You are on page 1of 5

HA.T.

N Page 1

Financial Statement Analysis
Identify the Industry
Since opportunities and constraints tend to be different across industries, companies in
different industries tend to make different investment, dividend, and financing decisions.
Thus, firms in different industries exhibit different financial characteristics. These companies
have been categorized into five groups with broadly similar attributes. They are:
Financial industry
Retail industry
High technology industry
Service industry
Capital intensive industry

I. Financial Industry
1. General Characteristics
High Receivables and Payables: Because primary activities of commercial bank are
lending and borrowing money, receivable and payable figures which definitely
indicate its loans and deposits will be so much higher than other firms.
Little Inventory: Bank is the entity providing service to customer not a manufacturing
or trading concern that could have inventory.
High gross profit: Due to doing business on money, the cost of goods sold figure of
commercial bank is much lower than other industries; hence, the gross profit is
higher.
Large ratio of assets to stockholders equity: deposit always constitutes roughly 90%
of Commercial banks Capital while owners equity just makes up 10%. Therefore,
the proportion of stockholders equity to total assets is very small.
Low assets turnover ratio: Providing financial services to customers, financial
industry requires little assets than a manufacturing organization which requires large
manufacture facilities, plant and equipment.
2. Who Is Who?
The 2
nd
company will be analyzed as Commercial Banking because their index in Financial
Statements match with typical financial features described above:
High receivables (45.93) & High Payables (50.78)
High gross profit (88.89)
Equity multiplier is very high because the shareholders equity is very low compared
to other firms.
Total assets Turnover = Sales/ Total assets = 0.07 (lower than other industries)

II. Retail industry
1. General Characteristics
Inventory is always higher than others because this type of firm needs to reserve a
lot of goods for later sales retail.
HA.T.N Page 2

Receivables and Payables are approximate because retail stores usually use
deferred payments then resell for customers by collecting money later.
Small gross profit margin and large cost of goods sold because goods are bought
back from the other suppliers then resell for customers
Low return on sales, normally less than 4%, is caused by increased sales. Retail
firms have many sales transactions each day, then revenue obtained from sales is
much high; however earnings of each transaction is always small.
High Asset turnover ratios: reflect the productivity of an organizations assets. Many
retail stores have the higher ratio because they use their assets to products sales
effectively.
2. Who Is Who?
The 1
st
company will be analyzed as Retail grocery stores because their index in Financial
Statements match with typical financial features described above:
High inventory level (11.78)
Receivables and Payables are approximate (Receivables = 10.16 , Payables =
15.26)
Gross Profit Ratio is the lowest one in the Ex.4 (0.21) because its cost of goods sold
accounts for the largest percentage of sales compared to other firms.
Return on sales = Earnings before Interests and Taxes/ Sales = 0.01 = 1% < 4%
Total Assets Turnover = Sales/ Total Assets = 2.24 (highest figure in comparison with
other industries)

III. High-technology Industry
1. General Characteristics
Research and Development expenditures is the highest one among groups of
industry
High return on sales
Low debt ratio.
Net Property, Plant and Equipment is very high
Compare with the requirement, there are 3 industries belong to high-tech industry
group: Computer software, pharmaceutical preparations and semiconductor
manufacturer.
As we can see, computer software, pharmaceutical preparations and semiconductor
manufacturer have the highest R&D expenditures among 10 companies
2. Who Is Who?
The 6
th
company belongs to semiconductor manufacturing because:
High R&D expenditures (14.61%)
High return on sale (0.2%)
Low debt ratio (0.3% and 0.4%)
A lot of property, plant and equipment (factory, big machines ) because of
producing ingredients of medicines and also lots of materials to produce
semiconductor so they must have highest cost of goods sold (43.81%) and prop,
plant & equip assets (90.48%) among 3 companies.
HA.T.N Page 3

The 8
th
company is computer software because:
High gross profit because they need nothing but human force to write software
(lowest COGS 17.03%).
Computer software can be stored on virtual sever and users can buy and download
them via internet, so the cost of inventory is lowest among 3 companies (1.09%).
Because writing software do not need big complex machines or big factory, so
computer software company have lowest prop, plant and equip assets among 3
companies (8.75%)
Raw materials is the lowest (0.31%)
Specification of this industry is to have no work on the assembly line, so Work in
Progress is the lowest (0.00) among three hi-tech firms.
The 7
th
company is the remaining company among 6, 7, and 8, which belongs to
pharmaceutical preparations because:
High R&D expenditures (20.01%)
High return on sale (0.15%).
PP&E is quite high (55.18%), the second one among three firms.
Raw materials (0.59), work in progress (5.9%) and finished goods (2.58%)
Compared to Semiconductor Manufacturer, this industry usually has higher intangible
assets (9.41) because of patents, licenses related to production.

