Comparative Analysis Exercise

To help you develop financial intuitions, we’re going to play a little game. This game will introduce
the
world of finance by creating an understanding of how to use numbers to evaluate performance—the
critical process of financial analysis. Financial analysis answers some of the most fundamental
questions that financial professionals—from CFOs and managers to investors and bankers—need to
answer, questions that go to the root of a company’s performance, viability, and potential.
Much of finance involves looking at a bunch of numbers and coming up with interesting things to say
about them. Look at the table attached What do you think about these numbers? You may be curious
why some are so different from others. If so, excellent! The beginning of much financial analysis
consists of looking at a series of numbers and thinking they are interesting.
The attached file contains 14 companies belonging to different sectors(names of companies are
attached as well) but they have been named as ABCD...... for the game.
Table 1-1 is roughly organized into three horizontal sections. The first section represents the
distribution of assets owned by a company, which includes its cash holdings, equipment, and
inventory. The second section shows how these companies finance those assets, by either borrowing
money or raising money from their owners or shareholders. The final section is a series of financial
ratios that assess performance, which requires going beyond what a company owns and how they
finance those purchases. The industries and associated companies represented are shown in table 1-2.
As you can see, these are leading companies from varied industries. There are 406 different numbers
in table 1-1, which can be quite intimidating. Many may not make a lot of sense right now. Don’t
panic. I’ll quickly explain what twenty- eight of the numbers mean—the “100s” across the rows for
total assets and total liabilities and shareholders’ equity represent various totals for the first two
sections. The companies aren’t the exact same size, but rather, the figures are percentages that
represent the distribution of assets and financing sources. Accordingly, the numbers in those two
sections add up to 100 when rounded.
The first step to analyse such vast information or sea of numbers is to look for extreme values at both
ends and then create a story out of these numbers. Before we figure out which company is which, let’s
go through each section and identify some of the more extreme numbers.
SO FIRST COMPONENT TO LOOK FOR EXTREME VALUES IS ASSETS
ASSETS:
Assets
Because companies invest in assets in order to fulfill their mission, it is critical to develop an intuitive
understanding of assets. In some sense, assets are the company itself. HäagenDazs, for example, owns
the ice cream it’s going to sell, the factories to make that ice cream, and the trucks to deliver it. Assets
are no more complicated than that. As seen, assets are ordered by the degree to which they can be
changed into cash; assets that can easily be changed into cash are called current assets, and they
appear at the top. What numbers strike you as particularly interesting in each Asset row of table 1-1 ?
The first asset we talk about is

a) CASH AND MARKETABLE SECURITIES

Starting with the first row of table 1-1, notice that companies F and G have more than half of their
assets in cash and marketable securities. That should strike you as strange.
Why would any company hold so much cash? This is a deep question in finance today as companies
hold more cash than ever before—we discussed in previous classes of how Apple sits on so much
cash without paying dividends. We’ll return to this question in more detail later, but large cash
holdings can generally be understood as (a)an insurance policy during uncertain times, (b) a war chest
for making future acquisitions, or (c) a manifestation of the absence of investment opportunities.
Given the forgone interest, it is unwise for companies to hold cash alone, so they invest much of their
cash in government securities that can quickly be turned into cash— so- called marketable securities.
Since marketable securities can be quickly converted into cash, they are often combined with cash in
balance sheet.
You may look up into what kind of marketable securities companies invest in?

The rest shall unfold one by one…