THE FINANCIAL DETECTIVE, 2005

THE FINANCIAL DETECTIVE, 2005

1. Comparisons among industries This case is primarily about the effects of managerial strategy on financial ratios, but it also affords several insights about the effect of industry differences on financial ratios. For instance, differences in asset intensity can produce dramatically different asset structures (for example, compare the percentages of inventory and net property, plant, and equipment [PP&E] for paper products with computers). The rate of technological change can manifest itself in several ways including the reinvestment rate required to stay competitive (for example, compare dividend-payout ratios for newspapers, and books and music). Industry structure is believed to affect the profitability through the pricing power of the firm. The newspaper industry can be characterized as locally oligopolistic (in some areas, however, monopolistic); the discount retail industry is much more competitive in structure. The gross profit margins of the two industries differ substantially. The general insight for students must be that, in conducting the financial analysis of a firm, one must understand the nature of the industry.

2. Comparisons of pairs of companies within industries For each of the industry, analyse and comment the financial ratios performance of both companies in the industry, in particular, the impact that different business strategies will have on the financial ratios of the companies.

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