School of Management and Entrepreneurship

Management Consulting
(STM653)

GROUP 5 : Ratios tell a story 2019

ASSIGNMENT - 4
Submitted to: Submitted by:
Prof. Arup Mazumdar Harshit Saxena(1910120012)
Kaustuv Chatterjee(1910120016)
Mayank Sharma(1910120021)
Narpat Singh (1910120123)
Paras Yadav(1910120026)
Sushobhan Paul(2110120015)
Vikas Yadav(1910120042)
 • Financial information is very invaluable to understand
different aspects of a business.
• Financial Analysis helps in interpretation of things about a
Introduction company.
Factors for evaluating and comparing the companies:
• The nature of the industry in which a company operates.
• Company’s management philosophy and policy.
• Competencies of management.
• Susceptible to macroeconomic factors.
 Reasons for Variation Between Companies
in Financial Statement

Factor 1: The nature of the industry in which a company operates.

For example:
• Some industries required large investments in property, plant, and equipment (PP&E), while others
did not.
• In some industries, the competitive product-pricing structure permitted companies to earn
significant profits per sales dollar.
• Other industries the product-pricing structure necessitated a much lower profit margin.
• In some industries, the market is conducive to pricing policies that result in relatively high margins
while others are not.
 Reasons for Variation Between Companies
in Financial Statement

Factor 2: Company’s management philosophy and policy.

For example:
• Some companies reduced their manufacturing capacity to match more closely their immediate sales
prospects.
• Others carried excess production facilities in order to be prepared for future sales growth and spikes in
demand.
• Some companies chose to finance their assets with borrowed funds, while others were more conservative,
preferring to avoid the accumulation of debt.
• Some corporate management teams opted not to pay dividends to their owners, preferring to reinvest those
funds in the company.
• Some companies sought to grow organically, while others focused on mergers and acquisitions as their
predominant means for growth.
 Reasons for Variation Between Companies
in Financial Statement

Factor 3: Competencies of management.

For example:
• Given the same industry characteristics and the same management strategies different companies may
report management strategies, different companies may report different financial results simply because
their managements are more or less successful in executing plans, seizing opportunities, and avoiding
problems.

Factor 4: Susceptible to macroeconomic factors.

For example:
• With macroeconomic conditions some companies in the same industry might be relatively new and
growing while others were more stable and mature. Others might have been more global in their operations
while other companies were more domestic.
 Exhibit 1
Selected Financial Data for 13 Companies (Balance sheet amounts are percentage of total assets)
 Company/Industry Matching with Data

Company/Industry Matching Reasons

Data
Airline 13 They have high Net PP&E, financial leverage and ROE which means that they must have owned
a lot of land and brought in a lot of cash just through sales and services. Low receivable.

Railway 6 This company have high net PP&E, which means they require very high initial investment into
their property. Also due to their low inventory turnover(N/A) and very low current assets it is
evident that company 6 is Railway.

Drug manufacturing-- 10 They have highest R&D ratio, which means they require lot of money for research , innovation
major and testing. That means the two industry with the highest R&D ratio are pharmaceutical and
software development. The one with inventory is drug-manufacturing.
 Company/Industry Matching with Data

Company/Industry Matching Reasons

Data
Commercial banking- 12 Commercial banking has a lot of loans and deposits. No.12 has the highest account receivable
regional and the highest current liabilities so that it matches commercial banking. As it have the highest
current liabilities as well as the receivables collection.

Consumer electronics 9 High Inventory Turnover and High Cash possession as assets.

Discount general- 4 Company 4 has roughly72.9% of their assets asproperty plant and equipment this is again very
merchandise retail likely of afirm in this industry due to the large number and variety of stores. Low receivable
collection period of only 14 days.

Electric utility 1 Electric utility needs a great number of equipment. No.1 matches it because it has the highest
net property, plant and equipment.
 Company/Industry Matching with Data

Company/Industry Matching Reasons

Data
Restaurant (Fast food) 11 High inventory and Net PP&E say that there is a lot of product to be sold as well as a lot of
chain potential selling locations. Along with decent inventory turnover that would suggest they are
quickly selling the inventory they have.

Wholesale food 7 Wholesale food distribution has high inventory and its ROS&ROA should be lower than other
distribution industries. No.7 matches it best because it has the highest inventory and very low ROS and
ROA.

Grocery store chain 2 1) Very small ROS which means company sell convivence products as there are lot of
competitors in the market, resulting in low ROS.
2) They also have high inventory which means they are more a grocery store.
 Company/Industry Matching with Data

Company/Industry Matching Reasons

Data
Internet retailing 8 R&D ratio of 12.81% which is high. Also a negative gross margin of -3.2% means the cost of
producing has exceeded total sales.

Advertising agency 5 1) They have high receivable collection period of 191 days and most company sales are made
services on accounts.
2) High percentage of goodwill in assets this usually happens in advertising service agencies
where one project may take up to a few months and the creativity and quality of the
advertising determines the company’s future prospects, which results in goodwill if the
company performs well.

Computer Application 3 Two industry with the highest R&D ratio are pharmaceutical and software development. The
development one with no inventory is software development as
1) They have no inventory in their assets and the second highest R&D ratio. Also have a high
gross margin which must mean they don’t put in much tangible assets in to get money.
2) Additionally the industry has least account payable among all the other industry.
THANK YOU