Drivers of Industry Financial Structure
In order to facilitate our analysis we divided the companies into services, retail and R&D. The first step was to divide the balances between the ones that had a value for R&D/Sales and the ones that didn’t. So we have balance sheets A, F, G and J and the companies that require R&D are the Developer of Prepackaged Software, the On-line Retailer, the Pharmaceutical Company and the Manufacturer of Electronic Communications Equipment. Now we have six remaining balance sheets and six companies. We divided these remaining companies into services and retail. Companies in the service business usually have low inventories so we have balance sheets C, D and ...view middle of the document...
All this leads us to believe that balance sheet A corresponds to the On-line Retailer, but let’s look at some other values in the balance sheet to be certain.
On-line retailers should have some cash & marketable securities because they usually have relatively high profit margins but they don’t need to spend much cash in a physical location and as we can see in balance sheet A, this company has 28,6% of cash & marketable securities, 12,9% in net plant & equipment and a gross margin of 17,7%. On-line retailers had a relatively high goodwill level during the period of 1999-2000 because there was a tendency for on-line companies to buy smaller companies in order to grow and this is visible in balance sheet A where the Goodwill is 29,5%. Also, during this period we had the dotcom bubble, which accounts for the negative value of Net Income/Sales of 43,9% that we have in the balance sheet and this, combined with the acquisition of smaller companies, may explain the high value of long-term debt. Finally, because this is still a retail company we expect to see a substantial value of inventory turnover which is exactly what we see in balance sheet A with a value of 6,1.
We can conclude that balance sheet A corresponds to the On-line Retailer.
Developer of Prepackaged Software
We will now analyze the Developer of Prepackaged Software. A Developer of Prepackaged Software should have a high R&D/sales (19,8%) value because they have to constantly renew their knowledge on the existing software and develop new software, a very high gross margin (90,7%) because it is very easy to duplicate software and they will probably have no inventories seeing as prepackaged software is stored in computers and they are probably made by order instead of being constantly reproduced. When we look at the balance sheets and search for the one, which fulfills all these conditions, we see that J is the balance sheet that corresponds to the Developer of Prepackaged Software.
However, we should analyze some other values in the balance sheet in order to make sure that this is the right balance sheet. The cash & marketable securities of a software developer should be very high because they have a very high gross margin and seeing as they don’t spend money on inventories and spend very little on a physical space which is visible in balance sheet J where cash & marketable securities is 62% and net plant & equipment is 8,6%. They should also have some receivables and, probably, no goodwill or intangibles because they develop prepackaged software, they don’t create software, which means they don’t register patents or anything of the sort. This sort of company may have some unearned revenues because they may make some sales by credit card, which always presents some level of risk. As was said before, it is very easy to reproduce software so this type of company should have a high Net Income/Sales. Finally, they should also have a very high fixed asset turnover because they have...