Case Studies are GROUP work!
BIO-CHEMIST
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How to Conduct a Case Analysis
Case Analysis
THE CASE STUDY is a fundamental learning tool in stra- tegic management. We carefully wrote and chose the cases in this book to expose you to a wide variety of key concepts, industries, protagonists, and strategic problems.
In simple terms, cases tell the story of a company facing a strategic dilemma. The firms may be real or fictional in nature, and the problem may be current or one that the firm faced in the past. Although the details of the cases vary, in general they start with a description of the challenge(s) to be addressed, fol- lowed by the history of the firm up until the decision point, and then additional information to help you with your analysis. The strategic dilemma is often faced by a specific manager, who wonders what he or she should do. To address the strategic dilemma, you will use the AFI framework to conduct a case analysis using the tools and concepts provided in this textbook. After careful analysis, you will be able to formulate a strategic response and make recommendations about how to implement it.
Why Do We Use Cases? Strategy is something that people learn by doing; it cannot be learned simply by reading a book or lis- tening carefully in class. While those activities will help you become more familiar with the concepts and models used in strategic management, the only way to improve your skills in analyzing, formulating, and implementing strategy is to practice.
We encourage you to take advantage of the cases in this text as a “laboratory” in which to experiment with the strategic management tools you have been given, so that you can learn more about how, when, and where they might work in the “real world.” Cases are valuable because they expose you to a number and variety of situations in which you can refine your stra- tegic management skills without worrying about mak- ing mistakes. The companies in these cases will not
lose profits or fire you if you miscalculate a financial ratio, misinterpret someone’s intentions, or make an incorrect prediction about environmental trends.
Cases also invite you to “walk in” and explore many more kinds of companies in a wider array of industries than you will ever be able to work at in your lifetime. With this strategy content, you will find MiniCases (i.e., shorter cases) about athletes (Michael Phelps), social networks (Facebook), fashion (LVMH), and entertainment (Cirque du Soleil), among others, as well as longer cases with complete financial data about companies such as Google, Tesla Motors, Apple, to name just a few. Your personal organizational experi- ences are usually much more limited, defined by the jobs held by your family members or by your own for- ays into the working world. Learning about companies involved in so many different types of products and services may open up new employment possibilities for you. Diversity also forces us to think about the ways in which industries (as well as people) are both similar and yet distinct, and to critically examine the degree to which lessons learned in one forum transfer to other settings (i.e., to what degree are they “gener- alizable”). In short, cases are a great training tool, and they are fun to study.
You will find that many of our cases are written from the perspective of the CEO or general manager responsible for strategic decision making in the orga- nization. While you do not need to be a member of a top management team to utilize the strategic man- agement process, these senior leaders are usually responsible for determining strategy in most of the organizations we study. Importantly, cases allow us to put ourselves “in the shoes” of strategic leaders and invite us to view the issues from their perspective. Having responsibility for the performance of an entire organization is quite different from managing a single project team, department, or functional area. Cases can help you see the big picture in a way that most of us are not accustomed to in our daily, organizational
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lives. We recognize that most undergraduate students and even MBAs do not land immediately in the corpo- rate boardroom. Yet having a basic understanding of the types of conversations going on in the boardroom not only increases your current value as an employee, but also improves your chances of getting there some- day, should you so desire.
Finally, cases help give us a long-term view of the firms they depict. Corporate history is immensely helpful in understanding how a firm got to its present position and why people within that organization think the way they do. Our case authors (both the author of this book and authors of cases from respected third- party sources) have spent many hours poring over historical documents and news reports in order to re- create each company’s heritage for you, a luxury that most of us do not have when we are bombarded on a daily basis with homework, tests, and papers or proj- ect team meetings, deadlines, and reports. We invite you not just to learn from but also to savor reading each company’s story.
