Professor Partha S. Mohanram
Hints on How to Identify Firms from Financial Statements
This exercise is a neat way to learn about how industrial characteristics and firm specific strategic choices affect financial statements. Here are a few hints to help you solve such problems.
1. Group Companies according to Industry.
2. Identify obvious industrial traits. For instance
• Which industries are likely to have high levels of property plant and equipment
• Which industries are likely to have high cash balances and which ones are likely to have low cash balances?
• Which industries are likely to have high levels of inventories and which are likely to have low levels of inventories?
• How large is the Balance Sheet with respect to the Income Statement?
• And so on and so forth…...
3. Look for obvious hints in the financial statements
• Are there any statements with some items that most others lack? (e.g. R&D)
• Are there statements lacking some items that most others have? (e.g. Inventories)
• Are some numbers distinctively larger or smaller than others?
Try to match industries with groups of statements. For example, if Firms A, B, and D are in the Finance industry and you think statements x, y and z seem to match them well, keep them aside as a “broad” match”.
5. Try to narrow the broad matches using firm specific strategic information. What can you say about the strategies of A,B,D that lets you match them more specifically with x, y or z?
6. Use a process of elimination to match the remaining firms. It gets easier once you are sure of the first 5-6 matches.
7. Don’t be afraid to make changes if you find another firm matches your original choice better.
Financial Statement Analysis
Professor Partha S. Mohanram
Identify the Firms
Use the data in these “common sized” financial statements to uncover which financial statements belong to which of these firms. All items are expressed as a percentage of sales – i.e. how large each of the items are with respect to $100 of sales. A brief description of the firms follows to assist you in the process. Remember – these financial statements do not have to be from the most recent year.
1. US Steel – manufactures and sells a range of steel products.
2. American Insurance Group – sells a broad range of insurance products. Revenues include premiums from customers and revenues earned from cash received from customers. Expenses include amounts paid out or expected to be paid out for claims.
3. Gillette – makes and sells a wide range of consumer personal grooming products. Has made a lot of acquisitions recently.
4. Hewlett Packard – the firm develops, manufactures and sells computer hardware, with a large part of the manufacturing outsourced. 5. Household International : A firm that lends money to consumers for periods ranging from few months to many years. A big part of expenses is the estimated uncollectable loans.
6. Interpublic Group : A media services firm. Creates advertising copy. Purchases ad time and space. Revenues are commissions for these services. Has made a lot of acquisitions recently.
7. Kelly Services : A “temp” agency. Hires out temporary help.
8. Lands End : An catalog based apparel selling firm. Most revenues through 3 rd party credit card. Sells own branded merchandise.
9. TJX Enterprises : Owns TJ Maxx and Marshalls – clothing stores. Sells bargain priced “famous maker” apparel.
10. McDonalds – Operates fast food restaurants, both thru firm owned as well as franchised operations. McDonalds often owns and leases properties to franchisees under long term leases.
11. Newmont Mining – Mines gold and other metals. R&D includes exploration costs, but can be zero if there is no exploration
12. Wendys – Similar to McDonalds, but Wendys owns most of its restaurants.
Use the hints in the handout to guess which firm is which. Use your common sense about these firms, these…