Business Ratios and Formulas

STEVEN M. BRAGG, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte. He is the author of over thirty books primarily targeted toward corporate financial leaders (controllers, treasurers, and CFOs) and their needs. Bragg received a master's degree in finance from Bentley College, an MBA from Babson College, and a bachelor's degree in economics from the University of Maine.

Preface xv

Acknowledgments xvii

Chapter 1: Introduction 1

Chapter 2: Asset Utilization Measurements 5

Sales to Working Capital Ratio 6

Sales to Fixed Assets Ratio 7

Sales to Administrative Expenses Ratio 8

Sales to Equity Ratio 9

Sales per Person 10

Sales Backlog Ratio 12

Sales Returns to Gross Sales Ratio 13

Repairs and Maintenance Expense to Fixed Assets Ratio 14

Accumulated Depreciation to Fixed Assets Ratio 15

Capital to Labor Ratio 17

Fringe Benefits to Wages and Salaries Expense 18

Sales Expenses to Sales Ratio 19

Discretionary Cost Ratio 19

Interest Expense to Debt Ratio 20

Foreign Exchange Ratios 21

Overhead Rate 22

Goodwill to Assets Ratio 25

Overhead to Cost of Sales Ratio 26

Investment Turnover 27

Break-Even Point 28

Margin of Safety 29

Tax Rate Percentage 30

Chapter 3: Operating Performance Measurements 31

Operating Assets Ratio 31

Sales to Operating Income Ratio 33

Sales Margin 34

Gross Profit Percentage 34

Gross Profit Index 35

Investment Income Percentage 36

Operating Profit Percentage 38

Operating Leverage Ratio 39

Net Income Percentage 40

Core Operating Earnings 41

Profit per Customer Visit 42

Profit per Person 43

Core Growth Rate 44

Quality of Earnings Ratio 45

Chapter 4: Cash Flow Measurements 47

Cash Flow from Operations 47

Free Cash Flow 49

Cash Flow Return on Sales 50

Fixed Charge Coverage 51

Expense Coverage Days 52

Cash Flow Coverage Ratio 54

Cash Receipts to Billed Sales and Progress Payments 55

Cash to Current Assets Ratio 55

Cash Flow to Fixed Asset Requirements 56

Cash Flow Return on Assets 58

Cash to Working Capital Ratio 59

Cash Reinvestment Ratio 60

Cash to Current Liabilities Ratio 61

Cash Flow to Debt Ratio 62

Reinvestment Rate 63

Stock Price to Cash Flow Ratio 64

Dividend Payout Ratio 65

Chapter 5: Liquidity Measurements 67

Accounts Receivable Turnover 68

Average Receivable Collection Period 69

Days Delinquent Sales Outstanding 70

Days Sales in Receivables Index 71

Accounts Receivable Investment 72

Ending Receivable Balance 73

Inventory to Sales Ratio 74

Inventory Turnover 75

Inventory to Working Capital Ratio 77

Liquidity Index 78

Accounts Payable Days 79

Accounts Payable Turnover 80

Current Ratio 81

Quick Ratio 82

Cash Ratio 83

Sales to Current Assets Ratio 84

Working Capital Productivity 85

Days of Working Capital 86

Weighted Working Capital 87

Defensive Interval Ratio 88

Current Liability Ratio 89

Required Current Liabilities to Total Current Liabilities Ratio 90

Working Capital to Debt Ratio 91

Risky Asset Conversion Ratio 92

Noncurrent Assets to Noncurrent Liabilities Ratio 93

Short-Term Debt to Long-Term Debt Ratio 94

Altman’s Z-Score Bankruptcy Prediction Formula 95

Chapter 6: Capital Structure and Solvency Measurements 99

Times Interest Earned 99

Cash Coverage Ratio 100

Debt Coverage Ratio 101

Asset Quality Index 102

Accruals to Assets Ratio 104

Times Preferred Dividend Earned 105

Debt to Equity Ratio 107

Funded Capital Ratio 108

Retained Earnings to Stockholders’ Equity 109

Preferred Stock to Total Stockholders’ Equity 110

Issued Shares to Authorized Shares 111

Chapter 7: Return on Investment Measurements 113

Net Worth 113

Book Value per Share 115

Tangible Book Value 116

Return on Assets Employed 117

Return on Infrastructure Employed 119

Return on Operating Assets 120

Return on Equity Percentage 121

Return on Common Equity 122

Financial Leverage Index 123

Equity Growth Rate 124

Earnings per Share 125

Percentage Change in Earnings per Share 126

Economic Value Added 127

EVA Momentum 129

Relative Value of Growth 130

Dividend Payout Ratio 131

Dividend Yield Ratio 133

Chapter 8: Market Performance Measurements 135

Insider Stock Buy-Sell Ratio 135

Institutional Capture Rate 137

Market Value Added 138

Enterprise Value/Earnings Ratio 139

Stock Options to Common Shares Ratio 140

Cost of Capital 142

Sales to Stock Price Ratio 144

Price/Earnings Ratio 145

Capitalization Rate 146

Chapter 9: Measurements for the Accounting/Finance Department 147

Purchase Discounts Taken to Total Discounts 148

Percentage of Payment Discounts Missed 149

Transactions Processed per Person 150

Transaction Error Rate 151

Average Time to Issue Invoices 152

Average Employee Expense Report Turnaround Time 154

Payroll Transaction Fees per Employee 155

Time to Produce Financial Statements 157

Percentage of Tax Filing Dates Missed 158

