National College of Business and Arts

Fairview, Quezon City

The
Financial
Detective
(A Case Study in Financial Management)
Submitted By:
De Castro, Kenneth Michael
Acaso, Marilou
Almonte, Poneve
Cantor, Rachelle
Salmorin, Princess
Submitted To:
Ms. Adalia Bringas
October 19, 2009

I.

Brief Background:
The financial statements of no two companies are
alike. External factors that affect such differences are
the nature of the industry in which the company belongs,
and the financial norms and standards that govern in each
industry.
In addition, the internal factors are also considered
such as the managements philosophy and operating style and
its attitude towards achieving certain goals. Moreover,
business strategies are also a key factor in analyzing such
financial, as well as non-financial differences between
companies.
Lastly, the social perspective should not be taken for
granted. The presence of good customer relations and a
sense of social responsibility add up in building company
goodwill which will in turn contribute to the operations of
the entity as a whole.

II. Case Objective:

Given the common sized financial statements of each
company in each industry, the objective is to match the
financial data with the company descriptions. Exhibit 1
shows the financial statements, as well as the financial
ratio analysis of each company.
The professor will be given a copy of the case study
to provide her with the company descriptions which will be
serve as a basis for the analysis of financial data.

Exhibit 1 Common Sized Financial Statements (Financial Position)

Health Products
"A"
"B"

Appliances
"C"
"D"

Computers
"E"
"F"

Retailing
"G"
"H"

Percentage of Total
Assets
Current Assets:
Cash and Cash
Equivalents
Receivables
Inventory
Other Current Assets
Total Current Assets

11.3%
14.6%
17.8%
6.3%
50.0%

0.7%
16.7%
16.7%
2.0%
36.1%

1.8%
23.9%
30.5%
4.9%
61.1%

3.7%
13.4%
25.8%
2.8%
45.7%

15.4%
18.7%
22.7%
9.1%
65.9%

19.3%
10.7%
21.4%
0.6%
52.0%

0.2%
1.9%
51.7%
2.8%
56.6%

15.6%
34.7%
5.5%
0.0%
55.8%

Noncurrent Assets:
Net Property, Plant and
Eqpt.
Other Assets
Total Noncurrent Assets

34.4%
15.6%
50.0%

23.3%
40.6%
63.9%

31.0%
7.9%
38.9%

32.3%
22.0%
54.3%

23.1%
11.0%
34.1%

42.2%
5.8%
48.0%

41.8%
1.6%
43.4%

6.4%
37.8%
44.2%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Current Liabilities:
Accounts
Payable
Other Current Liabilities
Total Current Liabilities

14.1%
12.8%
26.9%

15.1%
9.5%
24.6%

11.3%
16.3%
27.6%

12.1%
21.2%
33.3%

9.5%
31.0%
40.5%

2.1%
16.5%
18.6%

21.4%
12.6%
34.0%

8.6%
31.1%
39.7%

Noncurrent Liabilities:
Long-term debt
Other Liabilities
Total Noncurrent Liabilities

11.2%
8.7%
19.9%

21.5%
5.3%
26.8%

16.5%
7.3%
23.8%

6.8%
3.3%
10.1%

14.6%
4.4%
19.0%

12.0%
1.7%
13.7%

3.6%
18.4%
22.0%

12.8%
29.4%
42.2%

Total Liabilities

46.8%

51.4%

51.4%

43.4%

59.5%

32.3%

56.0%

81.9%

0.0%
53.2%
53.2%

0.0%
48.6%
48.6%

0.0%
48.6%
48.6%

2.7%
53.9%
56.6%

0.8%
39.7%
40.5%

0.0%
67.7%
67.7%

0.0%
44.0%
44.0%

0.0%
18.1%
18.1%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Total Assets

Equity:
Minority Interest
Equity
Total Equity
Total Liabilities and Equity

Exhibit 1 Common Sized Financial Statements (Financial Position)

Electronics
"I"
"J"

Hotel
"K"

"L"

Newspapers
"M"
"N"

