INKBR Data Codebook

Dan & Bradstreet Database: Key Business Ratios - Documentation

Key Business Ratios measure the relationship between various financial values in a company's balance sheet and income statement. If we have a set of such ratios for the entire industry, we can evaluate an individual company's ratios based on those industry "norms". By doing this, we can gain additional insight into the company's performance and stability, particularly when the objective of our analysis is to set credit limits, assess partnership prospects, assess acquisition prospects, or just perform analysis of an individual company vis-à-vis its peers.

Industry Norms are based on the SIC code of the company you are inquiring on, as well as the firm's geographic location and total asset size, when available. They represent median statistics derived from D&B's Financial Statement Database of public and private companies, which is updated on a quarterly basis

There are 14 Key Business Ratios in the Dun & Bradstreet Database, grouped in three categories:

• Solvency Ratios (6)
  
  Solvency Ratios measure the degree to which companies can meet their short- and long-term obligations
  1. Quick Ratio

     Also known as "Acid Test" or "Liquid Ratio" measures the extent to which a business can cover its current liabilities with those current assets that are cash or readily convertible to cash. Shows number of dollars of liquid assets available to cover each dollar of current debt.

     Formula: (cash + accounts receivable) / current liabilities. Generally, the 1.0 or higher ratio shows that current liabilities can be fairly easily met. In other words, the ratio measures the level of liquidity for a given company (group of companies, or the entire industry).

  2. Current Ratio

     Current Ratio measures the relation between current assets and current liabilities. Usually a ratio of 2.0 or higher is desirable. The higher it is, the better is the company's potential to cover its liabilities.

     Formula: current assets / current liabilities

  3. Current Liabilities to Net Worth Ratio

     This is the ratio between the total amount due to creditors during any given year and the amount of stockholders capital. It is commonly accepted that a business is in trouble when this ration exceeds 80%.

     Formula: current liabilities / current net worth

  4. Current Liabilities to Inventory

     The ratio measures total amount due to creditors in any given year to total inventories. A high ratio (in relation to industry norms) may indicate the company's dependence on unsold inventory to finance its obligations.

     Formula: current liabilities / inventories

  5. Total Liabilities to Net Worth Ratio

     Similar to the one above, but takes all the company's debt in relation to stockholders equity. This ratio focuses more on the long-term debt (as opposed to current liabilities). High long-term debt can burden the company with substantian interest liabilities. If the ratio exceeds 1.0 (total debt is larger than total equity, creditors stand more to loose in case of the company's collapse than the owners (stockholders)

     Formula: total liabilities / net worth

  6. Fixed Assets to Net Worth (%)

     This ratio measures the percentage of company's assets frozen as fixed assest in relation to total equity.

     Formula: fixed assets / net worth

     It is generally accepted that when this ratio exceeds 75%, the company becomes more vulnerable to unexpected changes in business climate. Most of the company's assets are frozen as fixed assets, and there may not be enough working capital to support day-to-day operations.

• Efficiency Ratios (5)

  Efficiency Ratios are centred on: the company's receivables; efficiency of the company's use of its assets; timely payments to the company's suppliers; and the use of borrowed funds.

  1. Collection Period Ratio (Days)

     Measures how fast business can increase its cash supply through collection of accounts receivable.

     Formula: accounts receivable / sales x 365

  2. Sales to Inventory Ratio

     Measures how fast inventory is being converted into a cash flow for the business. A low ratio shows obsolete inventories; a very high ratio may indicate that the company is loosing sales because it may be understocked.

     Formula: annual net sales / inventory

  3. Assets to Sales Ratio

     This ratio shows how well assets are being used to generate sales. An abnormally high ratio shows that the company's assets are not being used efficiently. An abnormally low ratio may indicate that assets are being overused, or that the company may not have enough assets to support the level of business activity.

     Formula: total assets / net sales

  4. Sales to Net Working Capital Ratio

     This ratio reflects the number of times working capital turns over annually to generate the company's sales. Usually viewed together with Assets to Sales Ratio.

     Formula: sales / net working capital or sales / (current assets - current liabilities)

     An abnormally high ratio may indicate that the company is overtrading in relation to its capital - relying extensively on bank credit or suppliers' credit.

  5. Accounts Payable to Sales Ratio

     An indicator of how the company pays its suppliers in relation to the volume of sales. Usually, a high ratio indicates that the company relies excessively on suppliers' credit.

     Formula: accounts payable / net sales

• Profitability Ratios (3)

  Profitability Ratios measure company's performance in terms of earned profit in relation to sales, total assets, and net worth.

  1. Return on Net Worth (%)

     In other words, Return on Equity - this ratio measures the company's returns in relation to capital invested by the owners (shareholders). It can be used as a proxy for management ability to generate profits out of the invested capital.

     Formula: Net Profits After Taxes / Net Worth

  2. Return on Assets (%)

     Often regarded as the key profitability ratio.

     Formula: Net Profits After Taxes / Total Assets

  3. Return on Sales (%)

     Also known as Profit Margin,this ratio measure annual Profit After Taxes in relation to annual Sales.

     Formula: Net Profit After Taxes / Net Sales

     This ratio is also used to measure the ability of a busines to weather adverse market conditions. A company with a high ratio of profit to sales stands a better chance of surviving a sharp downturn in market conditions than a company with a low ratio.