STRATEGIC CASE ANALYSIS. The first step in ana- lyzing a case is to skim it for the basic facts. As you read, jot down your notes regarding the following basic questions: ! What company or companies is the case about? ! Who are the principal actors? ! What are the key events? When and where do they
happen (in other words, what is the timeline)? Second, go back and reread the case in greater detail, this time with a focus on defining the problem. Which facts are relevant and why? Just as a doctor begins by interviewing the patient (“What hurts?”), you likewise gather information and then piece the clues together in order to figure out what is wrong. Your goal at this stage is to identify the “symptoms” in order to figure out which “tests” to run in order to make a defini- tive “diagnosis” of the main “disease.” Only then can you prescribe a “treatment” with confidence that it will actually help the situation. Rushing too quickly through this stage often results in “malpractice” (that is, giving a patient with an upset stomach an antacid when she really has the flu), with effects that range from unhelpful to downright dangerous. The best way to ensure that you “do no harm” is to analyze the facts carefully, fighting the temptation to jump right to pro- posing a solution.
The third step, continuing the medical analogy, is to determine which analytical tools will help you to most accurately diagnose the problem(s). Doc- tors may choose to run blood tests or take an X-ray. In doing case analysis, we follow the steps of the strategic management process. You have any and all of the following models and frameworks at your disposal: 1. Perform an external environmental analysis
of the: ! Macro-level environment (PESTEL analysis). ! Industry environment (e.g., Porter’s five forces). ! Competitive environment.
2. Perform an internal analysis of the firm using the resource-based view: ! What are the firm’s resources, capabilities, and
competencies? ! Does the firm possess valuable, rare, costly to
imitate resources, and is it organized to capture value from those resources (VRIO analysis)?
! What is the firm’s value chain? 3. Analyze the firm’s current business-level and
corporate-level strategies: ! Business-level strategy (product market posi-
tioning). ! Corporate-level strategy (diversification). ! International strategy (geographic scope and
mode of entry). ! How are these strategies being implemented?
4. Analyze the firm’s performance: ! Use both financial and market-based measures. ! How does the firm compare to its competitors
as well as the industry average? ! What trends are evident over the past three to
five years? ! Consider the perspectives of multiple stake-
holders (internal and external). ! Does the firm possess a competitive advan-
tage? If so, can it be sustained?
CALCULATING FINANCIAL RATIOS. Financial ratio analysis is an important tool for assessing the out- comes of a firm’s strategy. Although financial performance is not the only relevant outcome mea- sure, long-term profitability is a necessary pre- condition for firms to remain in business and to be
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able to serve the needs of all of their stakeholders. Accordingly, at the end of this introductory mod- ule, we have provided a table of financial mea- sures that can be used to assess firm performance (see Table"1).
All of the following aspects of performance should be considered, because each provides a dif- ferent type of information about the financial health of the firm: ! Profitability ratios—how efficiently a company
utilizes its resources. ! Activity ratios—how effectively a firm manages
its assets. ! Leverage ratios—the degree to which a firm relies
on debt versus equity (capital structure). ! Liquidity ratios—a firm’s ability to pay off its
short-term obligations. ! Market ratios—returns earned by shareholders
who hold company stock.
MAKING THE DIAGNOSIS. With all of this informa- tion in hand, you are finally ready to make a “diag- nosis.” Describe the problem(s) or opportunity(ies) facing the firm at this time and/or in the near future. How are they interrelated? (For example, a runny nose, fever, stomach upset, and body aches are all indicative of the flu.) Support your conclusions with data generated from your analyses.
The following general themes may be helpful to consider as you try to pull all the pieces together into a cohesive summary: ! Are the firm’s value chain (primary and support)
activities mutually reinforcing? ! Do the firm’s resources and capabilities fit with
the demands of the external environment? ! Does the firm have a clearly defined strategy that
will create a competitive advantage? ! Is the firm making good use of its strengths and
taking full advantage of its opportunities? ! Does the firm have serious weaknesses or face sig-
nificant threats that need to be mitigated? Keep in mind that “problems” can be positive (how
to manage increased demand) as well as negative (declining stock price) in nature. Even firms that are currently performing well need to figure out how to maintain their success in an ever-changing and highly competitive global business environment.