Transportation
"O"
"P"

Percentage of Total
Assets
Current Assets:
Cash and Cash
Equivalents
Receivables
Inventory
Other Current Assets
Total Current Assets

5.8%
20.7%
17.1%
7.3%
50.9%

15.6%
19.9%
17.4%
7.3%
60.2%

15.2%
7.9%
N/A
N/A
23.1%

0.3%
9.2%
3.5%
4.1%
17.1%

8.5%
8.7%
4.5%
2.6%
24.3%

4.4%
9.0%
2.1%
3.1%
18.6%

1.8%
6.5%
1.5%
0.9%
10.7%

0.9%
18.7%
3.9%
1.3%
24.8%

Noncurrent Assets:
Net Property, Plant and
Eqpt.
Other Assets
Total Noncurrent Assets

45.9%
3.2%
49.1%

35.7%
4.1%
39.8%

49.5%
27.4%
76.9%

48.0%
34.9%
82.9%

14.0%
61.7%
75.7%

56.2%
25.2%
81.4%

82.3%
7.0%
89.3%

73.3%
1.9%
75.2%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Current Liabilities:
Accounts Payable
Other Current Liabilities
Total Current Liabilities

10.3%
21.0%
31.3%

25.0%
4.3%
29.3%

8.9%
0.9%
9.8%

9.5%
11.4%
20.9%

5.4%
9.7%
15.1%

6.2%
11.9%
18.1%

12.0%
1.4%
13.4%

5.1%
21.0%
26.1%

Noncurrent Liabilities:
Long-term debt
Other Liabilities
Total Noncurrent Liabilities

6.5%
5.7%
12.2%

11.4%
6.5%
17.9%

21.6%
14.3%
35.9%

46.5%
17.5%
64.0%

25.6%
7.9%
33.5%

19.6%
14.1%
33.7%

14.5%
27.4%
41.9%

13.7%
17.7%
31.4%

0.0%
56.5%
56.5%

0.0%
52.8%
52.8%

0.0%
54.3%
54.3%

0.0%
15.1%
15.1%

0.0%
51.4%
51.4%

0.0%
48.2%
48.2%

0.4%
44.3%
44.7%

0.0%
42.5%
42.5%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Total Assets

Total Liabilities
Equity:
Minority Interest
Equity
Total Equity
Total Liabilities and Equity

Exhibit 1 Common Sized Financial Statements (Income Statement and Financial Ratios)
Health Products
"A"
"B"

Appliances
"C"
"D"

Computers
"E"
"F"

"G"

Retailing
"H"

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

36.9%
63.1%

64.0%
36.0%

72.8%
27.2%

79.3%
20.7%

69.7%
30.3%

35.7%
64.3%

77.0%
23.0%

N/A
100.0%

40.3%
7.7%
1.4%
-1.2%
14.9%
4.5%
10.4%

21.7%
3.2%
3.4%
0.5%
7.2%
1.9%
5.3%

13.3%
N/A
0.6%
-0.4%
13.7%
5.7%
8.0%

14.4%
N/A
0.6%
-0.4%
6.1%
1.5%
4.6%

29.4%
N/A
1.9%
-2.7%
1.7%
1.1%
0.6%

16.3%
15.8%
1.3%
0.0%
30.9%
9.5%
21.4%

16.3%
N/A
0.7%
-0.7%
6.7%
2.8%
3.9%

97.1%
N/A
N/A
-1.1%
4.0%
0.6%
3.4%

122.0%
13
24
96
186
43
8.41
6.88
21.0%

82.0%
4
12
71
147
75
4.87
4.87
44.0%

223.0%
18
37
93
221
39
9.33
7.32
34.0%

173.0%
8
15
51
137
28
12.92
6.69
13.0%

128.0%
1
2
84
163
54
6.81
5.62
37.0%

76.0%
16
24
162
280
51
7.09
3.56
18.0%

311.0%
12
28
6
6
2
166.37
6.02
8.0%

65.0%
2
12
127
127
196
1.86
11.77
70.0%

33.0%
17.9
4.4
1.1

49.0%
22.1
2.1
1.1

50.0%
13.5
5.2
1.1

43.0%
13.5
1.9
1.2

0.0%
32.0
1.2
1.3

0.0%
21.5
5.1
1.4

11.0%
27.7
8.0
1.3

46.0%
11.0
1.1
1.2

Percentage of Sales
Revenues
Cost of Goods
Sold
Gross Profit
Selling, General & Admin.
Exp.

