The Case Of Unidentified Industries 1995.2

The Case of the Unidentified Industries - 1995

Solution:

In order to find out the exact firm by analysing the financial structure of typical firms, first we need to separate those firms which have zero inventory turnover (A, B, F and H) from those firms which have zero debt ratio which in our case are (E, H and J) and we use the information to narrow down the possibilities of each firm. In this case there are three groups of companies:

1) Firms having zero inventory turnover.

2) Firms having zero debt.

3) Firms having all financial ratios given.

1) Firms having zero inventory turnover:

Under the category of zero inventories, there are four companies. The nature of these companies show that they are not involved in any production, but they provide services to the people and from services they generate cash. Each one with the name and reason is mentioned below.

Firm A. Commercial Bank:

The financial structure of (A) firm shows that it has zero inventory turnover and high receivables collection period. Banks usually have a large amount of receivables because they lend money to the individual people and a company due to which the average number of days, which in this case is very high, requires to convert receivables into cash is very high. Its financial structure also shows that the firm has borrow money from outside to pay debt to its customers.

Firm B. Advertising Agency:

This firm has very high receivables and payables due to one reason or the other. The advertising agencies have large number of customers and most of them are credit customers. On the other hand the high expenses show that this firm is paying off its current liabilities by collecting cash from its customers because their customers are core business in generating profit.

Firm F. Airline:

Again this firm has zero inventory turnover which shows that this perform business on long term basis therefore, it has a large amount of investment in fixed asset. Airline companies have nothing to do with short-term investment because their business is for longer period of time. Due to high investment in fixed asset the firm also need a high amount of debt in order to cover its expenses so the smooth run of business.

Firm H. Health Maintenance Organisation:

Health care organisations do business on cash basis. They provide proper medical services to different people and they receive cash when operation ends and they don’t use any debt to finance their operating activities. The capital structure of this firm shows a zero inventory turnover and a huge amount of cash from the customers from which partially is used to pay current liabilities and the remaining is in the form of retain earning.

2) Firms having zero debt:

Under this category there are three firms which have zero debt ratios because the nature of these firms show that all the financing is done by equity.

Firm E. Retail Drug Chain:

This type of business seems to be sole proprietor and the financial structure of this firm has maximum number of inventories and zero level of debt financing. Most of the drug retailers usually have a large amount of inventories due to any emergency situation and demand for the medicines is usually high. In this case the high asset turnover shows that the firm is effectively doing business by selling

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