Analysis Of Financial Statement Data †Free Samples For Students

Question: How To Analysis Of Financial Statement Data? Answer: Introduction The financial statements of a company portray its characteristics and could indicate the industry which the company belongs to. Further, it is commonly observed that the companies operating in the same industry show similarities in their financial statements. Thus, by analyzing the financial statements the industries could be identified which the companies belong to (Thompson, 2006). In this context, this report carries out an analytical exercise on the financial statements of nine companies to identify the industries. Segregation of Companies into Service, Manufacturing, and Retail Sector The common point that segregates the service industry from the manufacturing industry is the cost of goods sold ratio and gross profits ratio. Generally, it is observed that the cost of goods sold remains low in the service industry due to higher proportion of indirect costs. Further, since the cost of goods sold is lower therefore the gross profit margin remains high. Apart from this, the most of the firms engaged in service industry are supposed to have low investment in the property, plant and equipment (Atsuyuki, 2010). In the given case of nine companies, it has been observed that the company-2, company-3, company-4, and company-5, show similar characteristics in regards to cost of sales, gross profit, and gross investment in property, plant and equipment. The company-2, company-3, company-4, and company-5, has ratio of cost of goods sold to sales of 30.30%, 25.20%, 15.60%, and 22.70%. Further, the gross margin ratios of these companies are 69.70%, 74.80%, 84.40%, 77.30%, and 87.40% which are higher than other companies. The percentage of total assets to net value of property, plant and equipment of company-2, company-3, company-4, and company-5 is 12.20%, 33.50%, 22.70%, and 7.10% respectively. The investment in the property, plant and equipment of these four companies is low as compared to other companies, which indicates that these companies belong to service sector. Only one company i.e. company-3 has heavy investment in property, plant and equipment, so this company might be in airlines operations service industry. Thus, from the analysis of crucial financial figures, it appears that company-2, 3, 4, 5, and 7 belongs to service sector while the rest of the companies such as company-1, 6, 8, and 9 belong to either manufacturing or retail sector. In respect of company-9, it could be observed that the cost of sales to sales ratio is 80.70% which is very high. Due to high cost of sales to sales ratio, the gross profit margin is at 19.30%. The cost of sales is supposed to be higher in the retail sector comparing with manufacturing sector. Therefore, company-9 appears to be from retail sector. The analysis of companys financial figures depicts that the company belongs to RD based pharmaceutical industry. The gross profit of the company is 57.19% and investment in the net property, plant and equipment is 40.00% of total assets. The high investment in the property, plant and equipment depicts that the company engages in manufacturing industry. Further, it has been observed that the intangible assets of the company account for 47.60% of the total assets. Heavy investment in intangibles is required in the pharmaceutical industry. Thus, looking at the magnitude of the investment in intangible assets it seems that the company operates in the RD based pharmaceutical industry (Beynon Porter, 2000). This company has a gross profit margin of 69.70% which indicates that this company operates in the service sector. Further, the company has intangible assets amounting to 34.70% of the total assets. The companies engaged in software development activities generally have high amount invested in the intangible assets. Further, low investment in the property, plant and equipment also suggests that the company operates in the service industry. The gross margin of company-3 is 74.80% and the cost of sales is low, which indicates that the company operates in the service sector. Further, the investment in property, plan and equipment of the company amounts to 33.50% of the total assets. The two factors such as high gross margin and high investment in the property, plant and equipment indicate that the company operates in airlines industry (Vasigh, Fleming, Humphreys, 2014). The investment in plant and equipment is generally high in the case of airline companies because of costly aircrafts. Further, the administration expenses also tend to be high in airline companies. This has a ratio of selling and administrating expense of 41.7% which is quite high. The company has a low cost of goods sold to sales ratio of 15.60% and high gross margin of 84.40%. This entails that the company operates in service sector. Further, the investment in property, plant and equipment is worth 22.70% of the total assets. The company also has got significant amount tied in intangible assets as depicted from the ratio of intangibles to total assets of 13.80%. The companies operating in the mobile phone industry have