(all Oper. Exp. for Co. H &

O)
Research and Development
Interest Expense
Other Expense (Income)
Income before taxes
Taxes
Net Income
Operating and Condition Ratios
Ratio of Sales to Assets
Return on Assets
Return on Equity
Quick (Acid-Test) Ratio
Current Ratio
Days Sales Outstanding
Receivable Turnover (times)
Inventory Turnover (times)
Ratio of Long-term debt to Equity

Market Data
Dividend Payout Ratio
Price-Earnings Ratio
Price-Book Ratio
Beta

Exhibit 1 Common Sized Financial Statements (Income Statement and Financial Ratios)
Electronics
"I"
"J"

"K"

Hotel
"L"

Newspapers
"M"
"N"

Transportation
"O"
"P"

Percentage of Sales
Revenues
Cost of Goods
Sold
Gross Profit

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

60.5%
39.5%

78.3%
21.7%

41.0%
59.0%

92.1%
7.9%

45.9%
54.1%

54.2%
45.8%

N/A
100.0%

82.4%
17.6%

24.7%
N/A
1.2%
7.4%
6.2%
1.6%
4.6%

17.8%
N/A
0.4%
-3.9%
7.4%
1.9%
5.5%

33.8%
N/A
6.5%
0.7%
18.0%
4.4%
13.6%

1.1%
N/A
1.4%
-0.7%
6.1%
2.7%
3.4%

28.6%
N/A
2.3%
-11.8%
35.0%
14.4%
20.6%

28.6%
N/A
1.4%
-0.1%
15.9%
6.4%
9.5%

86.1%
N/A
2.5%
0.0%
11.4%
4.5%
6.9%

7.6%
N/A
0.5%
5.8%
3.7%
1.4%
2.3%

126.0%
6
10
81
162
60
6.09
7.38
11.0%

131.0%
7
18
121
206
55
6.6
7.57
22.0%

55.0%
8
14
218
236
49
7.52
N/A
40.0%

121.0%
4
28
45
82
28
5.41
13.21
308.0%

73.0%
15
29
114
161
43
8.48
16.24
50.0%

99.0%
9
19
74
103
33
11.01
47.28
41.0%

46.0%
3
7
62
80
52
7.08
30.97
33.0%

191.0%
4
11
75
95
36
10.18
49.22
32.0%

27.0%
22.7
2.15
1.45

24.0%
19.6
2.43
1.4

21.0%
17.8
2.53
0.95

10.0%
21.8
5.13
1.1

33.0%
20.9
4.58
0.9

20.0%
20.7
3.98
1.1

42.0%
20.9
1.52
N/A

43.0%
23.3
2.42
1.3

Selling, General & Admin. Exp.

(all Oper. Exp. for Co. H &

O)
Research and Development
Interest Expense
Other Expense (Income)
Income before taxes
Taxes
Net Income
Operating and Condition Ratios
Ratio of Sales to Assets
Return on Assets
Return on Equity
Quick (Acid-Test) Ratio
Current Ratio
Days Sales Outstanding
Receivable Turnover (times)
Inventory Turnover (times)
Ratio of Long-term debt to Equity

Market Data
Dividend Payout Ratio
Price-Earnings Ratio
Price-Book Ratio
Beta

III. Analysis of Financial Data:

A. Health Products
Company A is the manufacturer of a broad line of namebrand toiletries, non-prescription drugs and consumer
and baby-care products primarily because of a larger
market,
which
comprises
of
165
decentralized
subsidiaries; there is a presence of a higher gross
margin which accounts for 63.1% of the total revenue.
Company B is the manufacturer of pharmaceuticals and a
variety of low-margin hospital supplies which were
marketed primarily through direct sales to doctors and
hospitals because of the presence of a lower gross
margin of 36.0%. In addition, its other assets
comprise a large percentage of its total assets
(40.6%) , which can attributed to the goodwill
stemming from acquiring a large hospital supply
company.

