How a company’s income statement reveals its sector
The financial analysis derived from a company’s income statement not only reveals those results, but also its membership in a specific sector. In fact, each company has its own characteristics and forms of management, which are reflected in the income statement.
For example, a sector leaves certain imprints on a company’s figures, such as the nature of its operations, the cost structure or the business model. For example, a consultancy, a distributor or retailer and a travel company are entities that, despite sharing the common objective of generating benefits, have very different financial profiles.
The Consultant: The Strength of Human Talent
A consultancy helps a company to solve a specific problem, whether strategic or operational (review of internal processes, launch of a new service offering, etc.). It can also be specialized or generalist, so it is aimed at any type of organization that needs it.
The main tasks of a consultancy firm are to audit the client’s needs, define a strategy and translate this strategy into an action plan. Some consultancies also deal with the operational part of the process, based on the recommendations prepared beforehand.
Consulting services are part of the service sector and represent several hundred billion dollars in annual sales. Naturally, their income originates from the professional services offered by their consultants.
Given the nature of the consulting business, overhead or management expenses are also significant. These include the costs associated with maintaining offices and the administrative costs necessary to coordinate consultants and manage projects.
Distribution: a universe of tangible goods
The distributor is the intermediary between the manufacturer of the product and the end customer. They can be wholesalers, shopping centers or supermarkets. It should be noted that more and more manufacturers dispense with the services of a distributor and market their products directly to end customers, in a direct approach to the consumer.
Retailers also have to face the costs related to the digital sale of their products. These expenses include, for example, the maintenance of stores and e-commerce platforms, inventory management systems, logistics and sales personnel. However, your personnel costs may not be as high as those of a consulting firm, since your business model doesn’t rely much on specialized knowledge.
The travel company: the journey in numbers
In any travel agency, there are three basic departments or areas: marketing or sales; operations or reservations and accounting; although there may be others defined by the characteristics of the company (size, location, objectives, etc.). The highest expenses for these agencies are travel services such as booking flights, hotels and tours. In addition, in this sector it is common for there to be considerable marketing costs since the attraction and promotion of tourist packages are fundamental to their business model.
Often there are a large amount of expenses and a lot of management, due to the fact that companies have to coordinate several suppliers and keep their travel offer up to date.
From financial analysis to the sector
Understanding how a company’s sector is reflected in its income statement is a real exercise. Sometimes, financial ratios can provide clues. For example, a high inventory turnover ratio may suggest a company, while a high cost of sales may indicate a consultant.
In addition, it is essential to consider the context as different sectors are affected differently by consumer cycles, changes and trends. During a recession, a retail company may see its margins decrease, while a consulting firm may experience an increase in demand, as companies seek help to adapt to a changing environment.
In conclusion, a company’s income statement provides information about its sector. Although the numbers may give a distant picture, they actually tell a story about how a company works, where it allocates its resources and the business model it follows. It is important for any investor to learn from it and understand such data in order to properly understand the business landscape.
