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Sales to Working Capital Ratio 6Sales to Fixed Assets Ratio 7Sales to Administrative Expenses Ratio 9Sales to Equity Ratio 10Sales per Person 11Sales Backlog Ratio 13Sales Returns to Gro

Business Ratios and Formulas

A COMPREHENSIVE GUIDE SECOND EDITION

Steven M Bragg

John Wiley & Sons, Inc.

Business Ratios and Formulas

SECOND EDITION

Business Ratios and Formulas

A COMPREHENSIVE GUIDE SECOND EDITION

Steven M Bragg

John Wiley & Sons, Inc.

This book is printed on acid-free paper.

Copyright © 2007 by John Wiley & Sons, Inc All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Bragg, Steven M.

Business ratios and formulas : a comprehensive guide / Steven M Bragg.

p cm.

Includes index ISBN-13: 978-0-470-05517-5 (cloth) ISBN-10: 0-470-05517-0 (cloth)

1 Business mathematics I Title

HF5691.B73 2007

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1

To Andrea and Victoria: The value of watching you grow

has been beyond measurement

Sales to Working Capital Ratio 6Sales to Fixed Assets Ratio 7Sales to Administrative Expenses Ratio 9Sales to Equity Ratio 10Sales per Person 11Sales Backlog Ratio 13Sales Returns to Gross Sales Ratio 14Repairs and Maintenance Expense to Fixed Assets Ratio 15Accumulated Depreciation to Fixed Assets Ratio 17Fringe Benefits to Wages and Salaries Expense 18Sales Expenses to Sales Ratio 19Discretionary Cost Ratio 20Interest Expense to Debt Ratio 21Foreign Exchange Ratios 22

Goodwill to Assets Ratio 26Overhead to Cost of Sales Ratio 27Investment Turnover 29Break-Even Point 30Margin of Safety 31Tax Rate Percentage 32

3 Operating Performance Measurements 35

Operating Assets Ratio 35Sales to Operating Income Ratio 37

Gross Profit Percentage 39Gross Profit Index 40Investment Income Percentage 41Operating Profit Percentage 42Operating Leverage Ratio 43Net Income Percentage 44Core Operating Earnings 46Profit per Customer Visit 47Profit per Person 48Core Growth Rate 49Quality of Earnings Ratio 50

Cash Flow from Operations 53Cash Flow Return on Sales 55Fixed Charge Coverage 56Expense Coverage Days 57Cash Flow Coverage Ratio 59Cash Receipts to Billed Sales and Progress Payments 60Cash to Current Assets Ratio 61Cash Flow to Fixed Asset Requirements 62Cash Flow Return on Assets 63Cash to Working Capital Ratio 65Cash Reinvestment Ratio 66Cash to Current Liabilities Ratio 67Cash Flow to Debt Ratio 68Stock Price to Cash Flow Ratio 70Dividend Payout Ratio 71

Accounts Receivable Turnover 73Average Receivable Collection Period 75Days Delinquent Sales Outstanding 76Days Sales in Receivables Index 77Accounts Receivable Investment 78

viii / Contents

Ending Receivable Balance 80Inventory to Sales Ratio 81Inventory Turnover 82Inventory to Working Capital Ratio 85

Times Interest Earned 107Debt Coverage Ratio 108Asset Quality Index 110Accruals to Assets Ratio 111Times Preferred Dividend Earned 113Debt to Equity Ratio 114Funded Capital Ratio 116Retained Earnings to Stockholders’ Equity 117Preferred Stock to Total Stockholders’ Equity 118Issued Shares to Authorized Shares 119

Book Value per Share 125Tangible Book Value 126Return on Assets Employed 127

Contents / ix

Return on Infrastructure Employed 129Return on Operating Assets 130Return on Equity Percentage 131Return on Common Equity 132Financial Leverage Index 134Equity Growth Rate 135Earnings per Share 136Percentage Change in Earnings per Share 137Economic Value Added 138Relative Value of Growth 141Dividend Payout Ratio 142Dividend Yield Ratio 144

