Financial Management

Case Study

THE FINANCIAL DETECTIVE, 2005

Compiled by :

Syndcate 6:

29113385 Faris Hizrian

29113543 Ghea Widya Pratiwi

29113529 Maulana Angga Utama

29113323 Silvia Regina

29113357 Yuthika Fauziyyah

Master of Business Administration

School of Business and Management

Institut Teknologi Bandung

Bandung

2014

INTRODUCTION

The Financial Detective, 2005

Financial Characteristic of company vary vary for many reasons. Each

insutry has a financial norm around which companies within the industry tend

to operate. A steel industry for example would be expected to have a lower gross

margin than pharmaceutical manufacturer because commodities such as steel

are sujected to strong price competition, while highly differentiated product like

patened drugs enjoy much more pricing freedom.

In this following paragraph will describe pairs of participants in a number

of different industries. it could match company description with financial data

and can explain the differences in financial result accross indutries. Here are the

industries in this case:

1) Health Products

Based on this case, the first firm is the world’s largest prescription-

pharmaceutical company. This firm has very broad and deep pipepline

support by robust research and development budget. In recent years, the

company has divested several of its nonpharmaceutical businesses and

looking for partner for licencing deals with other pharmaceutical and

biotechnology firms.

The second company is a diversified health-products ompany that

manufactures and mass market a broad line of prescription

pharmaceuticals, over the counter remedies, consumer health and

beauty products, and medical diagnostic and device. Brand development

and management are a major element of this firm’s mass-market-

oriented strategy.

2) Beer

The first companies is anational brewer of mass-market consumer

vbeers sold under a variety of brand names, operates an extensive

network of breweries and distriution system and owns a number of beer-

related business.

The second company produces seasonal and year-round beers with

smaller production volume and higher prices, outsources most of its

brewing activity and recently has undergone a major cost-savings

initiative to counterbalance the recent surge in packaging and freight cost.

3) Computers

The first company focuses exclusively on mail-order sales of built-

to-order PC’s, including desktop, laptops, notebook, servers, workstation,

printers, and handled devices. The company is an assembler of PC

components y its suppliers and allows its customer to design, price, and

purchase throuh its website.

The second company led by its charismatic founder, the company

has begun to recover from dramatic decline in its market share. The firm

has an aggresive retail strategy intended to drive traffic through its stores

and to expand its instaled base of customers by showcasing its products

in a user-friendly retail atmosphere.

4) Books and Music

The first company focuses on selling primarily to customers through

a vast retail-store presence. The cmpany is the leader in traditional book

retailing and fosters through its “ community store” concept and regular

discount policy and maintain online presence and owns a publishing

imprint.

The second company sells book, music, and video solely its internet

web site. While more than three-quaters of its sales are media, it also sells

electronics and othr general merchandise recently this firm become

profitable, and followed an aggressive strategy of acquiring related online

businesses in recent years.

5) Paper products

The first company is the world largest maker of paper, paperroad,

and packaging. This vertically integrated copany owns timberland;

numerous lumber, paper, paper board, packaging-products facilities, and

papaper distribution network. The companies has spent the last few years

rationalizing capacity by closing inefficient mills, implementing cost-

containment initiatives and selling nonessential assets.

The second company is a small producer of printing, writing , and

technical specialty papers. Most of the company’s products are marketed

under branded label. The company purchases the wood fiber used in its

paper making process on the open market.

6) Hardware and Tools

The first companies is a global manufacturer and marketer of

power tools and power-tool accessories, hardware and home-

improvement products, and fastening systems. The firm sells primarily to

retailer,wholesalers, and distributors. Its products appear under varety of

well-kown brand names and geared for the end user.

The second company manufactures and marets high quality

precision tools and diagnostic-equipment systems for professional users,

often broad range product (which sells via its own technical

representatives and mobile franchise dealers), and also provide financing

for franchises and customers large purchases.

7) Retailing

The first company carries wide variety of nationally advertise

general merchandise, known for its low price, breadth of merchandse,

and volume oriented strategy. The company has begun to implement

plans to expand both internationally and in large urban areas.

The second company competes by attempting to match other

discounters’ prices on similar merchandise and by offering deep discounts

on its diferentiated items. The copany has partnership with several

leading designers, recently divested several nondiscount department-

store businesses, and offer credit to qualified customers to support sales

and earning growth.

8) Newspaper

Based on this case, the first company is a diversified media

company that generates most of its revenues through newspapers sold

around the country and around the world and has a strong central

controls. The competition for subscribers and advertising revenues in this

firm’s segment is fierce. The company has also built a large office building

for its headquarters.

The second firm has own relative small communities throughout

the Midwest and Southwest. From analyst view this firm as holding

portfolio of small local monopolies in newspaper publishing and has a

significant amount of goodwill on its balance sheet, stemming for

acquisition. This firm using decentralized decision making and

administration.

