UV7487

Jun. 28, 2018

Ratios Tell A Story—2017

It has been said that a picture is worth a thousand words. There is no doubt that we each have experienced
that phenomenon. In a similar fashion, it is also true that numbers convey information, and, in purposeful
combinations, they can actually tell a story. Indeed, when a physician counsels patients regarding their high
blood pressure number in concert with a bad cholesterol ratio (total cholesterol #/good cholesterol #), the
story is not good news, and corrective lifestyle behaviors are likely to be discussed. Similarly, a person’s weight
in combination with their height can reveal obesity. A baseball pitcher’s earned run average in combination
with his strikeouts per nine innings can provide insights into a mediocre or a dominant performance. An
elementary school’s teacher/student ratio, in part, indicates the instructional attention each student receives.
Numerous other examples are prevalent and common in our daily lives. Over time, we embrace the usefulness
of those measures and develop comfort and competence with them as inputs into our interpretations of things
around us and about us.

Likewise, over time, the companies we are interested in understanding and evaluating are frequently
subjected to an array of numerical indicators that point to a strength, concern, uniqueness, and/or direction.
Each indicator has its own focus and interpretation. Financial ratios are a large subset of corporate indicators
that are of interest to business observers. Singly, and in combination, financial ratios tell a story. They present
a picture that we are wise to learn how to interpret. Is Facebook more or less reliant on debt than Microsoft?
To what extent did American Airlines passenger revenue increase or decrease this year, and how did that
compare to Delta Air Lines? In what financial ways is Under Armour similar to Nike? Is Bank of America more
or less optimistic about the collectability of its loan portfolio than Wells Fargo? Numbers, and financial ratios
in particular, can help answer such questions.

To embark on a task of corporate financial analysis, it is important to note that corporate financial
performance and condition 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 permits companies to earn significant profits per sales
dollar, while in other industries the product-pricing structure necessitates a much lower profit margin. In most
low-margin industries, however, companies often experience a relatively high rate of product throughput (i.e.,
turnover).

A second reason 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 in order to be prepared for future sales growth. Also, some companies choose to finance their assets
with borrowed funds, while others are more conservative, preferring to avoid the buildup of debt. Some
corporate management teams opt to not pay dividends to their owners, preferring to reinvest those funds in

This case was prepared by Mark E. Haskins, Professor of Business Administration, and has benefited from collaborations with various colleagues over
the years on earlier versions. It was written as a basis for discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright  2018 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to
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This document is authorized for use only in Prof. Prince Doliya's PGP/ Financial Statement Analysis at Indian Institute of Management - Visakhapatnam (IIMV) from Aug 2020 to Nov 2020.
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the company. And some companies aim to grow organically (i.e., increasing sales of internally developed
products and/or services), while others focus on mergers and acquisitions as their dominant means for growth.

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 are more
or less capable.

And last, one other reason for differing corporate financial performance and condition is that some
industries, and even some companies within an industry, are more susceptible to macroeconomic factors than
others. This can be true when macroeconomic conditions (e.g., foreign exchange rates and interest rates) are
weak and deteriorating as well as when they are strong and improving. 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. Exhibit 1
presents common-size balance sheets (i.e., balance sheets in percentage form) and selected financial ratios
computed from fiscal year 2017 financial data for 13 companies from the following industries:
 airline
 railway
 drug manufacturing—major
 commercial banking—regional
 consumer electronics
 discount general-merchandise retail
 electric utility
 restaurant (fast-food) chain
 wholesale food distribution
 grocery store chain
 internet retailing
 advertising agency services
 software application development

Study the balance sheet profiles and the financial ratios listed for each of the 13 companies as presented in
Exhibit 1.1 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. There
is no need to proceed in any particular order—feel free to make the matches you are most confident about
first. Be prepared to give the reasons for your pairings, citing data that seem to be consistent with the
characteristics of the industry you selected. Ours is not a perfect world, however, and for the class discussion

1 Please note in Exhibit 1: OCI = Other Comprehensive Income, CFFO = Cash Flow From Operations, ST = Short Term, LT = Long Term, and

Net Contributed Capital is net of stock buy backs (i.e., Treasury stock purchases).