B. Household Appliances
Company C is the marketer of high quality washers,
dryers, dishwashers and refrigerators under its own
name, primarily because of a presence of lower cost of
goods sold (72.8%) which infers that manufacturing and
selling under one brand name entails a lower cost. In
addition, its sales to assets ratio is much higher
(223.0%) which says that they are much concentrated in
utilizing their assets to generate more sales.
Company D is the marketer of the same products, but
under 3 different brand names. The presence of a
higher
cost
of
goods
sold
(79.3%)
infer
that
manufacturing and selling under different brand names
would require higher cost.

C. Computers
Company E is the manufacturer of large mainframe
computers which also provides financial and insurance
services. Receivables comprise 18.7 percent of total
assets which is significant in financing type of
business. In addition, when a company offers financial
services, it generates other income in the form of

interest, which can be seen in their income statement

(2.7%).
Company F is the manufacturer of supercomputer systems
for scientific applications. Its output may be small,
but its price tag is the highest in the industry,
which is why they have a lower cost of goods sold
(35.7%) due to a small number of units produced, but a
higher gross margin (64.3%) because of higher selling
prices. In addition, since the computers were used for
physical research, the company incurs research and
development expense (15.8%).

D. Retailing
Company
G
is
the
firm
that
operates
discount
department store and wholesale clubs. Its inventory is
large (51.7%) which is typical for a wholesaler. In
addition, the presence of a nominal amount of
receivable in its assets (1.9%), a very quick
receivable turnover (166.37) and a very short days
receivable outstanding (2 days) reflect that the
company is selling largely on cash.
Company H is the firm that operates a credit-based
department store. Its receivable comprise 34.7% of its
total assets. In addition, the presence of a very slow
receivable turnover (1.86) and a long days receivable
outstanding (196 days) reflect that the company is
relying largely on credit sales.

E. Electronics
Company I is the firm that produces semi-conductors,
with the defense industry as its primary market and
specializes on small desktop and hand-held computing
equipment. Compared with Company J, its total current
assets is only 50.9% as against 60.2% of Company K
which
represents
that
it
is
less
financially
conservative.
Company J is the financially-conservative firm that
produces semi-conductors, which specializes on radio
and television equipment. Its total current assets are
60.2%, 15.6 % of which is on cash & equivalents. This
means that the company is financially conservative.
Aside from semiconductor manufacturing, it is also
8

involved in manufacturing of television

equipment, which will explain the other
3.9%.

and radio
income of

F. Hotels
Company K is the firm that operated a worldwide chain
of high-quality hotels and motels in addition to a
smaller line of casinos. In contrast with Company L,
the long-term debt is much lower (21.6%) which can be
inferred that it personally finances its operations
and does not rely too much on debt financing, or those
that are financed by creditors.
Company L is the largest food contractor in the
country. Its financing is through off-balance sheet
limited partnerships. This can be proven by the
percentage of long-term debt to its total assets
(46.5%). It means that hotel operations rely too much
on the finances provided by creditors on a long-term
basis.

G. Newspapers
Company M is the newspaper company that owns a number
of
small
newspapers
throughout
the
Midwest.
Broadcasting, which is its secondary line of business
accounts for the total other income of 11.8%. In
addition, the presence of a higher other assets
(61.7&) results from the goodwill stemming from
acquisitions.
Company N is the large flagship newspaper that sells
around the country and around the world. As compared
to Company M, its other assets is lower (25.2%), but
since it operates worldwide, its assets should
comprise mostly of property, plant and equipment which
corresponds to Company Ns net PPE of 56.2%.