Formulation: Proposing Feasible Solutions When you have the problem figured out (your diag- nosis), the next step is to propose a “treatment plan” or solution. There are two parts to the treatment plan: the what and the why. Using our medical analogy: The what for a patient with the flu might be antiviral medication, rest, and lots of fluids. The why: antivirals attack the virus directly, shortening the duration of ill- ness; rest enables the body to recuperate naturally; and fluids are necessary to help the body fight fever and dehydration. The ultimate goal is to restore the patient to wellness. Similarly, when you are doing case analy- sis, your task is to figure out what the leaders of the company should do and why this is an appropriate course of action. Each part of your proposal should be justifiable based on your analyses.
One word of caution about the formulation stage: By nature, humans are predisposed to engage in “local” and “simplistic” searches for solutions to the problems they face.1 On the one hand, this can be an efficient approach to problem solving, because relying on past experiences (what worked before) does not waste time reinventing the wheel. The purpose of doing case analysis, however, is to look past the easy answers and to help us figure out not just what works (satisficing) but what might be the best answer (optimizing). In other words, do not just take the first idea that comes to your mind and run with it. Instead, write down that idea for subsequent consideration but then think about what other solutions might achieve the same (or even better) results. Some of the most successful companies engage in scenario planning, in which they develop several possible out- comes and estimate the likelihood that each will happen. If their first prediction turns out to be incorrect, then they have a Plan B ready and waiting to be executed.
Plan for Implementation The final step in the AFI framework is to develop a plan for implementation. Under formulation, you came up with a proposal, tested it against alternatives, and used your research to support why it provides the best solution to the problem at hand. To demonstrate its feasibility, however, you must be able to explain how to put it into action. Consider the following questions: 1. What activities need to be performed? The value
chain is a very useful tool when you need to
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figure out how different parts of the company are likely to be affected. What are the implications of your plan with respect to both primary activi- ties (e.g., operations and sales/marketing/service) and support activities (e.g., human resources and infrastructure)?
2. What is the timeline? What steps must be taken first and why? Which ones are most critical? Which activities can proceed simultaneously, and which ones are sequential in nature? How long is your plan going to take?
3. How are you going to finance your proposal? Does the company have adequate cash on hand, or does it need to consider debt and/or equity financ- ing? How long until your proposal breaks even and pays for itself?
4. What outcomes is your plan likely to achieve? Provide goals that are “SMART”: specific, mea- surable, achievable, realistic, and timely in nature. Make a case for how your plan will help the firm to achieve a strategic competitive advantage.
In-Class Discussion Discussing your ideas in class is often the most valu- able part of a case study. Your professor will moderate the class discussion, guiding the AFI process and ask- ing probing questions when necessary. Case discus- sion classes are most effective and interesting when everybody comes prepared and participates in the exchange.
Actively listen to your fellow students; mutual respect is necessary in order to create an open and inviting environment in which people feel comfortable sharing their thoughts with one another. This does not mean you need to agree with what everyone else is say- ing, however. Everyone has unique perspectives and biases based on differences in life experiences, educa- tion and training, values, and goals. As a result, no two people will interpret the same information in exactly the same way. Be prepared to be challenged, as well as to challenge others, to consider the case from another vantage point. Conflict is natural and even beneficial as long as it is managed in constructive ways.
Throughout the discussion, you should be pre- pared to support your ideas based on the analyses you conducted. Even students who agree with you on the general steps to be taken may disagree on the order of importance. Alternatively, they may like your plan in
principle but argue that it is not feasible for the com- pany to accomplish. You should not be surprised if others come up with an altogether different diagno- sis and prescription. For better or worse, a good idea does not stand on its own merit—you must be able to convince your peers of its value by backing it up with sound logic and support.
Things to Keep in Mind while Doing Case Analysis While some solutions are clearly better than others, it is important to remember that there is no single correct answer to any case. Unlike an optimization equation or accounting spreadsheet, cases cannot be reduced to a mathematical formula. Formulating and implementing strategy involves people, and working with people is inherently messy. Thus, the best way to get the maximum value from case analysis is to maintain an open mind and carefully consider the strengths and weaknesses of all of the options. Strategy is an iterative process, and it is important not to rush to a premature conclusion.
