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CASE
7
The Financial
Detective, 2005
Financial characteristics of companies vary for many reasons. The two most promi-
nent drivers are industry economics and firm strategy.
Each industry has a financial norm around which companies within the industry
tend to operate. An airline, for example, would naturally be expected to have a high
proportion of fixed assets (airplanes), while a consulting firm would not. A steel
manufacturer would be expected to have a lower gross margin than a pharmaceutical
manufacturer because commodities such as steel are subject to strong price competi-
tion, while highly differentiated products like patented drugs enjoy much more pricing
freedom. Because of unique economic features of each industry, average financial
statements will vary from one industry to the next.
Similarly, companies within industries have different financial characteristics, in
part, because of the diverse strategies that can be employed. Executives choose strate-
gies that will position their company favorably in the competitive jockeying within an
industry. Strategies typically entail making important choices in how a product is
made (e.g., capital intensive versus labor intensive), how it is marketed (e.g., direct
sales versus the use of distributors), and how the company is financed (e.g., the use
of debt or equity). Strategies among companies in the same industry can differ dra-
matically. Different strategies can produce striking differences in financial results for
firms in the same industry.
The following paragraphs describe pairs of participants in a number of different
industries. Their strategies and market niches provide clues as to the financial condition
and performance that one would expect of them. The companies’ common-sized financial
statements and operating data, as of early 2005, are presented in a standardized format
in Exhibit 1. It is up to you to match the financial data with the company descriptions.
Also, try to explain the differences in financial results across industries.

This case was prepared by Sean Carr, under the direction of Robert F. Bruner. It was written as a basis for
class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright © 2005 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication
may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any
means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the
Darden School Foundation.

119
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120 Part Two Financial Analysis and Forecasting

Health Products
Companies A and B manufacture and market health-care products. One firm is the
world’s largest prescription-pharmaceutical company. This firm has a very broad and
deep pipeline of ethical pharmaceuticals, supported by a robust research and devel-
opment budget. In recent years, the company has divested several of its nonpharma-
ceutical businesses, and it has come to be seen as the partner of choice for licensing
deals with other pharmaceutical and biotechnology firms.
The other company is a diversified health-products company that manufactures
and mass markets a broad line of prescription pharmaceuticals, over-the-counter reme-
dies (i.e., nonprescription drugs), consumer health and beauty products, and medical
diagnostics and devices. For its consumer segment, brand development and manage-
ment are a major element of this firm’s mass-market-oriented strategy.

Beer
Of the beer companies, C and D, one is a national brewer of mass-market consumer
beers sold under a variety of brand names. This company operates an extensive network
of breweries and distribution systems. The firm also owns a number of beer-related
businesses, such as snack and aluminum-container manufacturing, and several major
theme parks.
The other company produces seasonal and year-round beers with smaller produc-
tion volume and higher prices. This company outsources most of its brewing activity.
The firm is financially conservative, and has recently undergone a major cost-savings
initiative to counterbalance the recent surge in packaging and freight costs.

Computers
Companies E and F sell computers and related equipment. One company focuses
exclusively on mail-order sales of built-to-order PCs, including desktops, laptops,
notebooks, servers, workstations, printers, and handheld devices. The company is an
assembler of PC components manufactured by its suppliers. The company allows its
customers to design, price, and purchase through its Web site.
The other company sells a highly differentiable line of computers, consumer-
oriented electronic devices, and a variety of proprietary software products. Led by its
charismatic founder, the company has begun to recover from a dramatic decline in its
market share. 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.

Books and Music

The book and music retailers are companies G and H. One focuses on selling pri-
marily to customers through a vast retail-store presence. The company is the leader
in traditional book retailing, which it fosters through its “community store” concept
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Case 7 The Financial Detective, 2005 121

and regular discount policy. The firm also maintains an online presence and owns a
publishing imprint.
The other company sells books, music, and videos solely through its Internet Web
site. While more than three-quarters of its sales are media, it also sells electronics and
other general merchandise. The firm has only recently become profitable, and it has
followed an aggressive strategy of acquiring related online businesses in recent years.

Paper Products
Companies I and J are both paper manufacturers. One company is the world’s largest
maker of paper, paperboard, and packaging. This vertically integrated company owns
timberland; numerous lumber, paper, paperboard, and packing-products facilities; and
a paper-distribution network. The company has spent the last few years rationalizing
capacity by closing inefficient mills, implementing cost-containment initiatives, and
selling nonessential assets.
The other firm is a small producer of printing, writing, and technical specialty
papers, as well as towel and tissue products. Most of the company’s products are mar-
keted under branded labels. The company purchases the wood fiber used in its paper-
making process on the open market.

Hardware and Tools

Companies K and L manufacture and sell hardware and tools. One of the 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 pri-
marily to retailers, wholesalers, and distributors. Its products appear under a variety
of well-known brand names and are geared for the end user.
The other tool company manufactures and markets high-quality precision tools
and diagnostic-equipment systems for professional users. The firm offers a broad
range of products, which it sells via its own technical representatives and mobile fran-
chise dealers. The company also provides financing for franchisees and for customers’
large purchases.

