Case 003Reading financialsCore
You have two minutes with selected financial data for two unnamed companies. Which industries are they in, and how do you know?
1The situation
Company A: gross margin 78%, EBITDA margin 30%, capex 4% of revenue, deferred revenue on the balance sheet equal to 35% of annual revenue, no inventory, receivables of 60 days and payables of 30 days.
Company B: gross margin 24%, EBITDA margin 6%, capex 3% of revenue, no deferred revenue, inventory of 30 days, receivables of 3 days and payables of 40 days.
2Your task
Name a likely industry for each, and give the two or three numbers that decide it.
Quick check
Which single line tells you most about Company A?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Company A reads as subscription software and Company B as grocery retail. A has a very high gross margin, no inventory and large deferred revenue: customers pay upfront for a product that costs little to deliver. B has a thin margin, stock that turns every month, customers who pay at the till and suppliers paid later, so its working capital funds the business.
Step 1What order do you read the numbers in?
Go from the top of the income statement to the balance sheet: gross margin, then operating margin, then working capital. Gross margin tells you what the product costs to make; working capital tells you how the customer pays. Together they narrow most businesses to a handful of industries in under a minute.
Step 2Why is Company B almost certainly selling to consumers?
Look at receivables of 3 days. Businesses selling to other businesses give credit; shops selling to households get paid at the till. Payables of 40 days against stock of 30 and receivables of 3 means suppliers are financing the shelves, a negative working capitalWhen money owed to suppliers exceeds stock plus money owed by customers, so the business collects cash before it pays for what it sold. model typical of supermarkets. The thin margin fits: grocery earns on volume, not price.
Step 3What do you say if you are not sure?
Name the runner-up and what would separate them. Company A could also be a data or information services business; a gross margin under 60% or significant capitalised software would push you there. Hedging with a test is strong; hedging with a list of guesses is weak.
Step 4What would make Company B something other than a supermarket?
Test the one line that could flip it. If receivable days rose to 40 or more, B would be selling to businesses, and a food distributor supplying restaurants would fit better than a shop. A 24% gross margin with 30 days of stock also fits a pharmacy chain, so a sharper answer names the family, consumer retail with fast moving stock, and then picks grocery because the margin is thinner than most other retail. Saying which number you would ask for next, here the share of fresh produce in stock, shows the interviewer how you would close the gap with more time.
Where candidates lose it
Candidates spend the two minutes on EBITDA margin, which overlaps across dozens of industries, and never reach working capital, which is where the industry signature lives.
The other miss is answering service versus manufacturing without a specific industry. Commit to one, then give the test that would change your mind.
What the interviewer asks next
- What would a steel company's profile look like on these same lines?
- Company B's payables stretch to 60 days. Is that good news?
- Which of these two would a sponsor lever more, and why?
Asked at Harris Williams, Mergers and Acquisitions, Richmond, 2025 (Wall Street Oasis): Had 2 minutes to review selected financial data and had to give my opinion on which industry the two companies likely operate in.
Asked at Harris Williams, Generalist, Richmond, 2025 (Wall Street Oasis): looking at 2 IS and had to figure out which one was a manufacturing company and which was a service company
Company names and figures are illustrative.