Using Financial Statements 29
comparison, averages should be used for all balance sheet numbers when
calculating financial ratios.
- Financial ratios can be no more reliable than the data with which the ra-
tios were calculated. The most reliable data is from audited financial
statements, if the audit reports are clean and unqualified.
- Financial ratios cannot be fully considered without yardsticks of compar-
ison. The simplest yardsticks are comparisons of an enterprise’s current
financial ratios with those from previous periods. Companies often pro-
vide this type of information in their financial reporting. For example,
Apple Computer Inc., recently disclosed the following financial quarterly
information, in millions of dollars:
Quarter 4 3 2 1
Net sales $1,870 $1,825 $1,945 $2,343
Gross margin $1,122 $1,016 $1,043 $1,377
Gross margin 25% 30% 28% 28%
Operating costs $ 383 $ 375 $ 379 $ 409
Operating income $ 64 $ 168 $ 170 $ 100
Operating income 4% 9% 9% 4%
This table compares four successive quarters of information, which
makes it possible to see the latest trends in such important items as Sales,
and Gross Margin and Operating Income percentages. Other types of
compar isons of financial ratios include:
- Comparisons with competitors.For example, the financial ratios of
Apple Computer could be compared with those of Compaq, Dell, or
Gateway.
- Comparisons with industry composites. Industry composite ratios can
be found from a number of sources, such as:
a. The Almanac of Business and Industrial Financial Ratios, au-
thored by Leo Troy and published annually by Prentice-Hall (Para-
mus, NJ). This publication uses Internal Revenue Service data for
4.6 million U.S. corporations, classified into 179 industries and di-
vided into categories by firm size, and reporting 50 different fi-
nancial ratios.
b. Risk Management Associates: Annual Statement Studies. This is a
database compiled by bank loan officers from the financial state-
ments of more than 150,000 commercial borrowers, representing
more than 600 industries, classified by business size, and reporting
16 different financial ratios. It is available on the Internet at
http://www.rmahq.org.
c. Financial ratios can also be obtained from other firms who special-
ize in financial information, such as Dun & Bradstreet, Moody’s,
and Standard & Poor ’s.