This document is authorized for use only in Prof. Prince Doliya's PGP/ Financial Statement Analysis at Indian Institute of Management - Visakhapatnam (IIMV) from Aug 2020 to Nov 2020.
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it will be helpful if you also identify those pieces of data that seem to contradict a pairing you have proposed.
Please note, at this introductory level and without multiple years of data and similar competitor data, it is not
possible to identify those companies whose financial results are a function of management policy and/or
competence.

The ratios in Exhibit 1 are based on the following formulas:

Net income
1. ROS (return on sales) = Net sales

Net sales
2. Asset turnover = Total assets

Net income
3. ROA (return on assets) = Total assets

or = ROS × Asset turnover

Total assets
4. Financial leverage = Total owners’ equity

Net income
5. ROE (return on equity) = Total owners’ equity

or = ROA × Financial leverage

Total current assets

6. Current ratio = Total current liabilities

Cost of goods sold

7. Inventory turnover = Ending inventory

Accounts receivable
8. Receivables collection = Net sales/365 days

This year’s net sales−Last year’s net sales

9. Revenue growth = Last year’s net sales

Net sales−Cost of goods sold

10. Gross margin = Net sales

Cash dividends
11. Dividend payout = Net income

= Research and development expense

12. R&D ratio Net sales

This document is authorized for use only in Prof. Prince Doliya's PGP/ Financial Statement Analysis at Indian Institute of Management - Visakhapatnam (IIMV) from Aug 2020 to Nov 2020.
This document is authorized for use only in Prof. Prince Doliya's PGP/ Financial Statement Analysis at Indian Institute of Management - Visakhapatnam (IIMV) from Aug 2020 to Nov 2020.

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Exhibit 1
Ratios Tell A Story—2017
Selected Financial Data for 13 Companies
(Balance sheet amounts are percentage of total assets)

