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Interpretation of Statement Studies Figures: RMA cautions that the studies be regarded only as a general guideline and not as an absolute industry norm. This is due to limited samples within categories, the categorization of companies by their primary Standard Industrial Classification (SIC) number only, and different methods of operations by companies within the same industry. For these reasons, RMA recommends that the figures be used only as general guidelines in addition to other methods of financial analysis. © 2000 by RMA. All rights reserved. No part of this table may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from RMA.

Interpretation of Statement Studies Figures: RMA cautions that the studies be regarded only as a general guideline and not as an absolute industry norm. This is due to limited samples within categories, the categorization of companies by their primary Standard Industrial Classification (SIC) number only, and different methods of operations by companies within the same industry. For these reasons, RMA recommends that the figures be used only as general guidelines in addition to other methods of financial analysis. © 2000 by RMA. All rights reserved. No part of this table may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from RMA.

Ross et al.: Fundamentals II. Financial Statements 3. Working with Financial of Corporate Finance, Sixth and Long-Term Financial Statements Edition, Alternate Edition Planning

Associates, one of many sources of such information. Table 3.11 contains selected ratios from the same source.

There is a large amount of information here, most of which is self-explanatory. On the right in Table 3.10, we have current information reported for different groups based on sales. Within each sales group, common-size information is reported. For example, firms with sales in the $10 million to $25 million range have cash and equivalents equal to 8.7 percent of total assets. There are 96 companies in this group, out of 582 in all.

On the left, we have three years' worth of summary historical information for the entire group. For example, operating expenses rose from 36.4 percent of sales to 37.5 percent over that time.

Table 3.11 contains some selected ratios, again reported by sales groups on the right and time period on the left. To see how we might use this information, suppose our firm has a current ratio of 2. Based on these ratios, is this value unusual?

Looking at the current ratio for the overall group for the most recent year (third column from the left in Table 3.11), we see that three numbers are reported. The one in the middle, 1.5, is the median, meaning that half of the 582 firms had current ratios that were lower and half had bigger current ratios. The other two numbers are the upper and lower quartiles. So, 25 percent of the firms had a current ratio larger than 2.4 and 25 percent had a current ratio smaller than 1.1. Our value of 2 falls comfortably within these bounds, so it doesn't appear too unusual. This comparison illustrates how knowledge of the range of ratios is important in addition to knowledge of the average. Notice how stable the current ratio has been for the last three years.

More Ratios

Take a look at the most recent numbers reported for Sales/Receivables and EBIT/Interest in Table 3.11. What are the overall median values? What are these ratios?

If you look back at our discussion, you will see that these are the receivables turnover and the times interest earned, or TIE, ratios. The median value for receivables turnover for the entire group is 42.2 times. So, the days in receivables would be 365/42.2 = 9, which is the bold-faced number reported. The median for the TIE is 3.6 times. The number in parentheses indicates that the calculation is meaningful for, and therefore based on, only 507 of the 582 companies. In this case, the reason is probably that only 507 companies paid any significant amount of interest.

There are many sources of ratio information in addition to the one we examine here. Our nearby Work the Web box shows how to get this information for just about any company, along with some very useful benchmarking information. Be sure to look it over and then benchmark your favorite company.

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