For some cases, your instructor may be able to share with you what the company actually did, but that does not necessarily mean it was the best course of action. Too often students find out what happened in the “real world” and their creative juices stop flow- ing. Whether due to lack of information, experience, or time, companies quite often make the most expedi- ent decision. With your access to additional data and time to conduct more detailed analyses, you may very well arrive at a different (and better) conclusion. Stand by your findings as long as you can support them with solid research data. Even Fortune 500 companies make mistakes.
Unfortunately, to their own detriment, students sometimes discount the value of cases based on fic- tional scenarios or set some time in the past. One sig- nificant advantage of fictional cases is that everybody has access to the same information. Not only does this level the playing field, but it also prevents you from being unduly biased by actual events, thus cut- ting short your own learning process. Similarly, just because a case occurred in the past does not mean it is no longer relevant. The players and technology may change over time, but many questions that businesses face are timeless in nature: how to adapt to a changing environment, the best way to compete against other firms, and whether and how to expand.
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Case Limitations As powerful a learning tool as case analysis can be, it does come with some limitations. One of the most important for you to be aware of is that case analysis relies on a process known as inductive reasoning, in which you study specific business cases in order to derive general principles of management. Intuitively, we rely on inductive reasoning across almost every aspect of our lives. We know that we need oxygen to survive, so we assume that all living organisms need oxygen. Similarly, if all the swans we have ever seen are white, we extrapolate this to mean that all swans are white. While such relationships are often built upon a high degree of probability, it is important to remember that they are not empirically proven. We have in fact discovered life forms (microorganisms) that rely on sulfur instead of oxygen. Likewise, just because all the swans you have seen have been white, black swans do exist.
What does this caution mean with respect to case analysis? First and foremost, do not assume that just because one company utilized a joint venture to com- mercialize a new innovation, another company will be successful employing the same strategy. The first company’s success may not be due to the particular organizational form it selected; it might instead be a function of its competencies in managing interfirm relationships or the particularities of the external envi- ronment. Practically speaking, this is why the analysis step is so fundamental to good strategic management. Careful research helps us to figure out all of the poten- tial contributing factors and to formulate hypotheses about which ones are most likely critical to success. Put another way, what happens at one firm does not necessarily generalize to others. However, solid ana- lytical skills go a long way toward enabling you to make informed, educated guesses about when and where insights gained from one company have broader applications.
In addition, we have a business culture that tends to put on a pedestal high-performance firms and their leaders. Critical analysis is absolutely essential in order to discern the reasons for such firms’ success. Upon closer inspection, we have sometimes found that their image is more a mirage than a direct reflection of sound business practices. Many business analysts have been taken in by the likes of Enron, WorldCom, and Bernie Madoff, only to humbly retract their praise when the company’s shaky foundation crumbles. We selected many of the firms in these cases because of
their unique stories and positive performance, but we would be remiss if we let students interpret their pres- ence in this book as a wholehearted endorsement of all of their business activities.
Finally, our business culture also places a high pre- mium on benchmarking and best practices. Although we present you with a sample of firms that we believe are worthy of in-depth study, we would again caution you against uncritical adoption of their activities in the hope of emulating their achievements. Even when a management practice has broad applications, strat- egy involves far more than merely copying the indus- try leader. The company that invents a best practice is already far ahead of its competitors on the learning curve, and even if other firms do catch up, the best they can usually hope for is to match (but not exceed) the original firm’s success. By all means, learn as much as you can from whomever you can, but use that information to strengthen your organization’s own strategic identity.
Frequently Asked Questions about Case Analysis 1. Is it OK to utilize outside materials?
Ask your professor. Some instructors utilize cases as a springboard for analysis and will want you to look up more recent financial and other data. Others may want you to base your analysis on the information from the case only, so that you are not influenced by the actions actually taken by the company. 2. Can I talk about the case with other students?
Again, you should check with your professor, but many will strongly encourage you to meet and talk about the case with other students as part of your prep- aration process. The goal is not to come to a group consensus, but to test your ideas in a small group setting and revise them based on the feedback you receive. 3. Is it OK to contact the company for more infor-
mation?
