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Key Business Ratios: A User Guide
Table of Contents:

Logging In:
http://www.lib.umn.edu/libdata/page.phtml?page_id=1235
To log in to D&B™ Key Business Ratios
  • 1. Open Internet Explorer and go to http://busref.lib.umn.edu
  • 2. Under Business and Economics Databases, choose 'A-Z List'
  • 3. Choose Key Business Ratios
  • 4. If you are entering the database remotely (not in the library), you will need to authenticate by using your username (the U of MN One-Stop email address) and your University password.


Changing the Screen Resolution
    The screen resolution setting, measured in pixels, determines how much information can be displayed on your desktop. You can choose from two resolution settings, 800 x 600 or 1024 x 768. The lower resolution, 800 x 600, makes items on the screen appear large although the actual screen area is small. The higher resolution, 1024 x 768, reduces the size of items on your screen and increases the size of your desktop.
    To change your screen resolution On the navigation bar, select the setting of your choice from the drop-down list, and then click Go.


Calculate Ratios
    Calculate 14 Key Business Ratios that cover all critical areas of business performance-solvency, efficiency, and profitability. Just select the industry, year and asset range of your choice.

    • 1. From the criteria selection bar on the Ratio Spreadsheet, do one of the following to select an industry:

      • To select an industry from a list of Standard Industry Classification (SIC) codes, click the SIC arrow to access the drop-down list. Then check each SIC code you want, and click OK.
      • To select an industry from a list of types of businesses, click the Line of Business arrow to access the drop-down list. Then check each item you want, and click OK.
      • Type the name of the industry in the Line of Business field, and click Find.

    • 2. Year: At this time, only 2004 is available.

    • 3. Click the Asset Range arrow to access the drop-down list. Then check each range you want, and click OK.

    Each time you select criteria from any of the three filter categories, the results section on the left side of the Ratio Spreadsheet will be updated. The right side of the page shows the Solvency ratios for each line item. Click on the other ratio tabs to see Efficiency and Profitability ratios.

    Use the page navigation links, located at the top and bottom left, to display other pages. Click any of the report icons, located in the left-most column, to display all 14 ratios in a report format.



Displaying Ratios in a Report Format
    To display ratios in report format:

    • 1. After you have selected the ratios for the industry, years, and asset ranges you want on the Ratio Spreadsheet page, do one of the following:

      • Click for the line of business you want to display in report format.

      • Click the Report tab. The first item listed on the Ratio Spreadsheet will be displayed in report format. If you wish to change the industry and/or asset range, select from the drop-down lists at the top of the page. (The selections in the drop-down lists are based on the industry, years, and asset ranges selected on the Ratio Spreadsheet.)

    • 2. If you wish to:

      • Print the report, click Print. A preview version of the report will be displayed in a separate window and the Print dialog box appears. Enter any changes to the print settings, if required, and then click Print.p
      • Export the report, click Export. The File Download dialog box appears. To download the report, click Open. The report will be downloaded and displayed in Microsoft™ Excel. To save the report, click Save. Specify the location and file name, and then click Save. The file will be saved in a comma separated value (.CSV) format.


Performing a Competitive Analysis
    You can type in the figures from a company's financial statement to generate a comparison of the company's own business ratios with the industry.

    To perform a comparative analysis:

    • 1. After you have calculated the ratios for the industry, years, and asset ranges you want to use for the comparison, do one of the following:

      • Click for the line of business you want to compare to display the ratios in report format.

      • Click the Report tab. Select the industry and asset range you want to use for your comparison from the drop-down lists at the top of the page.

    • 2. Click the My Financials tab.

    • 3. Enter the company, location and contact information in the appropriate fields.

    • 4. Enter the values from the company's financial statement in the appropriate fields, and then click Submit.

    The Comparative Analysis Report showing the variances between the company and the industry selected will be displayed.

    If you wish to:

    • Edit any of the company's financial information or change the industry/asset range you're comparing against, click Edit. Enter the changes, and click Submit again to update the report.

    • Print the report, click Print. A preview version of the report will be displayed in a separate window and the Print dialog box appears. Enter any changes to the print settings, if required, and then click Print.

    • Export the report, click Export. The File Download dialog box appears. To download the report, click Open. The report will be downloaded and displayed in Microsoft™ Excel. To save the report, click Save. Specify the location and file name, and then click Save. The file will be saved in a comma separated value (.CSV) format.


Solvency Ratios
This information is taken from the Key Business Ratios Help Screens.

