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

Use to Evaluate Company’s Financial Situation  Students can compare a company’s ratios to industry 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 http://library.rpi.edu 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.

Calculate a Company 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 http://library.rpi.edu 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. Financial Ratios: Industry Norms and Company Specific

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: http://library.rpi.edu/update.do?artcenterkey=458. C.O Holmes 10/4/2009