Question

The common-size balance sheets from five companies follow: Alcoa, a major producer of
aluminum products; Delta Air Lines, a major airline; Duke Energy, a leading energy company
focused on electric power and gas distribution; JCPenney, a national retailer; and Pfizer, Inc.,
a global research-driven pharmaceutical company.

Required:
Based on your general business knowledge, the economic activities of these five firms, and
information derived from the following balance sheet analysis, match the company with its
respective balance sheet. Explain your reasoning for the choices that you make.
A B C D E
Assets
Current assets:
Cash and marketable securities 0.71 5.25 13.91 9.53 6.47
Current receivables 2.02 5.10 4.88 0.00 4.03
Inventories 3.14 9.42 4.49 28.82 0.00
Other current assets 0.99 2.00 2.88 4.20 6.55
Total current assets 6.87 21.77 26.16 42.55 17.04
Noncurrent assets:
Property, plant, and equipment, net 62.49 40.56 8.22 51.01 43.36
Goodwill and intangibles, net 13.49 14.79 52.91 0.00 27.58
Other assets, net 17.15 22.88 12.71 6.44 12.01
Total assets 100.00 100.00 100.00 100.00 100.00
Liabilities and Stockholders’ Equity
Current liabilities 9.41 14.27 17.56 25.55 32.98
Long-term debt 30.95 24.76 17.21 49.54 12.73
Other long-term liabilities 26.82 22.29 26.42 11.05 33.86
Stockholders’ Equity:
Preferred stock 0.00 0.16 0.02 0.00 0.00
Common stock and additional paid-in capital 31.34 31.24 48.65 50.91 20.47
Retained earnings 2.12 24.18 42.99 (31.85) 14.35
Treasury stock 0.00 (7.73) (47.33) 0.00 (0.70)
Other comprehensive income (0.67) (14.87) (5.69) (5.20) (13.69)
Total parent company common equity 32.79 32.82 38.63 13.86 20.42
Noncontrolling interests 0.04 5.71 0.17 0.00 0.00
Total equity 32.83 38.69 38.81 13.86 20.42
Total liabilities and stockholders’ equity 100.00 100.00 100.00 100.00 100.00
Note: Amounts are rounded.

Answer 1

Company E has no inventory, so we can immediately rule out Alcoa and Pfizer, two manufacturing concerns, as well retailer JCPenney. That leaves only Duke Energy and Delta Air Lines as possibilities. However, Company E does not have significant debt, so it is unlikely to be a utility like Duke Energy. Rate-regulated utilities have a predictable and stable earnings stream. As a result, they tend to finance their investments in PP&E with significant amounts of debt. So, Company E is Delta Air Lines.

Company A has significant PP&E and debt, which is consistent with it being the utility – Duke Energy. Although Companies B and D also have significant amounts of PP&E and debt, those two companies also carry significant inventories, which one would not expect for Duke Energy. So, Company A is Duke Energy.

Company D has very large inventories and no receivables. The large inventories suggest the retailer – JCPenney. The lack of receivables is consistent with the company not providing any credit on its own, but rather accepting cash or credit cards. In contrast, manufacturers such as the other remaining companies – Alcoa and Pfizer – typically offer trade credit to their customers. Company D is JCPenney.

That leaves Companies B and C for Alcoa and Pfizer. Company B has significantly more PP&E while Company C has far more intangible assets. Pfizer, a highly successful pharmaceutical company, also acquires organizations and purchases intangibles such as patents. In contrast, Alcoa would be expected to be more tangible asset intensive. So, Company B is Alcoa and Company C is Pfizer.

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