How a company’s profit and loss statement reveals its industry
The financial analysis derived from a company’s income statement reveals not only the company’s results, but also its belonging to a specific sector. In fact, each company has its own characteristics and management methods, which are reflected in the income statement.
For example, an industry leaves certain traces in a company’s figures, such as the nature of its operations, cost structure or business model. For example, a consulting firm, a distributor or retailer and a travel company are entities that, despite sharing the common objective of generating profits, have very different financial profiles.
The consulting firm: 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 are to audit the client’s needs, define a strategy and translate this strategy into an action plan. Some consultancies also take care of the operational part of the process, based on the recommendations prepared in advance.
Consulting services are part of the service sector and account for several hundred billion dollars in annual sales. Naturally, its revenues originate from the professional services provided by its consultants.
Given the nature of the consulting business, general or administrative expenses are also significant. These include costs associated with office maintenance and administrative costs necessary to coordinate consultants and manage projects.
Distribution: a universe of tangible goods
The distributor is the intermediary between the product manufacturer and the end customer. They may be wholesalers, purchasing centers or supermarkets. It should be noted that more and more manufacturers are dispensing with the services of a distributor and marketing their products directly to end customers, in a direct-to-consumer approach.
Retailers also have to deal with the costs associated with digitally selling their products. These expenses include, for example, maintenance of stores and e-commerce platforms, inventory management systems, logistics and sales personnel. However, their personnel costs may not be as high as those of a consulting firm, as their business model does not rely heavily on specialized expertise.
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, it is common in this sector for there to be considerable marketing costs since the attraction and promotion of tourism packages are fundamental to their business model.
A lot of expenses and management are often encountered, due to the fact that companies have to coordinate several suppliers and keep their travel offerings up to date.
From financial analysis to industry
Understanding how a company’s industry is reflected in its income statement is a real exercise. Sometimes, financial ratios can provide clues. For example, a high inventory turnover ratio might suggest a company, while a high cost of sales might indicate a consulting firm.
In addition, it is essential to take context into account as different sectors are affected differently by cycles, changes and consumer trends. During a recession, a retail firm may see its margins decline, while a consulting firm may experience an increase in demand as companies seek help adapting to a changing environment.
In conclusion, a company’s income statement provides information about its industry. While the numbers may give a distant picture, they actually tell a story about how a company operates, where it allocates its resources and the business model it follows. It is important for any investor to learn from and understand such data to properly understand the business landscape.
