Undefined ratios accounting
Case Study
HBS: The case of the Unidentified Ratios
Based on the information provided by the common-sized financial statements, we came up to the conclusion that:
Firm A – Investment Bank
Main reasons:
High level of leverage, demonstrated in the highest ratios of all companies: assets/equity and debt/equity.
Highest number of days of receivable – banks lend money to their costumers (ex. long term loans) and expect to receive this money in a not very short period of time, reflected in the days of receivables (1941 days = 5.3 years approximately).
Low level of equity, characteristics of investment banks, which in this case only represents 8.5% of its structure, and is also the lowest from all the firms.
Firm B – Warehouse shopping club
Main reasons:
This company has a high level of inventory (17.3%) and a high level of inventory turnover (11.0).
Compared to the supermarket chain, this company has a higher percentage of net, plant and equipment (65.4% vs. 46.5%) and higher margins, since generally they have more value aggregated products. The warehouse-shopping club also has a similar number for days of receivables, characteristics of the payments in cash and payment cards.
Firm C – Express delivery firm
Main reasons:
Among all firms, we realize that firm C has the highest percentage for long-term debt (32.9%), characteristic of this type of companies that need long term debt to finance many of their assets.
In terms of days of receivable, this firm has an average number (41.2) as generally they give credit to some of its costumers.
If we see its intangibles (21%) we also see this takes into account a representative number of non-current assets, that might come from its brand name, know-how, etc.
Firm D – Hotel Chain
Main reasons:
This company has a high level of non-current assets (59.7%), typical from hotel chains that have generally real estate properties.
This company has a modest long-term debt policy that represents only
HBS: The case of the Unidentified Ratios
Based on the information provided by the common-sized financial statements, we came up to the conclusion that:
Firm A – Investment Bank
Main reasons:
High level of leverage, demonstrated in the highest ratios of all companies: assets/equity and debt/equity.
Highest number of days of receivable – banks lend money to their costumers (ex. long term loans) and expect to receive this money in a not very short period of time, reflected in the days of receivables (1941 days = 5.3 years approximately).
Low level of equity, characteristics of investment banks, which in this case only represents 8.5% of its structure, and is also the lowest from all the firms.
Firm B – Warehouse shopping club
Main reasons:
This company has a high level of inventory (17.3%) and a high level of inventory turnover (11.0).
Compared to the supermarket chain, this company has a higher percentage of net, plant and equipment (65.4% vs. 46.5%) and higher margins, since generally they have more value aggregated products. The warehouse-shopping club also has a similar number for days of receivables, characteristics of the payments in cash and payment cards.
Firm C – Express delivery firm
Main reasons:
Among all firms, we realize that firm C has the highest percentage for long-term debt (32.9%), characteristic of this type of companies that need long term debt to finance many of their assets.
In terms of days of receivable, this firm has an average number (41.2) as generally they give credit to some of its costumers.
If we see its intangibles (21%) we also see this takes into account a representative number of non-current assets, that might come from its brand name, know-how, etc.
Firm D – Hotel Chain
Main reasons:
This company has a high level of non-current assets (59.7%), typical from hotel chains that have generally real estate properties.
This company has a modest long-term debt policy that represents only