Retailing
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 areas.
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
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122 Part Two Financial Analysis and Forecasting

nondiscount department-store businesses. To support sales and earnings growth, this

company offers credit to qualified customers.

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.
The other firm owns a number of newspapers in relatively small communities
throughout the Midwest and the Southwest. Some analysts view this firm as holding
a portfolio of small local monopolies in newspaper publishing. This company has a
significant amount of goodwill on its balance sheet, stemming from acquisitions. Key
to this firm’s operating success is a strategy of decentralized decision making and
administration.
 EXHIBIT 1 | Common-Sized Financial Data and Ratios
Health Prod. Beer Computers Books & Music Paper Tools Retail Newspapers

Assets A B C D E F G H I J K L M N O P

Cash & Short-Term Investments 24.2 16.1 1.4 55.6 42.2 67.9 54.8 16.2 7.6 5.9 9.3 6.5 4.6 7.0 0.6 1.1
bru6171X_case07_119-124.qxd

Receivables 12.8 8.1 4.3 11.9 19.0 13.0 nmf 2.3 8.8 10.9 18.9 23.7 1.4 17.0 4.6 9.9
Inventories 7.0 5.4 4.3 11.7 2.0 1.3 14.8 38.6 7.9 14.4 17.8 14.9 24.5 16.7 0.8 0.8
Current Assets-Other 7.2 2.5 1.3 2.4 9.5 5.5 8.6 2.6 3.0 1.4 7.0 6.9 1.5 2.5 0.7 3.8
Current Assets-Total 51.2 32.1 11.2 81.7 72.8 87.6 78.2 59.7 27.2 32.6 52.9 52.1 32.0 43.1 6.6 15.5
Net Fixed Assets 19.6 14.9 54.7 16.0 7.3 8.8 7.6 24.4 50.8 62.5 13.6 13.7 57.0 52.2 14.1 34.6
11/24/12

Assets-Other 6.9 3.8 7.2 1.0 1.3 2.4 9.3 4.9 5.4 3.1 11.8 8.9 2.0 4.0 0.1 7.2
Intangibles 22.2 46.1 7.4 1.3 0.0 1.2 4.4 11.1 14.6 1.9 21.4 22.3 9.0 0.6 76.8 37.1
Investments & Advances 0.1 3.1 2.9 0.0 18.6 0.0 0.0 0.0 0.0 0.0 0.0 3.0 0.0 0.0 0.7 0.0
Assets-Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
2:31 PM

Liabilities & Equity

Accounts Payable 9.8 2.2 7.4 9.1 38.3 18.0 35.1 22.6 6.7 8.5 8.4 8.5 18.0 17.9 1.4 4.8
Debt in Current Liabilities 0.5 9.1 0.0 0.0 0.0 0.0 0.1 0.0 1.5 0.0 3.5 5.6 6.5 1.6 0.8 14.9
Income Taxes Payable 2.8 1.6 0.9 1.7 0.0 0.0 0.0 0.0 0.0 1.2 0.9 1.0 1.1 0.9 0.3 nmf
Page 123

Current Liabilities-Other 13.0 8.5 3.8 13.7 22.6 15.3 14.7 17.6 6.1 7.1 19.5 14.4 10.1 5.1 5.1 8.7
Current Liabilities-Total 26.1 21.4 12.2 24.4 60.9 33.3 49.9 40.2 14.2 16.7 32.4 29.4 35.7 25.5 7.5 28.3
LT Debt 4.8 5.9 51.2 0.0 2.2 0.0 56.9 7.4 41.3 18.3 21.7 8.9 19.7 28.0 14.4 11.9
Deferred Taxes 0.8 10.2 10.7 1.9 0.0 0.0 nmf 5.9 5.0 12.0 3.1 3.3 nmf 3.0 15.0 3.3
Liabilities-Other 8.6 7.3 9.5 0.7 8.9 3.7 0.2 11.0 10.9 12.4 14.6 8.9 2.5 3.2 0.7 17.5
Liabilities-Total 40.3 44.8 83.5 27.1 72.1 36.9 107.0 64.7 75.9 59.5 71.8 51.5 58.9 59.7 37.5 64.5
Stockholders’ Equity 59.7 55.2 16.5 72.9 27.9 63.1 (7.0) 35.3 24.1 40.5 28.2 48.5 41.1 40.3 62.5 35.5
Total Liabilities & Equity 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Income/Expenses

