3. where can we obtain industry norms? course hero

How to get industry norms?

A financial analyst can obtain norms from a variety of sources. Two of the most well known are the Dunn & Bradstreet industry ratios and the Risk Management Association guide to industry ratios. Other sources include Standard & Poor's and Value Line. Industry norms often do not come from "representative" samples, and it is often very difficult to categorize firms into industry groups. In addition, the industry norm is an average ratio that may not represent a desirable standard. Thus, industry averages only provide a "rough guide" to a firm's financial health.

When is it difficult to identify the industry category to which a firm belongs?

1. It is sometimes difficult to identify the industry category to which a firm belongs when the firm engages in multiple lines of business.

What is the five question approach?

These questions, along with the related ratios may be stated as follows: 1. How liquid is the firm? Current ratio Acid-test (Quick) ratio Accounts receivable turnover (average collection period) Days in receivables Inventory turnover Days in inventory

How is value created by management determined?

That is, the value created by management is determined by the amount the firm earns on its invested capital relative to the cost of these funds—both debt and equity—and the amount of capital invested in the firm.

Is industry average a desirable target ratio?

5. An industry average is not necessarily a desirable target ratio or norm. There is nothing magical about an industry norm.