Financial Ratios: Industry Norms and Company Specific

Overview

Mathematical relationship between 2 quantities.

Ratio for 600 to 300 is 2:1, 2 to 1, or 2.

Use to compare company’s performance with industry norms.

Show relationship between 2 financial terms from Balance Sheet, Income Statement, …

Example for a Solvency Ratio

Ratios can be categorized such as ratios for Solvency, Profitability, Efficiency, …

Example for Currency Ratio which is a Solvency ratio:

  • Current Ratio = current assets/current liabilities
  • Predicts short term cash problems.

Use to Evaluate Company’s Financial Situation

Students can compare a company’s ratios toindustry ratios(norms) for company’s primary SIC/NAICS.

Look Up Industry Ratios Using Industry SIC or NAICS:

D&B Financial Ratios: Industry Norms & Key Business Ratios(Arranged by SICs)

Ref Reserve HF5681 R25 I52x (3 most current years) Circulation Desk, Folsom Library; Earlier editions on the 3rd floor, Folsom Library.

RMA Annual Statement Studies(Arranged by NAICS)

Ref Reserve HF 5681 B2 R6x (3 most current years) Circulation Desk, Folsom Library; Earlier editions on the 3rd floor, Folsom Library.

Locate Ratios for a Specific Company’s Primary Industry (Primary SIC/NAICS)

Go to Click articles/journals tab at top. Click on “M”.

Click on Mergent Online. Click on mergent online button. Click on Ticker radio button. Enter company’s Ticker Symbol. Click on Search button. View entry for your company.

Note primary SIC/NAICS in left frame. Click on Company Financials tab at top. Click Ratios link.

CalculateaCompany Ratio When Can’t Locate Specific Ratio

Locate Formula for Ratio

  • See Preface of either RMA Annual Statement Studies and/or D&B Financial Ratios .
  • Locate the formula for the ratio in question.

Locate Financial Item(s) in Consolidated Financials Needed for Calculation

  • Go to Click articles/journals tab at top. Click on “M”.
  • Click on Mergent. Click on mergent online button.
  • Click on EDGAR SEARCH tab at top.
  • Click on Ticker radio button and enter company’s Ticker Symbol.
  • From Filing Date Search section, select radio button for Last 12 Months. From the Filing Type pull down menu, select 10-K. Click on Search button.
  • View document 10-K, Part II, Item 8.

Quartiles

Arrange ratios in numeric order from weakest to strongest.

Divide ratios into 4 roughly, equally sized groups.

 “Upper Quartile” (group with strongest ratios)

“Lower Quartile” (group with weakest ratios)

Largest ratio value not always the strongest; Depends on ratio.

Range between upper and lower quartiles represents middle 50 % of all companies in sample.

Median

Industry ratio that’s “smack dab” in the middle of the ratio “line up”.

If you had odd number of ratios such as 19, median is the 10th ratio in line up.

If you have even number of ratios such as 20, median is average of 10 and 11th ratios.

Why Use Quartiles and Medians?

Handles outliers.

Accounts for range of ratios in group.

More accurate than average for group of ratios.

For more on financial ratios, go to: .

C.O Holmes 10/4/2009