Question

Please take a look below at the two companies' financial ratios. Identify the industries these two companies operate in. Please include good quality analysis and arguments (e.g. this ratio indicates that... and that ratio indicates the other,... and taken together these ratios indicate that.... (and so forth)) :

Company A	Company B
P/E Ratio: 30 Price/Sales: 6 Price/Book Value of Equity: 7.5 Profit Margin: 20% Operating Margin: 25% Return on Assets (ROA): 6% Return On Equity (ROE): 25% Current Ratio: 3	P/E Ratio:   17 Price/Sales: 0.6 Price/Book Value of Equity: 3 Profit Margin: 3% Operating Margin: 5% Return on Assets (ROA): 7% Return On Equity (ROE): 15% Current Ratio: 1

Answer 1

Solution:

We will analyse company A and B together to find which industry they may operate in

Company A	Company B
P/E = 30. This is on a higher side and it suggests the industry can be with high growth rate. The industry might be technology	P/E :17 . This ratio is on lower side and it means that the expected growth can be lower. The industry might be asset heavy like retail industry
Price/ Sales=6. Higher share price as compared to sales, indicates the industry with high growth	Price/ Sales= 0.6. This ratio is low that means the company has high sales number and this again indicates that the industry might be retail
Price/Book Value= 7.5. This ratio is high means that the share price has higher value than book value and this again indicates the higher share price.	Price/Book Value= 3. This ratio is low, and this is due to the fact that the company has fair book value as compared to share price
All profitability ratios indicates the higher profit margin and that means the COGS is low and this is possible in case of technology or other service industry.	All profitability ratios indicates the lower profit margin and that means the COGS is high and this means that the company operates in asset heavy industry or retail industry where margins are low
Current Ratio: 3. Higher current ratio means higher current assets and this is possible in case of technology company as they have huge cash and short term investments.	Current Ratio: 1. This ratio is low and that means that the company operate in the industry where current assets and current liabilities are same. The industry can be retail or asset heavy.

Based on the above analysis, we can conclude that the company A operates in technology industry and the company can be Microsoft. The company B can be operating in retail industry and the company can be Walmart.