Financial Ratios Comparison Between Industries

by Steve Lander, studioD Google

Financial ratios are tools that companies use to understand their performance by comparing different aspects of their performance. For instance, to identify the current ratio you divide currents assets by current liabilities. It tells you how much of current assets may be used to pay obligations. Different industries tend to have different overall financial performance metrics. By comparing your business to your industry's benchmark, you can determine if you're doing better, worse or about the same as everyone else.

Quick Ratio

The quick ratio is related to the current ratio. Sometimes called the "acid test," it's calculated by dividing your company's total current liabilities into the amount of cash and cash equivalents available, excluding the value of your inventory. Many industries operate below the recommended quick ratio of 1.0 or higher. General merchandise stores average around 0.15, for example, while the average for computer system design firms is 0.33.

Inventory Turnover

The inventory turnover ratio measures how many times your inventory fills and empties. Generally, higher turnover is better since it means that you aren't spending money to store unnecessary items. However, this metric varies by industry. Restaurants must deal with spoilage and turn their inventories 26 times per year on average. Computer system design firms that don't hold onto a lot of inventory and must deal with rapidly changing prices and specifications turn their inventories even faster -- 47 times per year. Retail stores turn their inventories an average of 6.5 times per year.

Return on Sales

Also described as a net profit rate, the return-on-sales metric tells a company how much of every dollar it takes in turns into profit. Retail stores, which frequently have thin margins, average 3.4 percent, while a computer system design firm achieves an 8.2 percent average. Manufacturers have and average return on sales of 7.8 percent, and restaurants have a very similar 7.7 percent rate of return on sales.

Rent to Sales

The rent to sales ratio measures what your company is spending relative to what it's getting out of its location. To calculate it, you divide your annual rent by your annual sales. Restaurants average around 7.1 percent while retailers average around 1.0 percent. Manufacturers and computer system design companies spend around 2.1 percent and 1.9 percent, respectively.

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