The Financial Detective Task

Examine & analyze the financial ratios for pairs of unidentified companies.

Food industry

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From the market data, the beta of company B is slightly higher than company A. Company A appears to be less risky than company B. It is likely because company A is a diversified health-products company. Since it manufactures various products and involves in different segments, risk could be reduced. The liquidity ratios show that both companies A and B might not face liquidity problem. Current ratio and quick ratio of company A are higher than company B.

Company A holds more current asset in term of cash and short term investments. These cash and short term investments can be used to invest in the future. In terms of asset management, company A has a higher inventory turnover than company B. This is probably due to the mass-market-oriented strategy adopted by company A. In this strategy, activities of buying and selling of inventories are done frequently. The more frequent stocks are being bought and sold, the higher the inventory turnover. Moreover, company A focuses on brand development and management.

It is believed that another reason for the higher inventory turnover is likely due to the efficient stock management practiced by company A. Debt management ratios reveal that company B uses more debt in financing than company A. It is due to company B needs more capital for the research and development budget. From the view point of DuPont analysis, asset turnover of company B is lower than company A. According to the company description, company B has divested several of its business. Thus, its total assets decreased and use lesser assets to generate sales.


According to the ratios given, it shows that Company C exposed in lower risk than Company D does which shown in the beta level, this might due to the seasonal production of Company D which heavily rely on the sales volume during that particular seasonal period. Besides that, from the asset management, apparently there’s a much lower result in fixed asset turnover for Company C. This probably due to the company has involved in several different sector businesses which consists of loads of fixed assets volume.

Whereas, company D might merely focusing smaller production which requires lesser fixed assets in the production process compared with the former company. From the liquidity management ratios given, the Company D has achieved and places itself in a safer position in paying the current liabilities. It was led by a high level of cash and short term investments kept by the company. This is maybe due to the company’s customers demanding pattern as it requires keeping quite a certain amount of inventories and cash to meet the customers’ needs.

Meanwhile, for Company D, it might because of the company’s entire year sales can be pre-determined consistently by the company. From the Dupont analysis, Company D has a much lower Return On Equity (ROE) result than Company C because of the lower net income generated and a greater volume of SG&A expenses. This is maybe due to the smaller production volume at the particular season, eventually cannot achieve and enjoy a lower cost per unit of goods like Company C does.


From the market data shown, it is believed that Company F is in a lower risk bracket than Company E. The lower debt incurred reduces the risk of Company F going bankruptcy. The higher Price/Earnings (P/E) ratio conducted by Company F indicates investor’s higher expectations and confidence towards the company’s future earnings. The strength in liquidity management enhances Company F’s position. The higher assets proportional to debts held by Company F compliments its liquidity position.

Company E’s business nature which focuses more on online-retail, as compared to Company F would definitely hold a lower net fixed assets, just because it may foregoes the conduct of setting up retail stores. Asset management indicates Company E’s lower denomination in inventory turnover, which may possibly due to the obsolescence in the product line. Company F with the ability of selling highly differentiable line of products promotes its inventory ratio. In terms of receivables turnover, Company E has tighter credit policy which favors the company itself.

Debt management in both companies, though within the same industry are distinctively different. Company E which inclines more towards debt-financing, possibly due to the company’s policy and goal of maintaining their ownership in the business. Dupont analysis took side with Company E, in account of the higher net profit, which is contributed by lower SG&A and non-operating expenses.

The nature of Company E focuses more on online-retail, significantly reduces expenses from various aspects. Unlike Company F, which have to spend more on shop retails, wages of n-stores representatives and et-ceterea. Besides that, having hand in the positive investment and advances add value to Company E. We realized both companies pay no dividends, this may due to higher retention rate of dividend policy by the company in order for future expansion and investments.

Books & Music

The market data shows that Company G is riskier than Company H, probably due to its relatively higher composition of debt in its capital structure. The higher P/E ratio in Company G indicates a better growth prospect than the possibly more-established Company H.

In terms of liquidity, Company H has a significantly lower quick ratio than its current ratio – which indicates that Company H holds a huge amount of its current assets in the form of inventories. Asset management ratios indicate that Company H has a lower inventory turnover than Company G – probably due to the latter’s business nature which requires a larger amount of inventories on display in its stores. The high receivables turnover ratio in Company H reflects a tight credit policy or cash-sales-basis of its business operations.

In terms of debt management, Company G has a capital structure that skews towards debt-financing probably due to its expansion plans in the fast-expanding business segment. DuPont analysis reveals that the net profit margin for Company G is much higher than that of Company H, probably due to the intense competition in Company H’s business segment.

Paper Products

According to the market data, company J has a lower beta level and higher PE ratio compared to company I. This is due to investors are demanding more shares of company J just because of investors think that company J has a better future prospect.

