Ratios Tell a Story—2017
4 Pages Posted: 3 Jul 2018
This case challenges students to review a series of corporate financial metrics and to match each of them with an industry in a list of 13 industries.
Jun. 28, 2018
Ratios Tell A Story—2017
It has been said that a picture is worth a thousand words. There is no doubt that we each have experienced that phenomenon. In a similar fashion, it is also true that numbers convey information, and, in purposeful combinations, they can actually tell a story. Indeed, when a physician counsels patients regarding their high blood pressure number in concert with a bad cholesterol ratio (total cholesterol #/good cholesterol #), the story is not good news, and corrective lifestyle behaviors are likely to be discussed. Similarly, a person's weight in combination with their height can reveal obesity. A baseball pitcher's earned run average in combination with his strikeouts per nine innings can provide insights into a mediocre or a dominant performance. An elementary school's teacher/student ratio, in part, indicates the instructional attention each student receives. Numerous other examples are prevalent and common in our daily lives. Over time, we embrace the usefulness of those measures and develop comfort and competence with them as inputs into our interpretations of things around us and about us.
Likewise, over time, the companies we are interested in understanding and evaluating are frequently subjected to an array of numerical indicators that point to a strength, concern, uniqueness, and/or direction. Each indicator has its own focus and interpretation. Financial ratios are a large subset of corporate indicators that are of interest to business observers. Singly, and in combination, financial ratios tell a story. They present a picture that we are wise to learn how to interpret. Is Facebook more or less reliant on debt than Microsoft? To what extent did American Airlines passenger revenue increase or decrease this year, and how did that compare to Delta Air Lines? In what financial ways is Under Armour similar to Nike? Is Bank of America more or less optimistic about the collectability of its loan portfolio than Wells Fargo? Numbers, and financial ratios in particular, can help answer such questions.
To embark on a task of corporate financial analysis, it is important to note that corporate financial performance and condition vary among companies for a number of reasons. One reason for the variation can be traced to the characteristics of the industries in which companies operate. For example, some industries require large investments in property, plant, and equipment (PP&E), while others require very little. In some industries, the competitive product-pricing structure permits companies to earn significant profits per sales dollar, while in other industries the product-pricing structure necessitates a much lower profit margin. In most low-margin industries, however, companies often experience a relatively high rate of product throughput (i.e., turnover).
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Keywords: intuition, financial ratios, financial ratio metrics, annual reports
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