1 2 3 4 5 6 7 8 9 10 11 12 13
Year end 2.3.18 12.01.17 12.31.17 12.31.17 12.31.17 2.3.18 12.31.17 9.30.17 12.31.17 7.1.17 12.31.17 12.31.17 12.31.17
Assets: Cash 4.1% 15.9% 10.5% 15.2% 1.2% 5.8% 23.6% 19.8% 17.9% 4.9% 1.4% 7.3% 1.8%
Accts. Receivable 4.4% 8.4% 3.4% 32.4% 2.7% 1.0% 10.0% 4.8% 10.1% 22.6% 64.2% 5.8% 2.3%
Inventory 17.6% 0.0% 2.6% 4.5% 1.0% 22.2% 12.2% 1.3% 9.9% 16.9% 0.0% 0.2% 0.7%
Other CA 3.9% 25.6% 1.3% 4.5% 0.4% 3.2% 0.0% 8.5% 4.8% 0.9% 11.1% 2.4% 2.6%
Total Current Assets 29.9% 49.9% 17.8% 56.6% 5.4% 32.2% 45.8% 34.3% 42.7% 45.2% 15.8% 7.4%
Net PP&E 56.6% 6.4% 66.5% 2.8% 88.9% 64.2% 37.2% 9.0% 19.6% 24.6% 0.9% 66.4% 78.2%
Goodwill 7.9% 40.1% 8.0% 37.5% 0.0% 0.0% 10.2% 1.5% 9.7% 22.1% 4.3% 7.0% 0.9%
Intangibles & oth 5.6% 3.6% 7.8% 3.2% 5.8% 3.6% 6.8% 55.2% 28.0% 8.1% 18.1% 10.8% 13.6%
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%
Liabilities: Accts. Pay. 15.7% 0.8% 3.3% 46.4% 2.4% 22.2% 26.4% 13.1% 3.1% 22.4% 71.0% 2.7% 2.7%
ST Debt 9.6% 0.0% 5.0% 0.0% 0.1% 0.7% 0.1% 1.7% 8.2% 3.0% 2.2% 0.0% 2.7%
Other 12.8% 23.5% 20.9% 14.1% 2.9% 10.9% 17.7% 12.1% 20.9% 9.0% 2.7% 5.8% 4.8%
Total Current Liabilities 38.2% 24.3% 29.1% 60.6% 5.3% 33.8% 44.2% 26.9% 32.3% 34.3% 8.6% 10.2%
LT Debt 32.3% 12.9% 43.8% 19.7% 33.0% 29.0% 18.8% 25.9% 22.1% 43.1% 10.7% 87.4% 30.6%
Other 10.9% 4.6% 19.4% 7.0% 20.5% 7.1% 15.9% 11.5% 19.6% 8.6% 0.0% 13.7% 27.1%
Total Liabilities 81.4% 41.8% 92.4% 87.4% 58.8% 70.0% 78.9% 64.3% 74.1% 86.1% 86.6% 109.7% 67.9%
Equity:Noncontrolling Int. -0.1% 0.0% 0.0% 2.2% 0.0% 0.0% 0.0% 0.0% 0.2% 0.5% 0.0% 0.0% 0.0%
Net Contr. Cap. -25.8% -6.9% 11.1% -10.6% 3.1% 15.1% 14.9% 9.6% 14.3% -32.7% 6.7% -146.2% 10.8%
Ret. Inc. + OCI 44.5% 65.1% -3.5% 21.0% 38.0% 14.9% 6.2% 26.2% 11.5% 46.1% 6.7% 136.5% 21.2%
Total Equity 18.6% 58.2% 7.6% 12.6% 41.2% 30.0% 21.1% 35.7% 25.9% 13.9% 13.4% -9.7% 32.1%
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%
ROS 1.6% 23.2% 4.5% 7.1% 48.0% 4.1% 1.7% 21.1% -0.9% 2.1% 18.3% 22.8% 12.7%
Asset Turnover 3.30 0.50 0.82 0.61 0.32 1.84 1.35 0.61 0.51 3.12 0.05 0.68 0.25
ROA 5.1% 11.7% 3.7% 4.4% 15.3% 7.5% 2.3% 12.9% -0.5% 6.4% 1.0% 15.4% 3.2%
Financial Leverage 5.39 1.72 13.09 7.91 2.43 3.33 4.74 2.80 3.86 7.20 7.46 -10.34 3.12
ROE 27.6% 20.0% 48.9% 34.5% 37.2% 25.1% 10.9% 36.1% -1.7% 46.4% 7.5% -158.9% 9.9%
Current ratio 0.78 2.05 0.61 0.93 1.01 0.95 1.04 1.28 1.32 1.32 N/A 1.84 0.72
Receivables collection 5 61 15 193 31 2 27 28 73 26 4270 32 33
Inventory Turnover 14.6 N/A N/A N/A N/A 5.9 7.0 29.1 1.4 15.0 N/A 176.4 3.1
Gross margin 22.0% 91.9% N/A N/A N/A 28.8% 5.6% 38.5% 73.5% 19.1% N/A 18.2% 76.9%
Dividend payout 23.2% 0.0% 10.3% 47.3% 12.9% 45.6% 0.0% 26.4% -1074.5% 61.2% 53.1% 59.5% 52.7%
Revenue growth 6.3% 24.7% 5.0% -0.9% 10.4% 3.3% 30.8% 6.3% 7.8% 9.9% 5.4% -7.3% -0.3%
R & D ratio N/A 16.76% N/A N/A N/A N/A 12.72% 5.05% 23.09% N/A N/A N/A 0.39%
CFFO (millions) 3,413 1,470 4,744 2,024 3,472 6,923 18,434 63,598 5,616 2,176 4,635 5,551 3,367
Data source: Created by author using company 10-Ks filed with the SEC.