The Financial Detective

PAPER: We believe that Company I represents the Smaller Producer of printing papers and Company J represents the World’s Largest Market of Paper. Being the world’s largest paper maker indicates having a larger inventory, more current assets (esp. since it owns timberland and several facilities), and higher cost of goods sold than other paper makers. The inventory for Company J (10. 9) is larger than the inventory for Company I (8. 8); the current assets for Company J (32. 6) are higher than that for Company I (27. 2); and the cost of goods sold for Company J (82. 9) is higher than that for Company I (75. ). We also expect that, as the world’s largest paper maker, their products will move on the marketplace better than a smaller producer of paper. Thus, Inventory Turnover should also be higher. Here, Company J (7. 11) has a larger inventory turnover than Company I (6. 75). Receivables turnover, which tells how many times accounts receivables have been collected in a given period, should be higher for the world’s largest paper company than it would be for a small producer of specialty paper. Company J’s (11. 64) receivables turnover is higher than that for Company I (8. 68).
The facts also state that the world’s largest maker of paper has been rationalizing capacity by closing inefficient mills, implementing cost-containment initiatives, and selling nonessential assets. This implies that the company would have a larger asset turnover ratio than other paper companies. Company J (1. 20) has a larger asset turnover ratio than Company I (. 73). It is probable that since the small producer of paper has most of its product marketed under branded labels, that it would have a higher value of Intangibles, such as trademarks, than the larger company.
Here, Company I (14. 6) has an intangibles value that is significantly higher than Company J’s (1. 9) intangible value. Based on the above analysis, we believe that Company I is the small producer of printing, writing and technical specialty papers, and that Company J is the world’s largest maker of paper, paperboard, and packaging. RETAIL: From the financial ratios and the notes attached, it is apparent that Company N is the rapidly growing chain of upscale discount stores while Company M is the firm known for its low prices, breadth of merchandise and volume riented strategy. ASSETS Receivables: Company M has lower receivables of 1. 4 compared to company N with 17. 0 and this reason is to the fact that company N offers credit to qualified customer as a means of marketing strategy. Inventories: Company M has higher inventories of 24. 5 compared to company N with 16. 7 and this reason it attributed to the strategy company M adopts. Company M has a wide breadth of merchandise and volume oriented strategy amount to this high inventories on the balance sheet. Intangibles: There is a 93. 3% difference compared to company N with low intangibles. This reason is due to the operational strategy company M adopts. Company M possesses either or all of these following; Goodwill, Partnership rights or Patent rights. Analyzing the information provided accurately, one or more of the of the aforementioned rights exit because for company M to sell some products at very low prices, there must be an existing kind of memorandum of understanding between the producers and company M. LIABILITIES & EQUITY Deferred Taxes: Company M has deferred Taxes of 3. with company N having O. From the information of company M provided, it is possible that the deferred tax is an evidence of capital gains that might have risen from the proceeds of divestments of several non-discount department-store businesses. Debt in Current Liabilities: Company M is 75. 4% high than company N’s Debt Current Liabilities. This can be as a result of the lease contract entered by company M. Depending on the lease agreement; Company M might have an overdue payment for the lease for a period within a year. INCOME STATEMENT

Depreciation: It is understandable why company N has a high depreciation than company M and this is due to the reason that M is a lease copy therefore no depreciation is paid for leasing except a rental payment. There is an exception when the lease is a finance lease. Net Income: Company N strategies pay off because shareholders of any company want to maximize their investment or returns. Company N is making almost double of company M’s net profit, and also considering the fact that company N is making 85% of company M sales. MARKET DATA
Beta: Companies in the same industries usually have different betas, one of the reasons this can happen is the kind of financing or debt equity ratio. The higher the debt equity ratio the higher the beta: this shows why company N has a higher beta compared to company M that has a lower debt equity ratio. Dividend Payout: Company M has a higher payout ratio of 31. 12%. Reason why company N might have a low payout ratio can be attributed to investment in future projects with positive NPV due to the rapidly growing chain of upscale discount stores.
ASSET MANAGEMENT Receivables Turnover: This shows the degree of realization in accounts receivables. Company N has a lower turnover rate, a lower rate implies that receivables are being held longer and the less likely they are to be collected. Also there is an opportunity cost of tying up funds in receivables for a long period of time. Company M is 29 times higher than company N. From the above analysis, it is obvious that financial ratios of companies in same industries can never be the same but can only be similar.
