Computer Industries Comparison
For the Computer industries, we have Companies E and F. Going off of the common-sized financial data, we can see that the first paragraph describes Company E and the second describes Company F. For Company E, we are given that this company is focused on mail-order sales of built-to-order PCs. We can reasonably assume that a company with this focus would have lower net fixed assets because there would be no need for a physical store. This can be confirmed further in the paragraph where the company gives the option to customize a computer and purchase it online. Company E has net fixed assets at 7.3%, whereas Company F’s NFA are at 8.8%. In addition, since the company is an assembler of custom computers, we can reasonably assume that there would be higher inventories, to prevent backorders. This is true for Company E, who has inventories at 2% as opposed to Company F’s 1.3%
We can determine Company F is being described in the second paragraph because we are told that the company is recovering from a decline in market share. There is now the potential for growth within the market, and Company F’s price/earnings ratio reflects this. Per our textbook (p. 110), “price/earnings ratios are higher for firms with higher growth prospects, other things held constant, but are lower for riskier firms.” Not only is Company F’s price/earnings ratio higher, but its beta is also lower, indicating a less risky firm.
Companies G and H are in the Books and Music industry. The first paragraph of this section of the case pertains to Company H, and the second describes Company G. Company H has a vast retail store presence, which is highlighted through its high net fixed assets relative to Company G, at 24.4% as opposed to 7.6%. Also, Company H has a higher percentage of total assets as inventories. This is likely due to the amount of stock this company has in its many retail stores, as this company is a leader