Description
Enterprise-size breakdown of the AFTS provides key insights into the economic contributions of firms of different sizes. Micro, small, and medium-sized enterprises (SMEs) are of particular interest given their significant contribution to employment, entrepreneurship, and regional economic development.
Financial ratios by enterprise size are designed to track the performance and financial health of Canadian industries over time and across a range of dimensions, including liquidity, solvency, profitability, and efficiency. These ratios may also be used by enterprises to benchmark their performance against that of their peers.
Data sources and methodology
The AFTS provides a measure of financial position and performance of incorporated enterprises by industry aggregations. They are used by a wide variety of economists and industry analysts in both the private and government sectors. They are also used as the benchmark for the quarterly estimates of corporate profits in the Canadian System of National Accounts (CSNA). To derive size classifications for Canadian enterprises, a two-step process was employed. In the first step, enterprise-level AFTS data were integrated, where possible, with number of jobs following a hierarchical sourcing approach: employment estimates from the Survey of Employment, Payrolls and Hours (SEPH) were used when available, followed by PD7 administrative data, and finally from profiled employee numbers from the Business Register.
Enterprise size classifications were determined based on the number of jobs. Enterprises with fewer than 10 jobs were classified as micro enterprises; those with 10 to 99 jobs as small enterprises; those with 100 to 499 jobs as medium enterprises; and those with 500 or more jobs as large enterprises.
For enterprises where information on the number of jobs was unavailable, enterprise size was determined through imputation using operating revenues. Enterprises with operating revenues below $5 million were classified as micro enterprises; those with operating revenues between $5 million and $24.9 million as small enterprises; those with operating revenues between $25 million and $74.9 million as medium enterprises; and those with operating revenues of $75 million or more as large enterprises.
Estimates for size groups with a small number of enterprises are suppressed for confidentiality purposes. These suppressed values are denoted by an "x".
Data accuracy
Differences in business activities, cost structures, and balance sheet composition across industries limit the comparability of financial ratios. These structural differences mean that financial ratios are most informative when examined over time within the same industry rather than through cross-industry, point-in-time comparisons.
Although ratio analysis can assist in managing and analyzing a business, a proper financial analysis of the business requires more tools than just ratio analysis. Consequently, financial ratios should be considered as part of a broader analytical framework rather than used in isolation.
Upper and lower limits were applied to firms with extensively high ratios to prevent industry data being distorted by extreme values, data errors or very small denominators. These limits will be shown in each formula definition.
Ratios that are not appropriate or meaningful for a given industry, or that cannot be calculated due to a zero or negative denominator, are suppressed and represented by a ".." symbol.
Definitions
Current assets: Cash and deposits + Accounts receivable, net value + Inventory + Financial leases and lease contracts
Current liabilities: Accounts payable and income tax payable + Non-affiliate security borrowing with maturity of less than a year
Interest expenses: Interest expense on debt securities + Interest expense on amounts owing to affiliates + Interest expense on mortgages + Other interest expenses
Financial Ratios
Quick ratio : The quick ratio is calculated as the ratio of current assets excluding inventories to current liabilities. The quick ratio measures a company's ability to immediately meet its short-term obligations using its most liquid assets and used to evaluate the strength of a company's cash position. This ratio is generally applicable to firms operating in the non-financial industry. Extreme ratios have been defaulted to the following upper limits (50) and lower limits (-50).
Current ratio : The current ratio is calculated as the ratio of current assets to current liabilities. It measures the ability to pay short-term debts easily when they become due. This ratio is generally applicable to firms operating in the non-financial industry. Extreme ratios are defaulted to the following upper limits (20) and lower limits (-20).
Debt to equity ratio: The debt-to-equity ratio is calculated as the ratio of total liabilities to total equity. It indicates the extent to which a firm relies on borrowed funds to finance its operations. Firms that rely heavily on borrowed funds are said to be highly leveraged. This ratio is generally applicable to firms operating in all industries. Extreme ratios are defaulted to the following upper limits (20) and lower limits (-20).
Debt to assets ratio: The debt-to-assets ratio is calculated as the ratio of total liabilities to total assets. It tells what portion of the assets are financed by debt and other liabilities. This ratio is generally applicable to firms operating in all industries. Extreme ratios are defaulted to the following upper limits (100%) and lower limits (-100%).
Interest coverage ratio: The interest coverage ratio is calculated as the ratio of net income before taxes to investment interest expense. This ratio measures the ability to pay interest charges on debt and to protect creditors from interest payment default. It indicates the number of dollars of earnings available to pay interest for every dollar of interest expense incurred. This ratio is generally applicable to firms operating in the non-financial industry. Extreme ratios are defaulted to the following upper limits (50) and lower limits (-50).
Operating margin: The operating margin is calculated as the ratio of operating profit to operating revenue. Operating profit is the net result of the principal business activities of a firm. This ratio indicates management's ability to generate earnings from the principal business activities of a firm. This ratio is generally applicable to firms operating in the non-financial industry. Extreme ratios are defaulted to the following upper limits (100%) and lower limits (-100%).
Pre-tax profit margin: The pre-tax profit margin is calculated as the ratio of net income before taxes to operating revenue. It indicates how many cents of a revenue dollar remain in earnings after all expenses, except income tax expense, are deducted. The ratio is expressed as a percentage of operating revenue. This ratio is generally applicable to firms operating in all industries. Extreme ratios are defaulted to the following upper limits (100%) and lower limits (-100%).
Net profit margin: The net profit margin is calculated as the ratio of net income to operating revenue. It tells how many cents of a revenue dollar remain in the net earnings after all expense deductions. It reflects a firm's management ability to control the level of costs or expenses relative to sales revenue. This ratio is generally applicable to firms operating in all industries. Extreme ratios are defaulted to the following upper limits (100%) and lower limits (-100%).
Return on equity: Return on equity is calculated as the ratio of net income to total equity. This ratio measures how effectively a company uses shareholders' equity to generate net income. This ratio is generally applicable to firms operating in all industries. Extreme ratios are defaulted to the following upper limits (75%) and lower limits (-75%).
Return on assets: Return on assets is calculated as the ratio of net income to total assets. This ratio measures how efficient a firm is when using assets to generate profits. This ratio is generally applicable to firms operating in the financial industry. Extreme ratios are defaulted to the following upper limits (75%) and lower limits (-75%).
Asset turnover: Asset turnover is calculated as the ratio of total revenue to total assets. This ratio measures how efficient a firm is when using assets to generate revenues. This ratio is generally applicable to firms operating in the non-financial industry. Extreme ratios are defaulted to the following upper limits (50) and lower limits (-50).
Gross Insurance Service Ratio: The gross insurance service ratio is calculated as the ratio of insurance expenses to insurance revenues. The ratio is the percentage of costs to deliver insurance in relation to the revenues collected. The ratio indicates underwriting profitability from insurance services. This ratio is generally applicable to firms operating in the property and casualty insurance industry. This ratio differs from the industry definition, which classifies the gross insurance service ratio as insurance service expenses divided by total insurance revenue. Extreme ratios are defaulted to the following upper limits (150%) and lower limits (0%).
Inventory turnover: Inventory turnover is calculated as the ratio of the cost of goods sold to inventories. This ratio is a measure of the adequacy of inventory for the volume of business and how efficiently management turns over the inventory in over a certain period. This ratio is generally applicable to firms operating in the manufacturing, retail and wholesale industries. Extreme ratios are defaulted to the following upper limits (50) and lower limits (-50).