SOLVENCY (6)


              NOTES RECEIVABLE


          COST OF SALES


                      BALANCE SHEET RATIOS

CURRENT RATIO:  current assets should be more than twice the 
               current liabilities.

ACID TEST:  liquid assets should be more than the current 

INVENTORY RATIO:  inventory should be less than 3/4 of the net 
               working capital in a small company and less than 
               the net working capital in a large company.

LONG-TERM DEBT RATIO:  long-term debt should be less than the net 
               working capital

FIXED ASSETS RATIO:  fixed assets should be less than 2/3 of the 
               tangible net worth in a small company and less 
               than 3/4 of the tangible net worth in a large 

LIABILITIES RATIO:  total liabilities should be less than the 
               tangible net worth.  (This measures creditors' 
               interest vs owner's interest.)

CURRENT LIABILITIES RATIO:  current liabilities should be less 
               than 2/3 of the tangible net worth of a small 
               company and less than 3/4 for a large company.

NET WORKING CAPITAL:  current assets less the current 

TANGIBLE NET WORTH:  net worth less the intangible assets.

SMALL COMPANY:  tangible net worth less than $250,000 (as of 
               1972; this could be adjusted for inflation) (<75% 
               of net working capital).

LARGE COMPANY:  tangible net worth more than $250,000 (as of 
               1972; this could be adjusted for inflation) (<100% 
               of net working capital).

                     INCOME STATEMENT RATIOS


NET SALES TO TANGIBLE NET WORTH:  measures net sales against the 
owner's equity

NET SALES TO NET WORKING CAPITAL:  examines the effect of net 
sales on the ability of the company to meet emergencies.

NET PROFITS TO TANGIBLE NET WORTH:  measures the efficiency of 
the company management.

NET PROFITS TO NET SALES:  measures the efficiency of operation 
in a competitive situation.  The "ultimate" test of a company.

AVERAGE COLLECTION PERIOD:  examines the turnover of 
receivables.  Generally, should be no more than one-third greater 
than the net selling terms.

     (collection_period) = 

             ( accounts_receivable ) / ( net_credit_sales / 365 )
Dun & Bradstreet Fourteen Key Business Ratios 1984-85 Industry Norms and Key Business Ratios Library Edition SOLVENCY
D&B provides ratio analysis so you can compare your business to others in your industry. This can really give you insight.