Analysis

Health products: Companies A and B

We analyze this company based on:

Cash & short-term investments percentage:

Company A have higher proportion of cash and short-term investments than

Company B. That illustrates the Company A highly conservative approach to its

financial management.

Receivables percentage:

Company A has a higher percentage of receivables compared to company B. This

result occurs because company B provides financing, which may cause delays in

repayment. Company A, on the other hand may have more regular payment

schedules.

Intangibles Percentage :

The Intangibles Percentage of Company B is 46.1, and Company A is 22.2. That

shows a proportion of intangibles Company B nearly twice as large as Company

A, the conclusion is Company B have a higher investment than Company A.

Inventories percentage :

Company A’s proportion of inventories is higher than company B’s, but in Health

Product, the number is not too different.

Current Assets-Total percentage :

Company A’s Current Assets-Total is 51.2, that’s a better than Company B.

Accounts payable percentage :

Company A’s accounts payable is 9.8, it has a high percentage of accounts

payable than Company B, which may reflect a higher degree of supplier

financing.

Gross Margin:

Company B’s gross margin is 76.1, that’s higher than A’s, which reflects the

higher input costs for company A.

Inventory turnover:

Company A turns over is 3.08, and Company B is 0.93, Company A’s inventories

far more quickly than company B.

Net profit margin:

Company B’s net profit margin is higher than company A’s.

Beer: Companies C and D

We analyzed this company based on:

Cash & short-term investments percentage:

Company D’s Cash and short-term investment is 55.6, and Company C’s 1.4.

Company D’s has a extremely higher proportion of cash and short term

investments than Company C.

Receivables percentage:

Company D has a higher percentage of receivables than company C. This result

happened because company C provides financing, which may cause delays in

sales. Company D, on the other hand may have more regular payment

schedules.

Intangibles Percentage :

The Intangibles Percentage of Company C is 7.4, and Company D is 1.3. That

shows a proportion of intangibles Company C larger than Company D.

Net fixed assets:

Company C shows a relatively have high number of Net fixed assets. Company D

has much lower net fixed assets.

Gross profit versus net profit:

Company D has higher gross profit than company C. But, company C’s net profit

margin is almost three times greater than company D’s.

Current ratio:

Company D’s current assets to current liabilities ratio is three times greater than

company C’s, whose current ratio is less than one, illustrating a careful financial

approach.

Inventory turnover:

C’s inventory turnover is significantly higher than D’s turnover.

Asset turnover:

Company D’s asset turnover is much higher than Company C.

Computers

Company E focuses exclusively on mail-order sales of build-to-order PCs,

and allows its customers to design, price, and purchase through its web site. The

company is an assembler of PC components manufactured by its suppliers.

Company F sells a highly differentiable line of computers, consumer

oriented electronic devices, and a variety of proprietary software products. This

company led by a charismatic founder has begun to recover from a dramatic

decline. The firm has an aggressive retail strategy intended to drive traffic

through its stores and to expand its installed base of customers by showcasing

its products in a user-friendly retail atmosphere.

We can see from the line above that company F has begun to recover from

a dramatic decline, it means that this company must have more cash to prevent

the failure. From cost of goods sold side, company E which made exclusive

products based on its customers design will have much more cost than the

company F that made its products by mass production. “The company is an

assembler of PC components manufactured by its suppliers”, it means that

company E will has a higher accounts payable than company F because of

financing from its suppliers and also reflects that fixed assets turnover company

E also has a higher than company F. Also we can see that SG&A expense

company F has almost three times higher than company E because company F

has a user friendly retail atmosphere store which will bring more expenses than

company E that sell its products by mail-order strategy. Company F sells highly

differentiable products, so it will have much more gross profit than company E,

but otherwise company E has a higher net profit because it reflects lower

expenses to sell it products. Because company E production based on exclusively

order, so customers will make a faster payment by credit for purchasing rather

than company F.

Books and Music

Company G sells books, music, and videos through its internet web site, it

also sells electronics and other general merchandise. The firm has only recently

become profitable, and has acquired related online business in recent years.

Company H is the leader in traditional book retailing focuses on selling

primarily to customers through a vast retail-store presence, which fosters

through its “community store” concept, regular discount policy, online presence

and owns a publishing imprint.

Because of the acquiring strategy and higher risk in online retail business,

company G must has much more cash and short term investment in their assets.

“The firm has only recently become profitable, and has acquired related online

business in recent years”, from those sentence we can indicate that this

company is acquired related online business by the debt, so the long term debt

in company G is high. Company H which is a traditional book retailing has much

more inventories and fixed assets than company G that only sell its products by

its internet web site. Beta from company G is higher than company H which

means that this online business has a higher risk because has more debt from its

acquisition. Through web site, company G will has much more order from

overseas so its products will sold faster, also company G also has a lower

inventory so it will be much more easy to manage, this is explains that the

inventory turnover from company G is much more higher than company H.

