Case Hints – Some Guidelines for Case Analysis & Number Crunching

This note provides some broad guidelines to help you with quantitative analysis of cases. Please note that it is not possible to provide a formula or guideline to be followed for analyzing all cases. The guidelines provided below are therefore, illustrative. In the first part of the note I list some general points and in the second I provide a list of some of the commonly used computations in such analyses.

Some General Caveats & Notes

Please note that not all cases will be numerically oriented, nor will we use all these computations in this class. However, this note is also intended as a reference that you can keep for later use, hence more is provided than may be immediately relevant or applicable.

General Guidelines

1. Focus on the assignment questions given to you for the case. These, especially the first question, should provide an idea of what numbers are likely to be more important.
2. Identify the central issue or issues that the case seeks to address. The positioning of the case in the module, as well as my brief overview (introductory lecture) should be helpful in this.
3. Study each exhibit closely. They often contain the most critical information. Focus on such critical variables as sales, ROE, market share, industry size and growth rate, size and growth rate of market segments, gross and net margins, inventory turnover, and average collection and payable periods.
4. Identify and explain trends in the above variables. Compare these variables and ratios for the firm across years, and across firms within the industry.
5. Verify any important facts stated in the case. This exercise will enable you to identify any assumptions being made by the decision makers or case writers
6. Identify and where possible, numerically evaluate the different alternatives available to the decision maker.
7. If balance sheet data are given try and make a cash flow or funds flow statement (Statement of Sources and Uses of Funds). Often the cash flow of the business will indicate the severity of the problems that the business faces.

Commonly Used Ratios and Computation

Du Pont Formula:

This allows us to break down the ROE into 3 components:

1. The Net Income/Sales ratio, which measures the profitability of sales, without any reference to the utilization of assets involved in generating the sales.
2. The Sales/Assets ratio, which measures the efficiency of asset utilization in generating sales without any reference to the profitability of those sales.
3. The Assets/Equity ratio, which can be used as a measure of the leverage of the business. To see that, rewrite Assets as (Total Debt + Shareholders Equity). Then Assets/Equity can be rewritten as 1 + Debt/Equity). Hence, return could be increasing through the use of more ‘risky’ strategies (i.e. the use of higher debt).

ROE=(Net Income/Sales) x (Sales/Assets) x (Assets/Equity)
  or
ROE=(Net Income/Sales) x (Sales/Assets) x (1 + Debt/Equity)

Ratio Analysis

The table below lists some of the more commonly used ratios.

PROFITABILITY RATIOS

ACTIVITY RATIOS

LEVERAGE RATIOS

LIQUIDITY RATIOS