Quick Ratio is computed by dividing cash plus accounts receivable by total current liabilities. Current liabilities are all the liabilities that fall due within one year. This ratio reveals the protection afforded short-term creditors in cash or near-cash assets. It shows the number of dollars of liquid assets available to cover each dollar of current debt. Any time this ratio is as much as 1 to 1 (1.0) the business is said to be in a liquid condition. The larger the ratio the greater the liquidity. Current Ratio. Total current assets are divided by total current liabilities. Current assets include cash, accounts and notes receivable (less reserves for bad debts), advances on inventories, merchandise inventories, and marketable securities. This ratio measures the degree to which current assets cover current liabilities. The higher the ratio the more assurance exists that the retirement of current liabilities can be made. The current ratio measures the margin of safety available to cover any possible shrinkage in the value of current assets. Normally a ratio of 2 to 1 (2.0) or better is considered good. Current Liabilities to Net Worth is derived by dividing current liabilities by net worth. This contrasts the funds that creditors temporarily are risking with the funds permanently invested by the owners. The smaller the net worth and the larger the liabilities, the less security for the creditors. Care should be exercised when selling any firm with current liabilities exceeding two-thirds (66.6 percent) of net worth. Current Liabilities to Inventory. Dividing current liabilities by inventory yields another indication of the extent to which the business relies on funds from disposal of unsold inventories to meet its debts. This ratio combines with Net Sales to Inventory to indicate how management controls inventory. It is possible to have decreasing liquidity while maintaining consistent sales-to- inventory ratios. Large increases in sales with corresponding increases in inventory levels can cause an inappropriate rise in current liabilities if growth isn't made wisely. Total Liabilities to Net Worth. Obtained by dividing total current plus long-term and deferred liabilities by net worth. The effect of long-term (funded) debt on a business can be determined by comparing this ratio with Current Liabilities to Net Worth. The difference will pinpoint the relative size of long-term debt, which, if sizable, can burden a firm with substantial interest charges. In general, total liabilities shouldn't exceed net worth (100 percent) since in such cases creditors have more at stake than owners. Fixed Assets to Net Worth. Fixed assets are divided by net worth. The proportion of net worth that consists of fixed assets will vary greatly from industry to industry but generally a smaller proportion is desirable. A high ratio is unfavorable because heavy investment in fixed assets indicates that either the concern has a low net working capital and is over-trading or has utilized large funded debt to supplement working capital. Also, the larger the fixed assets, the bigger the annual depreciation charge that must be deducted from the income statement. Normally, fixed assets above 75 percent of net worth indicate possible over-investment and should be examined with care. EFFICIENCY Collection Period. Accounts receivable are divided by sales and then multiplied by 365 days to obtain this figure. The quality of the receivables of a company can be determined by this relationship when compared with selling terms and industry norms. In some industries where credit sales are not the normal way of doing business, the percentage of cash sales should be taken into consideration. Generally, where most sales are for credit, any collection period more than one-third over normal selling terms (40.0 for 30-day terms) is indicative of some slow-turning receivables. When comparing the collection period of one concern with that of another, allowances should be made for possible variations in selling terms. Net Sales to Inventory. Obtained by dividing annual net sales by inventory. Inventory control is a prime management objective since poor controls allow inventory to become costly to store, obsolete or insufficient to meet demands. The sales-to-inventory relationship is a guide to the rapidity at which merchandise is being moved and the effect on the flow of funds into the business. This ratio varies widely between different lines of business and a company's figure is only meaningful when compared with industry norms. Individual figures that are outside either the upper or lower quartiles for a given industry should be examined with care. Although low figures are usually the biggest problem, as they indicate excessively high inventories, extremely high turnovers might reflect insufficient merchandise to meet customer demand and result in lost sales. Assets to Sales is calculated by dividing total assets by annual net sales. This ratio ties in sales and the total investment that is used to generate those sales. While figures vary greatly from industry to industry, by comparing a company's ratio with industry norms it can be determined whether a firm is overtrading (handling an excessive volume of sales in relation to investment) or undertrading (not generating sufficient sales to warrant the assets invested). Abnormally low percentages (above the upper quartile) can indicate overtrading which may lead to financial difficulties if not corrected. Extremely high percentages (below the lower quartile) can be the result of overly conservative or poor sales management, indicating a more aggressive sales policy may need to be followed. Sales to Net Working Capital. Net sales are divided by net working capital. (Net working capital is current assets minus current liabilities.) This relationship indicates whether a company is overtrading or conversely carrying more liquid assets than needed for its volume. Each industry can vary substantially and it is necessary to compare a company with its peers to see if it is either overtrading on its available funds or being overly conservative. Companies with substantial sales gains often reach a level where their working capital becomes strained. Even if they maintain and adequate total investment for the volume being generated (Assets to Sales), that investment may be so centered in fixed assets or other non-current items that it will be difficult to continue meeting all current obligations without additional investment or reducing sales. Accounts Payable to Sales. Computed by dividing accounts payable by annual net sales. This ratio measures how the company is paying its suppliers in relation to the volume being transacted. An increasing percentage, or one larger than the industry norm, indicates the firm may be using suppliers to help finance operations. This ratio is especially important to short-term creditors since a high percentage could indicate potential problems in paying vendors. PROFITABILITY Return on Sales (Profit Margin) is obtained by dividing net profit after taxes by annual net sales. This reveals the profits earned per dollar of sales and therefore measures the efficiency of the operation. Return must be adequate for the firm to be able to achieve satisfactory profits for its owners. This ratio is an indicator of the firm's ability to withstand adverse conditions such as falling prices, rising costs and declining sales. Return on Assets. Net profit after taxes divided by total assets. This ratio is the key indicator of profitability for a firm. It matches operating profits with the assets available to earn a return. Companies efficiently using their assets will have a relatively high return while less well-run businesses will be relatively low. Return on Net Worth (Return on Equity) is obtained by dividing net profit after tax by net worth. This ratio is used to analyze the ability of the firm's management to realize an adequate return on the capital invested by the owners of the firm. Tendency is to look increasingly to this ratio as a final criterion of profitability. Generally, a relationship of at least 10 percent is regarded as a desirable objective for providing dividends plus funds for future growth. For further information, contact Dun & Bradstreet

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