differences in industry characteristics, in company policies, in management
performance, and in responsiveness to the macroeconomic environment are reflected in the
financial statements published by publicly held companies. Furthermore, they can be
highlighted through the use of financial ratios. The accompanying spreadsheet presents
balance sheets, in percentage form, and selected financial ratios computed from fiscal year
2015 balance sheets and income statements for eleven companies from the following
industries:
Grocery Stores
Railroads
Clothing
Commercial Banking
Chemicals
Courier Services
Insurance
Air Transport
Oil and Gas
Soap and Cleaning
Medical Manufacturing
Business Support

Fall 2016

Just for fun, five of the twelve companies are based in Ohio.

Study the balance sheet profiles and the financial ratios listed for each of the
twelve companies on the accompanying spreadsheet. Not every firm listed here is
truly representative of its industry. But it is all real data. Your assignment is to use
your intuition, common sense, and basic understanding of the unique attributes of
each industry listed above to match each column in the exhibit with one of the
industries. Write out the reasons for your pairings, citing the data that seems to be
consistent with the characteristics of the industry you selected. Ours is not a perfect
world, however, and for our class discussion, it will be helpful if you will also identify
those pieces of data that seem to contradict the pairings you have made. Please
note that using the data available here, you will find it difficult to identify those
companies whose financial results differ because of management policy and
competence. It will be easiest for our class discussion and for grading, if you list the
industries in numerical order. In other words, start your paper by identifying the
industry you believe is represented by the column labeled 1, and give your
rationale or justification. Then do the same for the industry in column 2, and so on
until you have covered all twelve industries.
The company ratios on the spreadsheet were calculated via the following formulas:

1. ROS (return on sales) =


Net Income / Net Sales

2. TATO (total asset turnover) =


Net Sales / Average Total Assets*

3. ROA (return on assets) = Net Income / Average Total Assets*

OR
ROS x TATO

4. Equity Multiplier (financial leverage) =

Average Total Assets* / Average Total Equity*

5. ROE (return on equity) = Net Income / Average Total Equity*

OR
ROA x EM

6. Current ratio =
Total Current Assets / Total Current Liabilities

7. Inventory Turnover =
Cost of Goods Sold / Ending Inventory

8. Average Collection Period =


Accounts Receivable / (Net Sales / 365)

9. Revenue Growth =
Change in Net Sales [This Year Last Year] / Last Years Net
Sales

10.Gross Margin =
(Net Sales Cost of Goods Sold) / Net Sales

11.Dividend Payout =
Cash Dividends Paid / Net Income

12.R&D Ratio** =
Research & Development Expense / Net Sales

* Averages were used when available, otherwise Ending Balances were used


** Not all companies report R&D expense separately. If this ratio is missing, it does
not mean necessarily

that the firm does not conduct any research and development

Based on a case prepared by Professor Mark E. Haskins, Darden Graduate School of


Business Administration.