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 xvAcknowledgments xviiChapter 1: Introduction 1Chapter 2: Asset Utilization Measurements 5Sales to Working Capital Ratio 6Sales to Fixed Assets Ratio 7Sales to Administrative Expenses Ratio 8Sales to Equity Ratio 9Sales per Person 10Sales Backlog Ratio 12Sales Returns to Gross Sales Ratio 13Repairs and Maintenance Expense to Fixed Assets Ratio 14Accumulated Depreciation to Fixed Assets Ratio 15Capital to Labor Ratio 17Fringe Benefits to Wages and Salaries Expense 18Sales Expenses to Sales Ratio 19Discretionary Cost Ratio 19Interest Expense to Debt Ratio 20Foreign Exchange Ratios 21Overhead Rate 22Goodwill to Assets Ratio 25Overhead to Cost of Sales Ratio 26Investment Turnover 27Break-Even Point 28Margin of Safety 29Tax Rate Percentage 30Chapter 3: Operating Performance Measurements 31Operating Assets Ratio 31Sales to Operating Income Ratio 33Sales Margin 34Gross Profit Percentage 34Gross Profit Index 35Investment Income Percentage 36Operating Profit Percentage 38Operating Leverage Ratio 39Net Income Percentage 40Core Operating Earnings 41Profit per Customer Visit 42Profit per Person 43Core Growth Rate 44Quality of Earnings Ratio 45Chapter 4: Cash Flow Measurements 47Cash Flow from Operations 47Free Cash Flow 49Cash Flow Return on Sales 50Fixed Charge Coverage 51Expense Coverage Days 52Cash Flow Coverage Ratio 54Cash Receipts to Billed Sales and Progress Payments 55Cash to Current Assets Ratio 55Cash Flow to Fixed Asset Requirements 56Cash Flow Return on Assets 58Cash to Working Capital Ratio 59Cash Reinvestment Ratio 60Cash to Current Liabilities Ratio 61Cash Flow to Debt Ratio 62Reinvestment Rate 63Stock Price to Cash Flow Ratio 64Dividend Payout Ratio 65Chapter 5: Liquidity Measurements 67Accounts Receivable Turnover 68Average Receivable Collection Period 69Days Delinquent Sales Outstanding 70Days Sales in Receivables Index 71Accounts Receivable Investment 72Ending Receivable Balance 73Inventory to Sales Ratio 74Inventory Turnover 75Inventory to Working Capital Ratio 77Liquidity Index 78Accounts Payable Days 79Accounts Payable Turnover 80Current Ratio 81Quick Ratio 82Cash Ratio 83Sales to Current Assets Ratio 84Working Capital Productivity 85Days of Working Capital 86Weighted Working Capital 87Defensive Interval Ratio 88Current Liability Ratio 89Required Current Liabilities to Total Current Liabilities Ratio 90Working Capital to Debt Ratio 91Risky Asset Conversion Ratio 92Noncurrent Assets to Noncurrent Liabilities Ratio 93Short-Term Debt to Long-Term Debt Ratio 94Altman’s Z-Score Bankruptcy Prediction Formula 95Chapter 6: Capital Structure and Solvency Measurements 99Times Interest Earned 99Cash Coverage Ratio 100Debt Coverage Ratio 101Asset Quality Index 102Accruals to Assets Ratio 104Times Preferred Dividend Earned 105Debt to Equity Ratio 107Funded Capital Ratio 108Retained Earnings to Stockholders’ Equity 109Preferred Stock to Total Stockholders’ Equity 110Issued Shares to Authorized Shares 111Chapter 7: Return on Investment Measurements 113Net Worth 113Book Value per Share 115Tangible Book Value 116Return on Assets Employed 117Return on Infrastructure Employed 119Return on Operating Assets 120Return on Equity Percentage 121Return on Common Equity 122Financial Leverage Index 123Equity Growth Rate 124Earnings per Share 125Percentage Change in Earnings per Share 126Economic Value Added 127EVA Momentum 129Relative Value of Growth 130Dividend Payout Ratio 131Dividend Yield Ratio 133Chapter 8: Market Performance Measurements 135Insider Stock Buy-Sell Ratio 135Institutional Capture Rate 137Market Value Added 138Enterprise Value/Earnings Ratio 139Stock Options to Common Shares Ratio 140Cost of Capital 142Sales to Stock Price Ratio 144Price/Earnings Ratio 145Capitalization Rate 146Chapter 9: Measurements for the Accounting/Finance Department 147Purchase Discounts Taken to Total Discounts 148Percentage of Payment Discounts Missed 149Transactions Processed per Person 150Transaction Error Rate 151Average Time to Issue Invoices 152Average Employee Expense Report Turnaround Time 154Payroll Transaction Fees per Employee 155Time to Produce Financial Statements 157Percentage of Tax Filing Dates Missed 158Proportion of Products Costed Prior to Release 159Internal Audit Savings to Cost Percentage 160Internal Audit Efficiency 161Deduction Turnover 162Bad Debt Percentage 163Percent of Receivables