Identify the Industries

Introduction

This paper aims to analyze the common-sized balance sheets and ratios of 12 companies in order to identify their respective industries (Please refer to the Appendix for an overview of the financial data).

The balance sheets of the 12 companies are analyzed in four steps, as shown in the following table. StepIndustryCommon CharacteristicsCompanies1ServiceAlmost no inventoriesInventory turnover negligibleMajor passenger airline Regional bankTemporary office personnel agencyHotel chainFor-profit hospital chain2MerchandizingHigh and similar inventory levelLeverage ratio is nearly identicalUpscale department store chain Warehouse clubDiscount department store chain3ManufacturingHigh plant & equipmentManufacturer of oral, personal, and household care products Defense contractor4OtherMajor regional utility companyInternational oil company

Based on balance sheets’ common characteristics of companies operating in similar industries, we defined major clusters in four steps. Within each of these clusters we used industry-specific characteristics to distinguish between individual companies.

Step 1: Five service industry companies

CompanyIndustry-related explanationsAMajorPassengerAirlineHigh unearned revenues (11.6%): Customers book and pay in advance Negative retained earnings (-1%): Airline industry is under severe pressure and many companies are losing money High plants & equipment(55.6%): Airplanes on the books

ERegionalBankHigh accounts payable (84.7%): Banks take deposits from their customers, which they have to pay back on the depositors’ request High receivables (63.1%): Banks loan money to third parties Low stockholders’ equity (7.9%): Banks are usually highly leveraged Very low plant & equipment (1.8%): Banks usually rent real estate for their operations KTemporary Office Personnel

AgencyHigh receivables (55.4%): Often get their fees when recommended employees get paid by employers Low plant & equipment (11.7%) and almost no long-term debt: Less need for long-term investments

JHotelChainHigh goodwill (17.6%): Hotels often expand their businesses through M&A High receivables (13.4%): Hotels often have pre-arrangement with big customers like MNC, which let their employees use hotels in advance and settle the bills later GFor-Profit Hospital

ChainHigh retained earnings (41.7%) & high investments (19.4%): Hospitals are exposed to frequent mal-practice lawsuits Hospital chains have higher cash related operations (13.4%) than hotel chains High plant and equipment (55.4%): Hospitals need real estate as well as expensive medical equipment

Step 2: Three merchandizing industry companies

CompanyIndustry-related explanationsBUpscaleDepartment Store ChainLow plant & equipment (16.1%): Upscale department stores are normally smaller-sized than discount department stores or even warehouse clubs Lowest accounts payable (10.6%): Bargaining power is low against luxury goods suppliers, resulting in pressure to pay faster Lowest inventory turnover (2.5): It normally takes longer to sell expensive goods Highest profit margin (6.8%): High-end goods are usually more profitableLWarehouse

ClubHighest accounts payable (25.3%): High bargaining power results in credit purchasing Highest inventory turnover (11.9): Warehouse clubs sell goods in bulk and within a short period of time Lowest profit margin (1.3%): Warehouse clubs have comparably lower profit margins FDiscount

Department Store ChainProfit margin (2.9%): Mid-level profit margin (worse than upscale department store chains but better than warehouse clubs)

Step 3: Two manufacturing industry companies

CompanyIndustry-related explanationsCOral, Personal & Household Care ProductsInventory turnover is relatively high (8.9): Oral, personal, and household care products manufacturers produce expendable goods

DDefenseContractorHigh inventory (22.9%): Very expensive and complicated products with many components which might be sourced from third parties High retained earnings (47.7%): highly profitable business as its normally protected by governmental institutions and monopolies are created High Receivables (32.7%): Expensive products

Step 4: Two companies in other industries

CompanyIndustry-related explanationsHInternational OilCompanyHigh goodwill (35.9%): Pay high premiums for exploration rights and active acquisitions High long-term debt (39.2%): Exploration before production start takes a long time and as the equipment is very expensive it is expected to operate for many years IMajor Regional

Utility CompanyLow inventories (1.6%): A large amount of the products (electricity) is sold immediately High plant & equipment (81.1%): Highlycapital intensive business which required very high long-term investments