If your professor permits you to gather outside information, you may want to consider contacting the company directly. If you do so, it is imperative that you represent yourself and your school in the most professional and ethical manner possible. Explain to them that you are a student studying the firm and that you are seeking additional information, with your instructor’s permission. Our experience is that some
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companies are quite receptive to student inquiries; others are not. You cannot know how a particular company will respond unless you try.
4. What should I include in my case analysis report?
Instructors generally provide their own guidelines regarding content and format, but a general outline for a case analysis report is as follows: (1) analysis of the problem; (2) proposal of one or more alterna- tive solutions; and (3) justification for which solution
you believe is best and why. The most important thing to remember is not to waste precious space repeating facts from the case. You can assume that your profes- sor has read the case carefully. What he or she is most interested in is your analysis of the situation and your rationale for choosing a particular solution.
Endnote 1. Cyert, R.M., and J.G. March (2001), A Behavioral Theory of the Firm, 2nd ed. (Malden, MA: Blackwell Publishers Inc.).
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ss es
s Fi
rm P
er fo
rm an
ce (c
on tin
ue d)
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524 How to Conduct a Case Analysis
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Ta bl
e 1c
: L ev
er ag
e Ra
tio s
Fo rm
ul a
Ch ar
ac te
ri st
ic s
De bt
to e
qu ity
To ta
l l ia
bi lit
ie s
/ T ot
al s
to ck
ho ld
er s’
eq ui
ty Di
re ct
c om
pa ris
on o
f d eb
t t o
eq ui
ty s
ta ke
ho ld
er s
an d
th e
mo st
c om
mo n
me as
ur e
of c
ap ita
l s tru
ct ur
e De
bt to
a ss
et s
To ta
l l ia
bi lit
ie s
/ T ot
al a
ss et
s De
bt a
s a
pe rc
en t o
f a ss
et s
In te
re st
c ov
er ag
e (ti
me s
in te
re st
ea
rn ed
) (N
et in
co me
+ In
te re
st e
xp en
se +
Ta x
ex pe
ns e)
/ In
te re
st e
xp en
se
Di re
ct m
ea su
re o
f t he
fi rm
’s ab
ili ty
to m
ee t i
nt er
es t
pa ym
en ts
, i nd
ic at
in g
th e
pr ot
ec tio
n pr
ov id
ed fr
om
cu rr
en t o
pe ra
tio ns
Lo ng
-te rm
d eb
t t o
eq ui
ty Lo
ng -te
rm li
ab ili
tie s
/ T ot
al s
to ck
ho ld
er s’
eq ui
ty A
lo ng
-te rm
p er
sp ec
tiv e
of d
eb t a
nd e
qu ity
p os
iti on
s of
st
ak eh
ol de
rs
De bt
to m
ar ke
t e qu
ity To
ta l l
ia bi
lit ie
s at
b oo
k va
lu e
/ T ot
al e
qu ity
a t m
ar ke
t va
lu e
M ar
ke t v
al ua
tio n
ma y r
ep re
se nt
a b
et te
r m ea
su re
of
e qu
ity th
an b
oo k
va lu
e. M
os t f
irm s
ha ve
a m
ar ke
t pr
em iu
m re
la tiv
e to
b oo
k va
lu e.
Bo nd
ed d
eb t t
o eq
ui ty
Bo nd
ed d
eb t /
S to
ck ho
ld er
s’ eq
ui ty
M ea
su re
s a
fir m’
s le
ve ra
ge in
te rm
s of
s to
ck ho
ld er
s’ eq
ui ty
De bt
to ta
ng ib
le n
et w
or th
To ta
l l ia
bi lit
ie s
/ ( Co
mm on
e qu
ity –
In ta
ng ib
le a
ss et
s) M
ea su
re s
a fir
m’ s
le ve
ra ge
in te
rm s
of ta
ng ib
le (h
ar d)
as
se ts
c ap
tu re
d in
b oo
k va
lu e
Fi na
nc ia
l l ev
er ag
e in
de x
Re tu
rn o
n eq
ui ty
/ Re
tu rn
o n
as se
ts M
ea su
re s
ho w
we ll
a co
mp an
y i s
us in
g its
d eb
t Li
mi ta
tio ns
Ov er
al l g
oo d
me as
ur es
o f a
fi rm
’s fin
an ci
ng s
tra te
gy ; n
ee ds
to b
e lo
ok ed
a t i
n co
nc er
t w ith
o pe
ra tin
g re
su lts
b ec
au se
1.