over XX Days Old 164Allowance Exhaustion Rate 165Percentage Collected of Dollar Volume Assigned 166Cash Collected per Aging Bucket 167Collection Effectiveness Index 168Best Possible DSO 169Partial Payment Agreement Percentage 170Percent of Cash Applied on Day of Receipt 171Auto Cash Hit Rate 172Unmatched Receipts Exposure 172Cost of Credit 173Earnings Rate on Invested Funds 174Brokerage Fee Percentage 175Borrowing Base Usage Percentage 176Chapter 10: Measurements for the Engineering Department 179Bill of Materials Accuracy 179Labor Routing Accuracy 181Idea Kill Rate 182Percentage of New Products Introduced 183Percentage of Sales from New Products 184Percentage of New Parts Used in New Products 185Percentage of Existing Parts Reused in New Products 186Average Number of Distinct Products per Design Platform 187Percentage of Products Reaching Market before Competition 188Return on Innovation Investment 189Intangibility Index 189Science Linkage Index 190Ratio of Actual to Target Cost 191Warranty Claims Percentage 192Time from Design Inception to Production 193Percentage of Floor Space Utilization 194Chapter 11: Measurements for the Human Resources Department 197Employee Turnover 197Average Time to Hire 198Late Personnel Requisitions Ratio 199Sendouts per Hire 200Intern Hiring Percentage 201Ratio of Support Staff to Total Staff 201Employment Cost Effectiveness 202Chapter 12: Measurements for the Logistics Department 205Production Schedule Accuracy 206Economic Order Quantity 207Number of Orders to Place in a Period 208Economic Production Run Size 209Raw Material Inventory Turns 209Raw Material Content 210Finished Goods Inventory Turns 211Obsolete Inventory Percentage 212Percentage of Inventory > XX Days Old 213Percentage of Returnable Inventory 214Excess Inventory Index 215Inventory Accuracy 216Percentage of Certified Suppliers 217Electronic Data Interchange Supplier Percentage 218Distribution Turnover 219Supplier Fill Rate 220On-Time Parts Delivery Percentage 221Purchased Component Defect Rate 223Incoming Components Correct Quantity Percentage 224Percentage of Actual Payments Varying from Purchase Order Price 225Percentage of Purchase Orders Issued below Minimum Dollar Level 226Proportion of Corporate Credit Card Usage 227Percentage of Receipts Authorized by Purchase Orders 228Freight Audit Recovery Ratio 230Picking Accuracy for Assembled Products 231Order Fill Rate 231Average Time to Ship 232On-Time Delivery Percentage 234Dock-to-dock Time 234Percentage of Products Damaged in Transit 236Percentage of Sales through Distributors 237Chapter 13: Measurements for the Production Department 239Constraint Productivity 240Takt Time 240Constraint Rework Percentage 241Constraint Schedule Attainment 242Constraint Utilization 243Operational Equipment Effectiveness 244Degree of Unbalance 245Throughput Effectiveness 246Manufacturing Critical Path Time 248Manufacturing Efficiency 249Break-Even Plant Capacity 250Manufacturing Effectiveness 251Productivity Index 252Unit Output per Direct Labor Hour 253Average Equipment Setup Time 255Unscheduled Machine Downtime Percentage 255Mean Time between Failures 257Acceptable Product Completion Percentage 258Work-in-Process Turnover 259Work-in-Process to Standard Work-in-Process 260Scrap Percentage 261First-Time-Through Yield 262Warranty Claims Percentage 263Maintenance Expense to Fixed Assets Ratio 264Indirect Expense Index 265Reorder Point 266On-Time Delivery Ratio 268Chapter 14: Measurements for the Sales and Marketing Department 271Market Share 271Customer Turnover 272Advertising Value Equivalency 273Net Promoter Score 274Browse-to-Buy Conversion Ratio 275Recency 276Direct Mail Effectiveness Ratio 277Inbound Telemarketing Retention Ratio 279Proportion of Completed Sales to Home Page Views 280Quote to Close Ratio 281Pull-Through Rate 282Sales per Salesperson 283Sales Productivity 284Sales Effectiveness 285Sales Trend Percentage by Product Line 286Product Demand Elasticity 287Days of Backlog 288Chapter 15: Measurement Analysis with an Electronic Spreadsheet 291Financial Statement Proportional Analysis 292Financial Statement Ratio Analysis 294Automated Ratio Result Analysis 296Leverage Analysis 297Trend Analysis 298Forecasting 299Cash Flow Analysis 303Capital Asset Analysis 305Compounding Analysis 307Investment Analysis 309Risk Analysis 311Appendix: Measurement Summary 313Glossary 339About the Author 345Index 347