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Identifying Industries from Financial Statement Data


Submitted By MiloCC
Words 1848
Pages 8

Graeme Rankine

Identify the Industry—Analysis of Financial Statement Data
Since companies in the same industry face similar opportunities and constraints, they tend to make similar invest- ment, dividend, and financing decisions. Thus, the financial characteristics of firms in the same industry tend to cluster together. For example, old economy businesses with large amounts of tangible assets may have higher leverage ratios because such assets provide good collateral for lenders. Service or trading firms may have large amounts of intangible assets such as knowledge assets or a large and loyal customer base, and, hence, have low leverage ratios because growth options can devalue quickly. On the other hand, companies in different industries tend to exhibit different financial characteristics, as measured by financial ratios, because of cross-sectional dif- ferences in operating and financing decisions. With some knowledge of the different operating, investing, and financing decisions across industries, financial ratios may be used to identify an industry (see Exhibit 1 for the definition of ratios used).

Common-sized balance sheets (all items scaled by total assets), common-sized income statements (all items scaled by net sales), and selected financial ratios for the nine companies are provided. Since unusual deviation from target values may occur in any given year, the values for the items were averaged over three years. The three- year average common-sized balance sheet, common-sized income statement, and financial ratios are reported in Exhibits 2, 3, and 4, respectively.
The 9 companies are drawn from the following 9 different industries:
• Liquor producer and distributor
• Discount airline
• Commercial bank (items fitted into the same categories as the non-financial firms)
• Computer software company
• Large integrated oil and

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