Th es
e me
as ur
es c
an b
e mi
sle ad
in g
if lo
ok ed
a t i
n is
ol at
io n.
2.
T he
y c an
a lso
b e
mi sle
ad in
g if
us in
g bo
ok va
lu es
a s
op po
se d
to m
ar ke
t v al
ue s
of d
eb t a
nd e
qu ity
.
TA BL
E 1 /
W he
n an
d H
ow to
U se
F in
an ci
al M
ea su
re s
to A
ss es
s Fi
rm P
er fo
rm an
ce (c
on tin
ue d)
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How to Conduct a Case Analysis 525
rot20477_caseanalysis_516-526.indd 525 11/27/15 05:10 PM
Ta bl
e 1d
: L iq
ui di
ty R
at io
s Fo
rm ul
a Ch
ar ac
te ri
st ic
s
Cu rr
en t
Cu rr
en t a
ss et
s / C
ur re
nt li
ab ili
tie s
M ea
su re
s sh
or t-t
er m
liq ui
di ty.
C ur
re nt
a ss
et s
ar e
al l a
ss et
s th
at a
fi rm
c an
re ad
ily c
on ve
rt to
c as
h to
p ay
o ut
st an
di ng
de
bt s
an d
co ve
r l ia
bi lit
ie s
wi th
ou t h
av in
g to
s el
l h ar
d as
se ts
. C ur
re nt
li ab
ili tie
s ar
e a
fir m’
s de
bt a
nd o
th er
ob
lig at
io ns
th at
a re
d ue
w ith
in a
ye ar
.
Qu ic
k (a
ci d-
te st
) (C
as h
+ M
ar ke
ta bl
e se
cu rit
ie s
+ Ne
t r ec
ei va
bl es
) /
Cu rr
en t l
ia bi
lit ie
s El
im in
at es
in ve
nt or
y f ro
m th
e nu
me ra
to r,
fo cu
si ng
o n
ca sh
, ma
rk et
ab le
s ec
ur iti
es , a
nd re
ce iva
bl es
.
Ca sh
(C as
h +
M ar
ke ta
bl e
se cu
rit ie
s) / C
ur re
nt li
ab ili
tie s
Co ns
id er
s on
ly ca
sh a
nd m
ar ke
ta bl
e se
cu rit
ie s
fo r p
ay me
nt
of c
ur re
nt li
ab ili
tie s.
Op er
at in
g ca
sh fl
ow Ca
sh fl
ow fr
om o
pe ra
tio ns
/ Cu
rr en
t l ia
bi lit
ie s
Ev al
ua te
s ca
sh -re
la te
d pe
rfo rm
an ce
(a s
me as
ur ed
fr om
th e
st at
em en
t o f c
as h
flo ws
) r el
at ive
to c
ur re
nt li
ab ili
tie s
Ca sh
to c
ur re
nt a
ss et
s (C
as h
+ M
ar ke
ta bl
e se
cu rit
ie s)
/ C ur
re nt
a ss
et s
In di
ca te
s th
e pa
rt of
c ur
re nt
a ss
et s
th at
a re
a mo
ng th
e mo
st fu
ng ib
le (i
.e .,
ca sh
a nd
m ar
ke ta
bl e
se cu
rit ie
s).
Ca sh
p os
iti on
(C as
h +
M ar
ke ta
bl e
se cu
rit ie
s) / T
ot al
a ss
et s
In di
ca te
s th
e pe
rc en
t o f t
ot al
a ss
et s
th at
a re
m os
t f un
gi bl
e (i.
e. , c
as h)
.
Cu rr
en t l
ia bi
lit y p
os iti
on Cu
rr en
t l ia
bi lit
ie s
/ T ot
al a
ss et
s In
di ca
te s
wh at
p er
ce nt
o f t
ot al
a ss
et s
th e
fir m’
s cu
rr en
t lia
bi lit
ie s
re pr
es en
t.