Proportion of Products Costed Prior to Release 159

Internal Audit Savings to Cost Percentage 160

Internal Audit Efficiency 161

Deduction Turnover 162

Bad Debt Percentage 163

Percent of Receivables over XX Days Old 164

Allowance Exhaustion Rate 165

Percentage Collected of Dollar Volume Assigned 166

Cash Collected per Aging Bucket 167

Collection Effectiveness Index 168

Best Possible DSO 169

Partial Payment Agreement Percentage 170

Percent of Cash Applied on Day of Receipt 171

Auto Cash Hit Rate 172

Unmatched Receipts Exposure 172

Cost of Credit 173

Earnings Rate on Invested Funds 174

Brokerage Fee Percentage 175

Borrowing Base Usage Percentage 176

Chapter 10: Measurements for the Engineering Department 179

Bill of Materials Accuracy 179

Labor Routing Accuracy 181

Idea Kill Rate 182

Percentage of New Products Introduced 183

Percentage of Sales from New Products 184

Percentage of New Parts Used in New Products 185

Percentage of Existing Parts Reused in New Products 186

Average Number of Distinct Products per Design Platform 187

Percentage of Products Reaching Market before Competition 188

Return on Innovation Investment 189

Intangibility Index 189

Science Linkage Index 190

Ratio of Actual to Target Cost 191

Warranty Claims Percentage 192

Time from Design Inception to Production 193

Percentage of Floor Space Utilization 194

Chapter 11: Measurements for the Human Resources Department 197

Employee Turnover 197

Average Time to Hire 198

Late Personnel Requisitions Ratio 199

Sendouts per Hire 200

Intern Hiring Percentage 201

Ratio of Support Staff to Total Staff 201

Employment Cost Effectiveness 202

Chapter 12: Measurements for the Logistics Department 205

Production Schedule Accuracy 206

Economic Order Quantity 207

Number of Orders to Place in a Period 208

Economic Production Run Size 209

Raw Material Inventory Turns 209

Raw Material Content 210

Finished Goods Inventory Turns 211

Obsolete Inventory Percentage 212

Percentage of Inventory > XX Days Old 213

Percentage of Returnable Inventory 214

Excess Inventory Index 215

Inventory Accuracy 216

Percentage of Certified Suppliers 217

Electronic Data Interchange Supplier Percentage 218

Distribution Turnover 219

Supplier Fill Rate 220

On-Time Parts Delivery Percentage 221

Purchased Component Defect Rate 223

Incoming Components Correct Quantity Percentage 224

Percentage of Actual Payments Varying from Purchase Order Price 225

Percentage of Purchase Orders Issued below Minimum Dollar Level 226

Proportion of Corporate Credit Card Usage 227

Percentage of Receipts Authorized by Purchase Orders 228

Freight Audit Recovery Ratio 230

Picking Accuracy for Assembled Products 231

Order Fill Rate 231

Average Time to Ship 232

On-Time Delivery Percentage 234

Dock-to-dock Time 234

Percentage of Products Damaged in Transit 236

Percentage of Sales through Distributors 237

Chapter 13: Measurements for the Production Department 239

Constraint Productivity 240

Takt Time 240

Constraint Rework Percentage 241

Constraint Schedule Attainment 242

Constraint Utilization 243

Operational Equipment Effectiveness 244

Degree of Unbalance 245

Throughput Effectiveness 246

Manufacturing Critical Path Time 248

Manufacturing Efficiency 249

Break-Even Plant Capacity 250

Manufacturing Effectiveness 251

Productivity Index 252

Unit Output per Direct Labor Hour 253

Average Equipment Setup Time 255

Unscheduled Machine Downtime Percentage 255

Mean Time between Failures 257

Acceptable Product Completion Percentage 258

Work-in-Process Turnover 259

Work-in-Process to Standard Work-in-Process 260

Scrap Percentage 261

First-Time-Through Yield 262

Warranty Claims Percentage 263

Maintenance Expense to Fixed Assets Ratio 264

Indirect Expense Index 265

Reorder Point 266

On-Time Delivery Ratio 268

Chapter 14: Measurements for the Sales and Marketing Department 271

Market Share 271

Customer Turnover 272

Advertising Value Equivalency 273

Net Promoter Score 274

Browse-to-Buy Conversion Ratio 275

Recency 276

Direct Mail Effectiveness Ratio 277

Inbound Telemarketing Retention Ratio 279

Proportion of Completed Sales to Home Page Views 280

Quote to Close Ratio 281

Pull-Through Rate 282

Sales per Salesperson 283

Sales Productivity 284

Sales Effectiveness 285

Sales Trend Percentage by Product Line 286

Product Demand Elasticity 287

Days of Backlog 288

Chapter 15: Measurement Analysis with an Electronic Spreadsheet 291

Financial Statement Proportional Analysis 292

Financial Statement Ratio Analysis 294

Automated Ratio Result Analysis 296

Leverage Analysis 297

Trend Analysis 298

Forecasting 299

Cash Flow Analysis 303

Capital Asset Analysis 305

Compounding Analysis 307

Investment Analysis 309

Risk Analysis 311

Appendix: Measurement Summary 313

Glossary 339

About the Author 345

Index 347