H. Transportation
Company O is the large national trucking and freight
forwarding company. Since this is a service type of
business, it does not incur cost of goods sold, which
can be clearly seen in its income statement. Majority
of its expenses are operating, which can be inferred

as the cost of service

freight-forwarding company.

which

is

typical

for

Company P is the railroad company. 20% of revenues was

said to be derived from real estate business which
will reflect on the companys receivables which
comprises 18.7% of the total assets. Its sales to
assets ratio (191%) reflects that it has diverse and
high selling products like real estate.

IV. Recommendation:
A. Health Products
Company A should continue to penetrate its market in
order to sustain the margin percentage. However, costbenefit considerations should also be considered such
that if maintaining its market would entail more cost
and will provide less benefits, it would be advisable
to reduce the number of its subsidiaries.
Company B should expand its market. It can be achieved
by having advertising projects aimed to mass market
their products in an effort to attract more consumers
and generate larger revenue.

B. Household Appliances
Company C should maintain its strategy to operate
under a single brand name. In addition, if the
companys sales to assets ratio can still be improved,
much better.
Company D, since selling under 3 different brand names
entail more cost, they should make an effort to reduce
brand names. However, qualitative factors should also
be considered such as the market demand for that
particular brand, its impact on consumers and its
contribution to the companys total income.

C. Computers
Company E, which also engages in financial and
insurance services, should take a closer look and
emphasize on credit management; that is, efficient

10

management of receivables, credit granting, and taking

precautions with regards to uncollectible accounts. In
addition, it should generate larger income in the form
of interest.
Company F should provide a balance of all sorts. A
company may have a larger margin but with its high
selling prices, it would not be attractive on the
consumers point of view. The company should expand on
its production and maintain reasonable level of R & D
costs.

D. Retailing
Company G should sell more on credit. A healthy
business enterprise allows for selling goods on credit
because it will generate more revenue and would be
attractive from the consumers viewpoint. However,
focus is still on the possibility of uncollectible
accounts, but nonetheless, it is still a necessary
cost of credit sales.
Company H should improve its financial ratios. They
may be selling on credit, but the realization of
receivables to cash is still very slow. They should
improve the collection methods which in turn will
improve receivable turnover, and days receivables
outstanding.
Note
that
selling
on
credit
only
postpones the collection of cash, and not to make it
uncollectible.

E. Electronics
Company I should be more financially conservative.
Note that having sufficient cash is the ultimate
requirement of being liquid. Cash is still what every
business wants.
Company J should maintain its being financially
conservative.
They
should
continue
to
provide
sufficient cash balance, enough to maintain working
capital necessary for operations.

11

F. Hotels
Company K should maintain its reliance on equity
financing, while also taking into consideration the
advantages of tapping debt in some situations.
Company
L
should
consider
the
advantages
and
disadvantages of relying on debt financing. It is
advisable to rely on debt if the firm is liquid enough
to pay its obligation upon maturity, however, there
are disadvantages of debt financing the entity should
consider such as: (1) Since debt requires a fixed
charge, there is a risk of not meeting this obligation
if the earnings of the firm fluctuate; (2) Debt adds
risk to the firm; (3) Certain managerial prerogatives
are usually given up in the contractual relationship
outlined in the contract (Example: specific ratios
must be kept above certain level during the term of
the loan, restrictions in paying dividends).

G. Newspapers
Company
M
should
improve
on
its
broadcasting
operations, since it provides benefit on the firms
operations. It would be a great mix if the firm could
find the balance between the print media and visual
media operations.
Company
N
should
maintain
its
international
operations. Aside from the non-financial benefits of
operating on a global market, the worldwide operation
would attract more market, and would be a cause of
larger revenue. In addition, they should utilize more
their
property,
plant
and
equipment
in
their
operations.

H. Transportation
Company O should reduce the cost of service at a
reasonable level. Note that incurring more costs would
decrease net income.
Company P should improve on its real estate business,
since, like Company M in the Newspaper industry, it
provides additional benefits on the company.

12