Industrial Comparative Analysis

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Introduction: Explain briefly the similarities and differences between your company and its competitor with focus on business activities. (10 points)
Income Statement: Prepare common size analysis for two companies. Compare the composition of their costs, operating expenses, EBIT and net income. Compare their dividend payout and retention ratios.
(20 points)
Balance Sheet: Prepare common size analysis for two companies. Compare the composition of their Assets (what part is Current Assets and what part is Non-Current Assets). Also compare their inventories, accounts receivable and accounts payable, short-term debt and long-term debt. Compare the capital structures of two companies.
(20 points)
Ratio Analysis: compare two companies in terms of liquidity, profitability, leverage and efficiency. Make meaningful conclusions related to the ratio results. Explain which company performs better in every area.
(20 points)
Research the industry performance in year 2022 and summarize the main tendencies. Relate the companies’ performance to the industry trends. Highlight strong and weak points for each company and suggest improvements. Explain how you see the leading company in this industry in the future.
(30 points)
Note that all comparisons should be performed in relative terms (i.e., percentages, ratios, etc.) and not in absolute (monetary) terms.

 

 

Sample Solution

Introduction:

[Company A] and [Company B] are both leading players in the [industry] industry, offering similar products and services to a comparable customer base. However, they differ in their operational structure, target market, and financial performance.

Income Statement Analysis:

Item [Company A] [Company B]
Revenue 100% 100%
Cost of Goods Sold 60% 55%
Gross Profit 40% 45%
Operating Expenses 25% 28%
EBIT 15% 17%
Net Interest Expense 2% 3%
Pre-tax Income 13% 14%
Tax Expense 4% 5%
Net Income 9% 9%
Dividend Payout Ratio 50% 30%
Dividend Retention Ratio 50% 70%

Comparison:

  • [Company B] has a slightly higher gross profit margin due to its lower cost of goods sold.
  • [Company B] has slightly higher operating expenses, resulting in a similar EBIT margin.
  • Both companies have a similar net income margin.
  • [Company A] has a higher dividend payout ratio, suggesting a greater focus on shareholder returns.
  • [Company B] retains a higher percentage of earnings, potentially indicating a focus on future growth and investment.

Balance Sheet Analysis:

Item [Company A] [Company B]
Total Assets 100% 100%
Current Assets 55% 60%
Non-Current Assets 45% 40%
Inventory 15% 20%
Accounts Receivable 10% 15%
Accounts Payable 20% 25%
Short-term Debt 5% 10%
Long-term Debt 15% 10%
Equity 65% 70%

Comparison:

  • Both companies have a healthy mix of current and non-current assets, indicating a balance between liquidity and long-term growth.
  • [Company B] has a higher proportion of inventory and accounts receivable, suggesting a slightly longer operating cycle.
  • [Company A] has a slightly higher proportion of accounts payable, potentially indicating a more efficient payables management system.
  • [Company A] has a slightly higher level of short-term debt, while [Company B] has a slightly higher level of long-term debt.
  • Both companies have a strong equity base, suggesting financial stability and low reliance on debt financing.

Ratio Analysis:

Ratio [Company A] [Company B]
Liquidity Ratios:
Current Ratio 2.75 2.4
Quick Ratio 1.75 1.4
Profitability Ratios:
Gross Profit Margin 40% 45%
Operating Profit Margin 15% 17%
Net Profit Margin 9% 9%
Leverage Ratios:
Debt-to-Equity Ratio 0.35 0.30
Interest Coverage Ratio 7.5 4.67
Efficiency Ratios:
Inventory Turnover Ratio 4.0 3.0
Accounts Receivable Turnover Ratio 10.0 8.0

Comparison:

  • [Company A] has slightly better liquidity ratios, indicating a stronger ability to meet short-term obligations.
  • [Company B] has a higher gross profit margin and operating profit margin, suggesting greater efficiency in generating profits from revenue.
  • [Company A] has a slightly higher debt-to-equity ratio, indicating a slightly higher level of financial leverage.
  • [Company A] has a significantly higher interest coverage ratio, suggesting a stronger ability to service

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