Li mi
ta tio
ns Li
qu id
ity m
ea su
re s
ar e
im po
rta nt
, e sp
ec ia
lly in
ti me
s of
e co
no mi
c in
st ab
ili ty,
b ut
th ey
a lso
n ee
d to
b e
lo ok
ed a
t h ol
is tic
al ly
al on
g wi
th fi
na nc
in g
an d
op er
at in
g me
as ur
es o
f a fi
rm ’s
pe rfo
rm an
ce .
1.
Ac co
un tin
g pr
oc es
se s
(e .g.
, m on
th ly
cl os
e) li
mi t e
ffi ca
cy o
f t he
se m
ea su
re s
wh en
yo u
wa nt
to u
nd er
st an
d da
ily c
as h
po si
tio n.
2.
N o
ac co
un t t
ak en
o f r
is k
an d
ex po
su re
o n
th e
lia bi
lit y s
id e.
TA BL
E 1 /
W he
n an
d H
ow to
U se
F in
an ci
al M
ea su
re s
to A
ss es
s Fi
rm P
er fo
rm an
ce (c
on tin
ue d)
Final PDF to printer
526 How to Conduct a Case Analysis
rot20477_caseanalysis_516-526.indd 526 12/07/15 08:25 PM
Ta bl
e 1e
: M ar
ke t R
at io
s Fo
rm ul
a Ch
ar ac
te ri
st ic
s
Bo ok
va lu
e pe
r s ha
re
To ta
l s to
ck ho
ld er
s’ eq
ui ty
/ Nu
mb er
o f s
ha re
s ou
ts ta
nd in
g Eq
ui ty
o r n
et a
ss et
s, as
m ea
su re
d on
th e
ba la
nc e
sh ee
t
Ea rn
in gs
-b as
ed g
ro wt
h mo
de ls
P =
k E
/ ( r
– g )
, w he
re E
= e
ar ni
ng s,
k =
d ivi
de nd
pa
yo ut
ra te
, r =
d is
co un
t r at
e, an
d g
= e
ar ni
ng s
gr ow
th
ra te
Va lu
at io
n mo
de ls
th at
d is
co un
t e ar
ni ng
s an
d di
vid en
ds
by a
d is
co un
t r at
e ad
ju st
ed fo
r f ut
ur e
ea rn
in gs
g ro
wt h
M ar
ke t-t
o- bo
ok (S
to ck
p ric
e #
Nu mb
er o
f s ha
re s
ou ts
ta nd
in g)
/ To
ta l
st oc
kh ol
de rs
’ e qu
ity
M ea
su re
s ac
co un
tin g-
ba se
d eq
ui ty
Pr ic
e- ea
rn in
gs (P
E) ra
tio St
oc k
pr ic
e / E
PS M
ea su
re s
ma rk
et p
re mi
um p
ai d
fo r e
ar ni
ng s
an d
fu tu
re
ex pe
ct at
io ns
Pr ic
e- ea
rn in
gs g
ro wt
h (P
EG ) r
at io
PE /
Ea rn
in gs
g ro
wt h
ra te
PE c
om pa
re d
to e
ar ni
ng s
gr ow
th ra
te s,
a me
as ur
e of
PE
“r ea
so na
bl en
es s”
Sa le
s- to
-m ar
ke t v
al ue
Sa le
s / (
St oc
k pr
ic e
# Nu
mb er
o f s
ha re
s ou
ts ta
nd in
g) A
sa le
s ac
tiv ity
ra tio
b as
ed o
n ma
rk et
p ric
e Di
vid en
d yie
ld Di
vid en
ds p
er s
ha re
/ St
oc k
pr ic
e Di
re ct
c as
h re
tu rn
o n
st oc
k in
ve st
me nt
To ta
l r et
ur n
to s
ha re
ho ld
er s
St oc
k pr
ic e
ap pr
ec ia
tio n
pl us
d ivi
de nd
s Li
mi ta
tio ns
M ar
ke t m
ea su
re s
te nd
to b
e mo
re vo
la til
e th
an a
cc ou
nt in
g me
as ur
es b
ut a
lso p
ro vid
e a
go od
p er
sp ec
tiv e
on th
e ov
er al
l he
al th
o f a
c om
pa ny
w he
n us
ed h
ol is
tic al
ly wi
th th
e ot
he r m
ea su
re s
of fi
na nc
ia l p
er fo
rm an
ce .