such characteristics as depicted by this company. Therefore, it could be inferred that company-4 operates in the mobile phone industry. Company-5 has a high gross margin of 77.30% which is indicative of the fact that the company operates in service sector. Companys investments on the property, plant and equipment are very low. The investment in property, plant and equipment bears a ratio of 7.10% to total assets of the company, which indicates that the requirement of property, plant and equipment is negligible for the business that the company is engaged in. Further, most important factor observed in the case of this company is ratio of cash short term investments to total assets. This ratio is 51.90% which is very high and it indicates that half of the companys assets are cash or cash equivalent. The characteristics shown by the companys financial statement matches with the banking industry (Elliott, 2014). Therefore, it could be inferred that company-5 operates in the commercial banking industry. The company earns a gross margin of 22.70% which is low and it indicates that the company operates in the manufacturing sector. Further, net value of property, plant and equipment of this company amounts to 68.30% of total assets, which is highest among all the nine companies given in the case study. Based on the fact that the company has highest investment in property, plant and equipment, it could be inferred that the company operates in Oil and Gas industry. The company-7 has a net margin of 20.20% and it invests 0.8% of total funds in property, plant and equipment. Further, it has a high gross profit margin of 87.40%. The intangible assets of the company amount to 3.30% of total assets. The characteristics shown by the financial statements of the company indicates that this company operates in RD based semi conductor industry. The gross margin of company eight is 26.40% which indicates that it operates in manufacturing sector. Further, more than half of the total assets of the company comprises of property, plant and equipment. The ratio of net value of property, plant and equipment to total assets is 57.70%. Further, net margin of the company is low at 3.50% due to high administrative and financing expenses. The characteristics depicted from the analysis of financial figures of the company shows it belongs to liquor producer and distributor industry. In the retails sector transactions of purchase and sales occurs at heavy volume. Further, most of cost of the business is accounted in the form of cost of revenues/sales. The costs other than cost of sales are supposed to be low in a company engaged in the retail sales operations. The intangible assets are also supposed to be negligible in the case of a company engaged in the retail sales (Study.com, 2017). In the case of company-9 it has been observed that the cost of sales eats 80.70% of the total sales, which quite high. Further, other costs such as selling and administration are low only at 3.80% of sales. Company-9 does not own intangible assets. The characteristics of retail sales industry are matching with the financial figures and ratios of the company. This implies that the company-9 could be inferred to be operating in the retail sales industry. Conclusion This paper presents the analysis of financial figures of nine companies for the purpose of identifying the industries to which these companies belong. From the analysis carried out in this paper it could be inferred that to indentify the industry it is crucial understand the features of finical statements. The relationships between the data shown through ratios indicate about the business operations of the company. For instance, the company having low ratio of cost of goods sold to sales could be related to service sector. On other hand, the companies having high cost of goods sold to sales ratio could be related to manufacturing sector. Further, the investment in the property, plant and equipment, position of cash and cash equivalents, and amount of inventories also helps in indentifying the nature of business of the company; References Atsuyuki, K. 2010. Similarities and Differences between the Manufacturing and the Service Sectors: An empirical analysis of Japanese automobile related industries. Retrieved August 10, 2017, from https://www.rieti.go.jp/jp/publications/dp/10e057.pdf Study.com. 2017. Retail Trade: Definition, Characteristics Examples. Retrieved August 10, 2017, from https://study.com/academy/lesson/retail-trade-definition-characteristics-examples.html Beynon, K. Porter, A.D. 2000. Valuing Pharmaceutical Companies: A Guide to the Assessment and Evaluation of Assets, Performance and Prospects. Woodhead Publishing. Vasigh, B., Fleming, K., Humphreys, B. 2014. Foundations of Airline Finance: Methodology and Practice. Routledge. Elliott, D.J. 2014. Bank Liquidity Requirements: An Introduction and Overview. Retrieved August 10, 2017, from https://www.brookings.edu/wp-content/uploads/2016/06/23_bank_liquidity_requirements_intro_overview_elliott.pdf Thompson. 2006. Crafting and Executing Strategy: The Quest For Competitive Advantage (Special Indian Edition). Tata McGraw-Hill Education.