Sales-Net 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of Goods Sold 23.9 11.1 53.9 38.5 81.0 70.9 75.8 69.5 75.3 82.9 61.0 51.6 75.3 67.1 49.7 40.5
Gross Profit 76.1 88.9 46.1 61.5 19.0 29.1 24.2 30.5 24.7 17.1 39.0 48.4 24.7 32.9 50.3 59.5
SG&A Expense 44.5 46.7 17.3 50.5 9.7 23.1 16.9 21.8 12.0 7.3 24.8 38.9 17.9 22.5 23.0 39.7
Depreciation 4.5 9.7 6.2 2.0 0.7 1.8 1.1 3.7 6.1 5.8 2.6 2.5 1.5 2.7 7.0 4.1
Earnings Before Interest &Taxes 27.2 32.5 22.5 9.0 8.6 4.2 6.2 5.0 6.6 4.0 11.7 6.9 5.3 7.7 20.2 15.6
Nonoperating Income (Expense) 0.7 1.1 2.9 0.3 0.4 0.7 0.3 0.1 0.4 0.1 0.6 0.1 0.8 0.0 1.3 0.4
Interest Income (Expense) (0.7) 0.7 2.9 0.0 0.0 0.0 1.5 0.3 3.3 1.0 1.1 1.0 0.5 1.0 1.9 1.6
Special Items-Income (Expense) (0.0) (6.3) 0.2 0.0 0.0 (0.3) 0.1 (0.3) (0.8) 0.0 0.0 (1.0) 0.0 (0.2) 0.0 (0.1)
Pretax Income 27.1 26.7 22.8 9.2 9.0 4.6 5.1 4.5 2.9 3.1 11.2 5.1 5.6 6.5 19.7 14.4
Income Taxes-Total 9.1 5.1 7.8 3.5 2.8 1.3 (3.4) 1.9 0.8 1.2 3.0 1.6 2.0 2.4 7.1 5.6
Net Income (Loss) 18.0 21.6 15.0 5.8 6.2 3.3 8.5 2.9 (0.1) 2.0 8.4 3.4 3.6 6.8 12.6 8.9

123
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EXHIBIT 1 | Common-Sized Financial Data and Ratios (Continued )
Health Prod. Beer Computers Books & Music Paper Tools Retail Newspapers
bru6171X_case07_119-124.qxd

Market Data A B C D E F G H I J K L M N O P

Beta 0.65 0.85 0.55 0.60 1.20 1.05 1.70 0.51 1.15 1.10 1.00 1.00 0.85 1.10 0.85 0.90
Price/Earnings 22.29 22.32 16.85 19.73 30.48 41.85 27.32 21.63 30.97 33.78 13.64 23.01 18.97 24.19 20.54 13.29
Price to Book 5.93 3.08 13.99 2.56 17.46 5.13 nmf 2.36 1.91 1.80 4.65 1.85 4.23 3.64 2.07 3.09
11/24/12

Dividend Payout 38.21 46.28 33.16 0.00 0.00 0.00 0.00 0.00 101.46 86.16 15.30 70.62 21.56 14.85 37.53 30.81

Liquidity

Current Ratio 1.96 1.50 0.92 3.35 1.20 2.63 1.57 1.49 1.91 1.94 1.63 1.77 0.90 1.69 0.88 0.55
2:31 PM

Quick Ratio 1.42 1.13 0.47 2.77 1.01 2.43 nmf 0.46 1.15 1.00 0.87 1.03 0.17 0.94 0.69 0.39

Asset Management

Inventory Turnover 3.08 0.93 12.60 7.44 67.96 74.78 13.56 2.42 6.75 7.11 3.89 3.59 7.69 5.86 33.35 43.48
Receivables Turnover 7.06 5.47 21.87 18.68 12.23 8.28 nmf 72.11 8.68 11.64 5.82 4.42 192.73 8.31 10.98 8.50
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Fixed Assets Turnover 4.67 2.86 1.72 12.67 30.68 12.03 29.42 6.54 1.43 1.86 7.63 7.50 4.50 2.77 3.43 2.59

Debt Management

Total Debt/Total Assets 5.34 14.99 51.19 0.00 2.18 0.00 56.94 7.42 42.78 18.36 25.21 14.45 26.16 29.54 15.22 26.81
LT Debt/Shareholders’ Equity 8.06 10.66 310.28 0.00 7.79 0.00 nmf 21.01 171.21 45.32 77.03 18.29 47.92 69.34 23.04 33.66
Interest Coverage After Tax 27.34 32.57 6.25 nmf 191.19 93.00 6.49 9.52 1.56 2.98 8.62 4.55 8.86 4.92 7.83 6.69

DuPont Analysis

Net Profit Margin 17.97 21.58 15.00 5.76 6.18 3.33 8.50 2.53 1.87 1.96 8.17 3.39 3.59 4.02 12.65 8.86
Asset Turnover 0.93 0.44 0.97 2.23 2.31 1.11 2.56 1.43 0.73 1.20 1.11 1.09 2.54 1.47 0.48 0.85
Return on Equity 26.75 16.64 83.97 15.95 46.92 5.44 nmf 10.58 5.79 5.71 28.30 7.36 20.79 14.47 9.86 20.89

Sources of data: S&P’s Research Insight; Value Line Investment Survey.

nmf = not a meaningful figure.