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.
Step Industry Common Characteristics Companies
1 Service  Almost no inventories
 Inventory turnover negligible  Major passenger airline
 Regional bank
 Temporary office personnel agency
 Hotel chain
 For-profit hospital chain
2 Merchandizing  High and similar inventory level
 Leverage ratio is nearly identical  Upscale department store chain
 Warehouse club
 Discount department store chain
3 Manufacturing  High plant & equipment  Manufacturer of oral, personal, and household care products
 Defense contractor
4 Other  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

Company Industry-related explanations
A Major
Passenger
Airline  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
E Regional
Bank  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
K Temporary Office Personnel
Agency  High receivables (55.4%): Often