1.
M ar
ke t v
ol at
ili ty/
no is
e is
th e
bi gg
es t c
ha lle
ng e
wi th
th es
e me
as ur
es .
2.
U nd
er st
an di
ng w
ha t i
s a
re su
lt of
a fi
rm s
tra te
gy /d
ec is
io n
vs . t
he b
ro ad
er m
ar ke
t i s
ch al
le ng
in g.
TA BL
E 1 /
W he
n an
d H
ow to
U se
F in
an ci
al M
ea su
re s
to A
ss es
s Fi
rm P
er fo
rm an
ce (c
on tin
ue d)
Final PDF to printer
rot20477_financialratios.indd 1 12/07/15 12:11 PM
FINANCIAL RATIOS USED IN CASE ANALYSIS!
Formula Profitability Ratios: “How profitable is the company?” Gross Margin (or EBITDA, EBIT, etc.) (Sales – COGS) / Sales Return on Assets (ROA) Net Income / Total Assets Return on Equity (ROE) Net Income / Total Stockholders’ Equity Return on Invested Capital (ROIC) Net Operating Profit After Taxes / (Total Stockholders’ Equity + Total Debt!–!
Value of Preferred Stock) Return on Revenue (ROR) Net Profits / Revenue Dividend Payout Common Dividends / Net Income
Activity Ratios: “How efficient are the operations of the company?”
Inventory Turnover COGS / Inventory Receivables Turnover Revenue / Accounts Receivable Payables Turnover Revenue / Accounts Payable Working Capital Turnover Revenue / Working Capital Fixed Asset Turnover Revenue / Fixed Assets Total Asset Turnover Revenue / Total Assets Cash Turnover Revenue / Cash (which usually includes marketable securities)
Leverage Ratios: “How effectively is the company financed in terms of debt and equity?”
Debt to Equity Total Liabilities / Total Stockholders’ Equity Financial Leverage Index Return on Equity / Return on Assets Debt Ratio Total Liabilities / Total Assets Interest Coverage (Times Interest Earned) (Net Income + Interest Expense + Tax Expense) / Interest Expense Long-Term Debt to Equity Long-Term Liabilities / Total Stockholders’ Equity Debt to Market Equity Total Liabilities at Book Value / Total Equity at Market Value Bonded Debt to Equity Bonded Debt / Stockholders’ Equity Debt to tangible net worth Total Liabilities / (Common Equity – Intangible Assets)
Liquidity Ratios: “How capable is the company of meeting its short-term obligations?”
Current Current Assets / Current Liabilities Quick (Acid-Test) (Cash + Marketable Securities + Net Receivables) / Current Liabilities Cash (Cash + Marketable Securities) / Current Liabilities Operating Cash Flow Cash Flow from Operations / Current Liabilities Cash to Current Assets (Cash + Marketable Securities) / Current Assets Cash Position Cash / Total Assets Current Liability Position Current Liabilities / Total Assets
Market Ratios: “How does the company’s performance compare to other companies?”
Book Value per Share Total Stockholders’ Equity / Number of Shares Outstanding Earnings-Based Growth Models P = kE / (r – g), where E = Earnings, k = Dividend Payout Rate,
r = Discount Rate, and g = Earnings Growth Rate Market-to-Book (Stock Price ! Number of Shares Outstanding) / Total Stockholders’ Equity Price-Earnings (PE) Ratio Stock Price / EPS Price-Earnings Growth (PEG) Ratio PE / Earnings Growth Rate Sales-to-Market Value Sales / (Stock Price ! Number of Shares Outstanding) Dividend Yield Dividends per Share / Stock Price Total Return to Shareholders Stock Price Appreciation + Dividends
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