Company J also has a lower level of beta. This might due to the well-managed capital structure. However, company I has a very high level of intangible assets compared to company J, this might due to company I is a world’s largest maker of paper, they have a better reputation. For the liquidity ratios such as current ratio and quick ratio, there is no big different between company I and company J as the ratios showing that company I and company J have 1. 91 and 1. 94 for the current ratio, while 1. 15 and 1. 00 for quick ratio respectively.

According to these figures, it shows that both companies are pretty liquid as their current ratios are kind of high. Besides that, for the asset management, company J has higher inventory turnover as well as receivables turnover which means that company J is selling out their inventories faster than company I and higher receivable turnover means that company J will collect back their money in a shorter period compared to company I. Other than that, company I has a higher SG&A expense. Probably because of company I owns a paper-distribution network, they need a physical location to place their stocks.

Thus, SG&A expense will be increased indirectly as usage of electricity and water by the warehouse. In addition, for the debt management, company I has a big figure for total debt as well as long term debt. This is not a good situation as the more debt a company having, the more risks the company is facing. However, according to the common-sized financial data, it shows that company I has lower account payable compared to company J. Most probably is due to company I owns timberland, they do not have to purchase timber from other company, this will reduce their account payables.

Finally, for the performance of DuPont analysis, it shows that company J has lower net profit margin compared to company I. This is due to company J needs to purchase wood fiber to produce their products. This might increase their costs of goods sold and reduce their net profit.

Hardware and Tools

Based on the market data, Company K’s lower PE ratio reflects higher risk earnings, indicating a lack of confidence from the potential investors in the company’s ability to maintain earnings growth which may probably due to high financial gearing adopted by the company.

Company K’s lower dividend payout as compared to Company L signifies a more securing dividend payment in the future due to the higher retention rate being able to be invested in more worthwhile projects and for research and development purposes. As for the liquidity management, after taking into consideration the Quick Ratio, both companies, especially Company K may be in a vulnerable state in failing to meet short term liabilities after deducting a significant amount of illiquid inventories.

In the view of asset management, Company K’s higher inventory turnover may be due to the company’s business nature as a global manufacturer that caters for end user. Besides that, Company L’s lower receivables turnover may be caused by the company’s high credit sales. In terms of debt management, it indicates that Company K’s capital structure is mainly formed up by debt-financing while Company L is primarily made up by equity funds.

Despite the high gearing, Company K’s interest coverage is exceptionally high which means Company K is able to pay the interest-due from the earnings of the firm and not likely to face any risk of additional debt. From the viewpoint of DuPont Analysis, a more heavily indebted Company K has a much higher ROE than Company L is due to the difference in their financial structures where debt financing proves to be a cheaper source of funds that works in advantage to the shareholders in a way. Company K’s higher net profit margin indicates that it is the dominator in the industry.


Based on the market data, the beta of company N is generally higher than company M. Company N competes by attempting to match other discounters’ prices and offering deep discounts. The competition might hurt the company and deplete its earnings. This proves that company N is riskier than company M. The liquidity ratios show that company M is not as liquid as company N. Company M being a wide variety of nationally advertised general merchandise, has higher level of inventories. Company M adopts volume-oriented strategy and therefore it needs to hold more inventories.

From the asset management view, the inventory turnover of company M is slightly higher than company N. It is because company M often offers low prices and therefore it has higher sales. In addition, company M has extremely high receivables turnover compare to company N. Company N offers credit to qualified customers and this boost up its receivables. High receivables will eventually leads to a low receivables turnover. Debt management ratios exhibits that company N uses more debt in its capital structure. However, company N’s interest coverage is low.

This implies that the company might be unable to pay the interest due from the earnings. From the view point of DuPont analysis, asset turnover of company N is lower than company M. Company N has divested several nondiscount department-store businesses. Total assets of the company have reduced. The ability to generate sales by using the assets also reduced.


The market data given shows that Company O has a higher PE even though its ROE level is much lower than its competitor Company P. This might due to better future prospect and lower risk exposure on the market performance of Company O.

This might due to the Company P’s sales market is around the country and around the world that exposed itself to more foreign country risks and foreign market risk as well. However, from the asset management ratios shown, we can notice that Company P has a higher inventory turnover because of the company sales market encompassed not only the country itself but the around the world as well. Next, it might because the company has set up a huge office building lately. It led a higher fixed asset level for Company P which driven its fixed asset turnover to a lower level.

However, for the Company O, it has a shorter debtor collection period which because the company has offered cash discount to encourage customers to pay off the credit amount early. From the Dupont analysis, it shows that Company O has a higher net profit margin. This is maybe the company well-managed its operating strategy which substantially gives impact on the operational expenses. Besides that, Company O’s asset turnover has fallen to a lower range. This might due to the great amount of intangible assets owned by the company such as reputation and goodwill.

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The Financial Detective Task. (2018, Feb 06). Retrieved from