Because of a regular discount policy and has a offline store, online store, and

publishing imprint, absolutely company H will has much more expenses than

company G, so company G has higher net profit margin.

Paper product

From the data given, one of the company is characterized as the company

who have largest maker of paper, paperboard, and packaging which can be

referred to as company I. The other companies is small producer of printing,

writing, and technical specialty papers which can be referred to as company J

At the cost of goods sold side, we can see that company I’s has a lower

percentage of cost of good sold than company J’s even though the raw materials

for each company’s goods are essentially the same but company I’s have their

own forest and lumber operations rather than company J they purchase raw

material on the open market. The second, Company I’s selling, general, and

administrative expense are higher than company J’s.It shows that the large

companies will be directly proportional to SG&A expense percentage, and this

will have an impact on net profit margin that company J’s is higher than I’s.

Hardware and tools

From the data given, one of the companies is a global manufacture

and marketer of power tools and power tool accessories which can be referred

to as company K. The other companies is also manufacturer of tools but known

for its high quality which can be referred to as company L

At SG&A expense percentage side we can see that Company L has a higher

level because they have a large direct sales force. This is confirmed by the data

from the income statement a lower net profit margin and a lower return on

equity for company L versus company K. the second Company L has a higher

percentage of receivables compared to company K because company K markets

directly to end-users, which may cause delays in repayment. It will be opposite

condition when company L sells to retailer, which may have more regular

payment schedule.the other thing about Gross profit, company L markets

higher margin precision tools for the commercial customer. As such, company

L’s gross profit percentage is measurably higher than K’s.

Retail

Companies M and N are two large discount retailers. One firm carries a

wide variety of nationally advertised general merchandise. The company is

known for its low prices, breadth of merchandise and volume-oriented strategy.

Most of its stores are leased and are located near the company’s expanding

network of distribution centers. The company has begun to implement plans to

expand both internationally and in large urban area.

The other firm is a rapidly growing chain of upscale discount stores. The

company competes by attempting to match other discounters’ prices on similar

merchandise and by offering deep discounts on its differentiated items.

Additionally, the company has partnerships with several leading designers.

Recently the firm has divested several nondiscount department-store

businesses. To support sales and earnings growth, this company offers credit to

qualified customers.

According to the data, we can see that receivables percentage at company

N are much higher than at company M, reflecting N’s substantial credit activities.

Company M’s inventory has higher relative inventory levels, which may reflect

the company’s commitment to providing a vast selection of goods. Cost-of-

goods-sold of company N has a relatively lower cost-of-goods-sold percentage,

reflecting its relatively fuller price for proprietary, designer-made products.

Company M offers low prices, which, all else being equal, would result in a

higher COGS/sales percentage. Company M has a higher receivables turnover,

due to its lower use of credit sales. So we can conclude that the differences are

pricing strategy and product focus.

Newspapers

Companies O and P own newspapers. One is a diversified media company

that generates most of its revenues through newspapers sold around the

country and around the world. Because the company is centered largely on one

product, it has strong central controls. Competition for subscribers and

advertising revenues in this firm’s segment is fierce. The company has also

recently built a large office building for its headquarters.

Actually the difference between those two entities is along the

centralization/decentralization dimension. Company P has a centralized, well-

managed inventory system, whereas company O corresponds to the profile of a

decentralized publisher.

According to the data, company P has a higher level of net fixed assets than

company O. It reflects company O’s recent investment in a large corporate

headquarters. About Intangibles percentage, Company K bears some of the

features of a decentralized operation, perhaps built by acquisition, since its

intangibles comprise almost 77% of total assets, which suggests the existence of

substantial goodwill created by acquisitions or equity interests in

unconsolidated subsidiaries. Cost-of-goods-sold percentage of Company O is

75,3% and Company P is 67,1% Company P’s level of cost of goods sold is lower

than company O’s, which may suggest that as a larger centralized company,

company P may be in a better position to negotiate for volume discounts on

inputs, such as newsprint. The SG&A percentage of company O is lower. High

prices may be masking a relatively high SG&A expense. A way to determine this

would be to examine performance ratios such as subscriptions or advertising

revenue per employee. Company O’s price-to-earnings ratio is higher than

company P’s, which may indicate the expectations of growth for company O,

which has been able to increase earnings through acquisitions. As the dominant

market player on a larger scale, company P may be unable to grow through

strategic acquisition. Company P’s net profit margin is lower.

Conclusion

Every company has many indicator, moreover in the same company

category, it can be indicated more specifically depends on the type of the

business and the strategy itself. We can also identified the company

characteristic and performance based on it financial data (like income

statement, balance sheet, and etc) and see the factors like Cash & short term

investment percentage, receivables percentage, intangible percentage,

inventories percentage, current assets-total percentage, account payable

percentage, gross marginm and inventory turnover, net profit margin, using

ratio analysis (involves methods of calculating and interpretig financial ratios in

order to analyze and monitor the firm’s performance), and also differentiable

product from the companies.