Question

Consider companies in the following industries: Technology, Financial, Manufacturing. Name 2 companies within each industry and identify 3-4 Ratios that you think would be most important within that industry (and why) and 2 Ratios that would not be important considerations (and why).

Answer 1

Technology company (often tech company) is a type of business entity that focuses mainly on the development and manufacturing of technology products or providing technology as a service.

Finance companies provides finance services/economic services,which encompasses a broad range of businesses that manage money, including credit unions, banks, credit card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises etc.

Manufacturing business is any business that uses raw materials, parts, and components to assemble finished goods and they can choose to sell their products directly to consumers, to other manufacturers, to distributors or to wholesalers.

Technology companies:

Google,Microsoft,Apple

Key ratios:

1.Liquidity Ratios- Liquidity ratios give information about a company's ability to meet short-term obligations. Since many technology companies do not make a short term profit or even generate revenue, it is extremely important to analyze how well a technology company can meet its short-term financial obligations.

2.Financial Leverage Ratios-Financial leverage ratios measure the long-term solvency of a company. These types of ratios take into account long-term debt and any equity investments, both of which highly impact technology companies.

3. Profitability Ratios-While most technology companies are not profitable, even large ones such as Amazon, it is necessary to look at what margins these companies have; other ratios, such as the gross profit margin, are a good indicator of future profitability even if there is no current profit.

Ratios not useful in Tech companies areRatios not useful in Tech companies are Inventory Turnover ratio,Manufacturing Costs to Total Expenses because these are used in analyzing manfucaturing entites

2. Finance companies: S&P global, Bank of america, Citi bank

Key ratios:

1.Interest Margin Ratio:Since the interest earned on such assets is a primary source of revenue for a finance company, this metric is a good indicator of overall profitability, and higher margins generally indicate a more profitable company

2.The Loan-to-Assets Ratio: Finance companies that have a relatively higher loan-to-assets ratio derive more of their income from loans and investments, while companies with lower levels of loans-to-assets ratios derive a relatively larger portion of their total incomes from more-diversified, noninterest-earning sources, such as asset management or trading. Finance companies  with lower loan-to-assets ratios may fare better when interest rates are low or credit is tight. They may also fare better during economic downturns.

3.Provisioning coverage ratio: Finance companies usually set aside a portion of their profits as a provision against bad loans.A high PCR ratio (ideally above 70%) means most asset quality issues have been taken care of and the company is not vulnerable.

Ratios not useful Finance companies are Ratios Inventory Turnover ratio,Manufacturing Costs to Total Expenses because these are used in analyzing manfucaturing entites

3.Manufacturing companies: Thor Industries Inc., Align technology inc, Patrick Industries Inc.

Key ratios:

1.Inventory Turnover:The inventory turnover ratio measures the effectiveness of a company’s manufacturing process. This ratio shows how many times a company sells and replaces its inventory over a specific period of time. It is measured by dividing the cost of goods sold by the average balance in inventory.

2.Maintenance Costs to Total Expenses:A manufacturing company may utilize equipment or machinery during the production process of its goods. A critical measurement of the sustainability of long-term operations is comparing repair and maintenance costs to total expenses.

3.Manufacturing Costs to Total Expenses:A manufacturing company incurs expenses while producing a product as well as indirect costs needed to operate the business.Manufacturing costs to total expenses is a financial metric that measures this proportion. A higher calculated result indicates more expenses are attributable to costs directly needed to manufacture the product.

Ratios not useful in Tech companies areRatios not useful in Tech companies are Interest margin ratio,Loan to total assets because these are used mainly in analyzing finance companies