IV. Service industry:
1. Characteristics of Service industry
No or little Inventories, no raw material, no or little finished goods.
Receivables and Payables are high
Products from this industry are services; it means that there is no defined value for service.
Tangible products such as hi-tech devices, it is quite easy to identify its value basing on
quality and producing cost, while the value of services bases on the perception and
evaluation of customers. At the standpoint as financial analysts, service or trading may have
large amounts of intangible assets such as knowledge assets or a large and loyal customer
base, and, hence, have low leverage ratios because growth options can evaporate.
2. Who Is Who?
The 5
th
company belongs to mobile phone service provider because:
No inventory, raw material, works in process and finished good. It implies that this
firm operates its business in service sector
Cash is very high (35.47%) because it can collect payments for customers mobile
phone bills.
Receivables are high compared to other firms which accounts for 19.77%, while its
current liabilities are also the same with high percentage of 26.94%. The days
receivable is quite large, about 71.39 days.



HA.T.N Page 4

The 10
th
company is IT service provider because:
Main asset is intangible assets; this accounts for 61.39%, which is prominent over
the others. Normally, the intangible assets of the IT firm are brand name, intellectual
property and so on which create significant value for the firm.
Its inventory is very low, about 0.28%.
Receivables and payables of IT service firm are quite high (although other accounts
like intangible assets and capital surplus occupy very large amount, receivables and
payables still much more compared to other firms).
V. Capital intensive industry
1. General Characteristics
Require substantial amount of capital for the production of goods. Proportion of
capital involved is much higher than the proportion of labor. This is because the
industrial structure and industry type require high value investments in capital Assets.
The large amount of capital invested in these industries produce high rate of return
and this in turn leads to more capital.
High level of fixed cost, so involve higher degree of risk.
Requires large inventory. Because of high level of fixed cost and capital for
producing, so the reserves capital has to be at high volume. As a result, the volume
of inventory will be high.
Cost for producing one piece of product high, so the cost of inventory will be high.
Because inventory are not only finished goods but also materials and unfinished
good, so high cost of materials can lead to high cost of inventory.
Following to the formula: inventory turnover = Cost of good sold/ inventory; when
inventory high, so the inventory turnover is low. Moreover, with the formula: Days
sales in inventory = 365/inventory turnover, inventory turnover low so the days sale
in inventory will be high.
Require large administrative expense. It means large capital investment for starting
up the business and to run the business as well. The benefit of capital intensive
industry is that it promises high level of productivity because the capital investments
are used to equip the industry with essential tools and high tech machinery and this
use of advanced technology raises the productivity of labor resulting in greater
output. As the capital intensity of capital intensive industries result in higher level of
productivity, these industries possess the power to generate more income and thus
more profit.
2. Who Is Who?
The 3
rd
company is Liquor producer and distributor because:
The highest raw materials (11.13%)
The highest days inventory (260.56 days)
The highest inventories (based on Exhibit 3: 20.12%)
The selling & administrative expense is ranked the 2nd position among
others (39.91%).
The 4
th
company is integrated oil & gas because:
The highest property, plant and equipment (119.29%) (Boring rig, oil filter,
factory, production line, etc.)
HA.T.N Page 5

High accumulated depreciation (66.32)
R& D Expenditures (0.32)
Raw materials (0.73) and finished goods (4.01%)
The 9
th
company is commercial airline because:
High property, plant and equipment (99.65%) for runways, variety of planes.
Deferred charges (0.00%) because customers usually book tickets as well as
pay money immediately.
No finished goods
No R&D expenditures


VI. Conclusion
1 = Retail grocery store
2 = Commercial bank
3 = Liquor producer and distributor
4 = Integrated oil and gas
5 = Mobile phone service provider
6 = Semiconductor manufacturer
7 = Pharmaceutical preparation
8 = Computer software
9 = Commercial airline
10 = IT service provider