The kind of strategy and technology a company adopts tells a lot about differences in financial ratios. COMPUTERS: We believe that Company E is the company focused exclusively on mail-order sales and Company F is the company that sells a highly differentiable line of products. In this industry one company focuses exclusively on mail-order sales of built-to-order PCs, including desktops, laptops, and notebooks. Besides the company allows its customers to design, price and purchase through its web site.
In contrast the other company has a retail strategy intended to drive traffic through its stores. With regards to the SGA expense, as well as depreciation, we can assume that the company resulting with the highest values is of course the one having more stores compared to the one conducting most of its transactions on an online basis. In this case the high value of 23. 1 in selling, general and administrative expense and the high value of 1. 8 in depreciation belonging to company F fit the description of the company with more retail stores.
Another important financial data confirming this finding is the intangible data. From the Exhibit 1, the company E has a value of 0 in intangibles which is not surprising due to its business orientation. Company E is an assembler of PC components manufactured by its suppliers, therefore not having any claim of ownership of intangibles. On the other hand, the intangible value of 1. 2 of company F is due to the fact that company F has a variety of proprietary software products. In addition, the price to book ratio is lower for Company F (5. 3) than for Company E (17. 46). This is in line with our analysis because the facts state that the retail store has a declining market share, so the lower price to book ration would match the description for a company with a lower market share. Based on our analysis above, we believe that company E is the company focusing exclusively on mail-order sales of built-to-order PCs, and company F is the company having an aggressive retail strategy intended to drive traffic through its stores. NEWSPAPERS:
We believe that company P is the diversified media company that generates most of its revenues through newspapers sold around the country and around the world and that Company O is the firm that owns a number of newspapers in relatively small communities throughout the Midwest and southwest. We believe this because Company P has a larger amount of current assets (other and total) and net fixed assets than CompanyO. Company P operates in not just the United States but it also operates in countries all around the world, which it means it will have a lot of assets than Company O.
FINANCIAL STATEMENT ANALYSIS ASSETS RECEIVABLES:Company P is higher than Company O and this can be attributed to the fact that company P has an international presence. This will result to a huge customer base compared to Company O. higher customer base would yield more credit sales. result to its revenues all over the world in the sense that it will have a lot of customers and there can be delays in monetary transactions. Since its business has international presence it can adopt a business strategy of offering a high volume of credit sales to customers.
INVENTORIES: The two companies are at par have the same ratios. This means that there is an equal amount of goods and services available in the stock of both companies. INTANGIBLES: Company O has a higher intangibles value than company P because although company O is a smaller company it has acquired a Customer good will, employee morale, increased bureaucracy, and aesthetic appeal than company P which is a more diversified media company. DEBT MANAGEMENT TOTAL DEBT/TOTAL ASSET:Company P has a higher ratio compared to O.
Most of company’s total debt are short term financed and this is to say that in the next period, the company can have a lower total debt to total asset ratio compared to company O. Based on this current standing it shows that 26. 81% of company’s P asset is financed by debt. INCOME/EXPENSES NETINCOME: Company O is almost likely to succeed more than company P in its operations because of its decentralized decision making and administration. Looking closely at the net income figure of both companies, company O net income is higher than company P net income.
EBIT AND NET PROFIT MARGIN: Company O has a higher EBIT because the company is more profitable than company P. Company P has a lower net profit margin value than company O which indicates a low margin of safety, higher risk, and that a decline in sales will erase profits and result in a net loss. Company O is better in this aspect because of the adopted business of decentralized decision making and administration, which led to better success in its operations. MARKET DATA
DIVIDEND PAYOUT: Company O has a higher ratio than company P which means it has a higher percentage of earnings paid to its shareholders in dividends. The shareholders of company O are benefiting better from the company than the shareholders of company P are. The reason for this could be that company P may be trying to invest in a project that is preventing it from paying shareholders adequate dividends BETA: Company P has a higher value which means a higher expected return of a stock or portfolio which is correlated to the return of the financial market as a whole than company O.
PRICE/EARNING RATIO: Company O has a higher ratio than P. Over the years smaller firms have performed better in terms of returns. Shareholders of company O are willing to pay more for the shares today in anticipation of great prospects of returns in the future. ASSET MANAGEMENT RECEIVABLES TURNOVER: Company O has a higher turnover value because it has a higher number of number of times that account receivables are collected during in a period than company P. LIQUIDITY
CURRENT RATIO AND QUICK RATIO: Company O has a better and higher value of the two ratios than company P so it means that company O has more current assets and cash equivalents to cover its liabilitie when due than company P. Based on our analysis above, we believe that company P is the diversified media company that generates most of its revenues through newspapers sold around the country and around the world and that Company O is the firm that owns a number of newspapers in relatively small communities throughout the Midwest and Southwest