Question

Financial ratios should be interpreted in the context of all other relevant information that is available about the company. For example, management may have decided on a strategy of cutting profit margins in the short term in order to win market share. This would affect the current profit margin, but in the long run should result in higher sales and more profits.

This point is well illustrated by the following case study:
Philip Morris is the largest tobacco company in the US. However, in the early 1990s its main brand, Marlboro, suffered a large drop in market share. The company increased the prices of Marlboro cigarettes, hoping to maintain profits. However, this strategy was not successful, because customers were unwilling to pay the higher prices for premium brands, when cheaper brands were selling at much lower prices. So on 'Marlboro Friday (2nd April 1993) Philip Morris began a price war and overnight cut the price of its Marlboro cigarettes by 20%. $10 billion was immediately wiped off the market value of the company, but the price war changed market behaviour. Customers switched back to the lower-priced premium brands such as Marlboro and the cheap cigarette brands were largely destroyed. American Tobacco decided to quit the market altogether. By 1995 Marlboro had regained its lost market share and its profits and its share price had fully recovered.

Required: In the light of above case study make review of the financial information needed (Financial ratio calculation not required.) While answering you may consider following:

Who is the user?
What information is the user interested in?
Why has the user requested the report?
How should the information be presented to the user?
What industry does the company operate in?
Is the business seasonal?
Have there been any key transaction during the year that may affect comparisons with previous years?
(25marks)

Answer 1

1) Here the user is the management of the company.

2) The user is interested in the market share and product price information and the relation between them.

3) The user has requested the information as to understand whether by cutting price in the short-term whether it can gain market share in the long-term.

4) The relevant information should be presented to the user like current level of revenue and market share and with how much cut in the price of the product how much market share can be gained and whether the increase in the market with reduce in price will increase the overall revenue.

5) The company is in Tobacco industry.

6) No, the industry is not seasonal, the consumption of such products is generally not seasonal.

7) Yes, the company has lost market share because of the large number of competitors in the industry who are making the product available at cheap prices.