Solvency ratios measure the financial soundness of a business and how well the company can satisfy its short- and long-term obligations. D&B uses six key financial business ratios to measure a company's solvency:

  • -- Quick Ratio - This ratio, also called "acid test" or "liquid" ratio, considers only cash, marketable securities (cash equivalents) and accounts receivable because they are considered to be the most liquid forms of current assets. A Quick Ratio less than 1.0 implies dependency on inventory and other current assets to liquidate short-term debt. This ratio is calculated using the following formula:
      Cash + Accounts Receivable - Current Liabilities

  • -- Current Ratio - This ratio is a comparison of current assets to current liabilities, commonly used as a measure of short-run solvency, i.e., the immediate ability of a business to pay its current debts as they come due. Potential creditors use this ratio to measure a company's liquidity or ability to pay off short-term debts. This ratio is calculated using the following formula:
      Current Assets - Current Liabilities

  • -- Current Liabilities to Net Worth Ratio - This ratio indicates the amount due creditors within a year as a percentage of the owners or stockholders investment. The smaller the net worth and the larger the liabilities, the less security for creditors. Normally a business starts to have trouble when this relationship exceeds 80%. This ratio is calculated using the following formula:
      Current Liabilities - Net Worth

  • -- Current Liabilities to Inventory Ratio - This ratio shows, as a percentage, the reliance on available inventory for payment of debt (how much a company relies on funds from disposal of unsold inventories to meet its current debt). This ratio is calculated using the following formula:
      Current Liabilities - Inventory

  • -- Total Liabilities to Net Worth Ratio - This ratio shows how all of a company's debt relates to the equity of the owners or stockholders. The higher this ratio, the less protection there is for the creditors of the business. This ratio is calculated using the following formula:
      Total Liabilities - Net Worth

  • -- Fixed Assets to Net Worth Ratio - This ratio shows the percentage of assets centered in fixed assets compared to total equity. Generally the higher this percentage is over 75%, the more vulnerable a concern becomes to unexpected hazards and business climate changes. Capital is frozen in the form of machinery and the margin for operating funds becomes too narrow for day-to-day operations. This ratio is calculated using the following formula:
      Fixed Assets - Net Worth


Efficiency Ratios

This information is taken from the Key Business Ratios Help Screens.

Efficiency ratios measure the quality of a business' receivables and how efficiently it uses and controls its assets, how effectively the firm is paying suppliers, and whether the business is overtrading or undertrading on its equity (using borrowed funds). D&B uses five key financial business ratios to measure a company's efficiency:

  • -- Collection Period Ratio - This ratio is helpful in analyzing the collectability of accounts receivable, or how fast a business can increase its cash supply. Although businesses establish credit terms, they are not always observed by their customers. In analyzing a business, you must know the credit terms it offers before determining the quality of its receivables. While each industry has its own average collection period (number of days it takes to collect payments from customers), there are observers who feel that more than 10 to 15 days over terms should be of concern. This ratio is calculated using the following formula:
      Accounts Receivable - Sales x 365 Days

  • -- Sales to Inventory Ratio - This ratio provides a yardstick for comparing stock-to-sales ratios of a business with others in the same industry. When this ratio is high, it may indicate a situation where sales are being lost because a concern is understocked and/or customers are buying elsewhere. If the ratio is too low, this may show that inventories are obsolete or stagnant. This ratio is calculated using the following formula:
      Annual Net Sales - Inventory

  • -- Assets to Sales Ratio - This ratio rates sales to the total investment that is used to generate those sales. An abnormally high percentage may indicate that a business is not being aggressive enough in its sales efforts, or that its assets are not being fully utilized. A low ratio may indicate that a business is selling more than can be safely covered by its assets. This ratio is calculated using the following formula:
      Total Assets - Net Sales

  • -- Sales to Net Working Capital Ratio - This ratio measures the number of times working capital turns over annually in relation to net sales. This ratio should be viewed in conjunction with the Assets to Sales Ratio. A high turnover rate can indicate overtrading (excessive sales volume in relation to the investment in the business) and also may indicate that the business relies extensively upon credit granted by suppliers or the bank as a substitute for an adequate margin of operating funds. This ratio is calculated using the following formula:
      Sales - Net Working Capital

  • -- Accounts Payable to Sales Ratio - This ratio measures how a company pays its suppliers in relation to the sales volume being transacted. A low percentage would indicate a healthy ratio. A high percentage may indicate that the business may be using suppliers to help finance operations. This ratio is calculated using the following formula:
      Accounts Payable - Net Sales


Profitability Ratios

This information is taken from the Key Business Ratios Help Screens.

Profitability ratios measure how well a company is performing by analyzing how profit was earned relative to sales, total assets and net worth. D&B uses three key financial business ratios to measure a company's efficiency:

  • -- Return on Sales (Profit Margin) Ratio - This ratio measures the profits after taxes on the year's sales. The higher this ratio, the better prepared the business is to handle downtrends brought on by adverse conditions. This ratio is calculated using the following formula:
      Net Profit After Taxes - Net Sales

  • -- Return on Assets (ROA) Ratio - This ratio shows the after tax earnings of assets and is an indicator of how profitable a company is. Return on assets ratio is the key indicator of the profitability of a company. It matches net profits after taxes with the assets used to earn such profits. A high percentage rate will tell you the company is well run and has a healthy return on assets. This ratio is calculated using the following formula:
      Net Profit After Taxes - Total Assets

  • -- Return on Net Worth Ratio - This ratio measures the ability of a company's management to realize an adequate return on the capital invested by the owners in the company. This ratio is calculated using the following formula:
      Net Profit After Taxes - Net Worth


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