Finance as the Lifeblood of Trade and Industry - Essay Example

The paper "Finance as the Lifeblood of Trade and Industry" is an outstanding example of an essay on finance and accounting. Finance is the lifeblood of trade and industry. The business world has come to rely on ratio analysis and common-sized income statements and balance sheets when comparing two companies in the same industrial sector (Meigs & Meigs, 1989). Also, there is a rough estimate gathered through experience that represents the Industry Average in a particular sector of the corporate world. In this case study, we are going to compare two enterprises in the newspaper industry, Companies O and P, better known as Lee Enterprises and The New York Times Company. While Company P has a well managed centralized inventory system, Company O conforms to the nature of a decentralized operation. P=Cent O=Decent

Discussion

This analysis will combine the information given with ratios mentioned for Companies O and P in the case study for more succinct and well-meaning analysis. Taking the net fixed assets first, we see that Company O has an Asset Turnover of 3.03 compared to Company P’s 2.59. This means that Company O has been more efficient in using its fixed assets than Company P. This would be expected as with centralized operations, Company P would not be in a position to use its fixed assets more profitably than Company O. Moreover it has recently invested in a large centralized headquarters.

Regarding the percentage of intangibles to total assets, Company O’s ratio of 76.8 is more than double Company P’s 37.1 percent. This is explained by the fact that much of Company O’s decentralized structure is due to acquisitions and equity interests in unconsolidated subsidiaries, contributing to a high percentage of goodwill on its balance sheet.

We next look at the Cost of goods sold percentages for O and P and can deduce that Company O’s CGS is 49.7 percent of sales, compared to Company P’s 40.5 percent for the same period. This suggests that as a centralized enterprise, Company P has been able to take advantage of volume discounts on the larger orders it must have placed with suppliers of inks, paper and other materials compared to Company O. When revenues, expenses, and inventory ordering points are consolidated, some advantages are clearly possible with a centralized operation.

Coming to Selling, General and Administrative Expense percentages, we see that there is again quite a difference, with Company O incurring 23 percent compared to Company P’s 39.7 percent. Although it would ordinarily be expected that Company P having centralized operations would be better off in this area through consolidating expenses, it has not been able to reap this benefit and Company O is better by comparison.

Looking at the Price to Earnings Ratios for Company O and P, it is evident that Company O is better off with a P/E of 20.54 compared to Company P’s 13.29. This could reflect market expectations that Company O being decentralized could grow further by acquisitions and add more value to its name. However, the chances of Company P doing the same are slim, as it is already one of the largest and most established names in the newspaper industry.

Lastly, taking into account the Net Profit Margin of both companies, we see that Company O has a net profit margin of 12.65 percent compared to Company P’s 8.86 percent. This indicates that Company O though being a smaller company overall, is a local monopoly in the area in which it operates, perhaps being the town’s only newspaper. Company P’s lower net profit margin is justified in the light of the intense competition for readers in major metropolitan cities.

Conclusion

We have used the data and comments in the case study to analyze two companies in the newspaper industry. We conclude that although the size and market differentials contribute to differences, consolidation of operations can lead to advantages while decentralization is a boon in some other circumstances.