Insider Stock Buy-Sell Ratio 147Market Value Added 149Enterprise Value/Earnings Ratio 151Stock Options to Common Shares Ratio 152Cost of Capital 154Sales to Stock Price Ratio 156Price/Earnings Ratio 157Capitalization Rate 158

9 Measurements for the Accounting/Finance Department 161

Purchase Discounts Taken to Total Discounts 162Percentage of Payment Discounts Missed 164Transactions Processed per Person 165Transaction Error Rate 166Average Time to Issue Invoices 167Average Employee Expense Report Turnaround Time 169Payroll Transaction Fees per Employee 170Time to Produce Financial Statements 172Percentage of Tax Filing Dates Missed 173Proportion of Products Costed Prior to Release 174Internal Audit Savings to Cost Percentage 175Internal Audit Efficiency 177Bad Debt Percentage 178Percent of Receivables over XX Days Old 179Percentage Collected of Dollar Volume Assigned 181

x / Contents

Collection Effectiveness Index 182Percent of Cash Applied on Day of Receipt 183Unmatched Receipts Exposure 184

Earnings Rate on Invested Funds 186Brokerage Fee Percentage 187Borrowing Base Usage Percentage 188

Bill of Material Accuracy 191Labor Routing Accuracy 193Percentage of New Products Introduced 194Percentage of Sales from New Products 195Percentage of New Parts Used in New Products 196Percentage of Existing Parts Reused in New Products 198Average Number of Distinct Products per Design Platform 198Percentage of Products Reaching Market before

Intangibility Index 200Science Linkage Index 201Ratio of Actual to Target Cost 202Warranty Claims Percentage 204Time from Design Inception to Production 205Percentage of Floor Space Utilization 206

11 Measurements for the Human Resources Department 209

Employee Turnover 209Average Time to Hire 210Late Personnel Requisitions Ratio 211Intern Hiring Percentage 212Ratio of Support Staff to Total Staff 213

Production Schedule Accuracy 216Economic Order Quantity 217Number of Orders to Place in a Period 218Economic Production Run Size 219Raw Material Inventory Turns 220Raw Material Content 221

Contents / xi

Finished Goods Inventory Turns 223Obsolete Inventory Percentage 224Percentage of Inventory > XX Days Old 225Percentage of Returnable Inventory 226Inventory Accuracy 227Percentage of Certified Suppliers 228Electronic Data Interchange Supplier Percentage 229Distribution Turnover 230On-Time Parts Delivery Percentage 232Purchased Component Defect Rate 233Incoming Components Correct Quantity Percentage 234Percentage of Actual Payments Varying from Purchase

Constraint Productivity 250

Constraint Rework Percentage 252Constraint Schedule Attainment 253Constraint Utilization 254Degree of Unbalance 255Throughput Effectiveness 256Manufacturing Critical Path Time 258Manufacturing Efficiency 259Break-Even Plant Capacity 260Manufacturing Effectiveness 262Productivity Index 263Unit Output per Direct Labor Hour 264

xii / Contents

Average Equipment Setup Time 265Unscheduled Machine Downtime Percentage 266Mean Time between Failures 268Acceptable Product Completion Percentage 269Work-in-Process Turnover 271Scrap Percentage 272Warranty Claims Percentage 274Maintenance Expense to Fixed Assets Ratio 275Indirect Expense Index 276

On-Time Delivery Ratio 279

14 Measurements for the Sales and Marketing Department 281

Customer Turnover 282Net Promoter Score 284Browse to Buy Conversion Ratio 285

Direct Mail Effectiveness Ratio 287Inbound Telemarketing Retention Ratio 289Proportion of Completed Sales to Home Page Views 290Quote to Close Ratio 291Pull-Through Rate 292Sales per Salesperson 293Sales Productivity 294Sales Effectiveness 296Sales Trend Percentage by Product Line 297Product Demand Elasticity 298Days of Backlog 299

15 Measurement Analysis with an Electronic Spreadsheet 301

Financial Statement Proportional Analysis 302Financial Statement Ratio Analysis 303Automated Ratio Result Analysis 306Leverage Analysis 307

Compounding Analysis 318Investment Analysis 320

About the Author

Steven Bragg, CPA, CMA, CIA, CPIM, has been the chief financial officer orcontroller of four companies, as well as a consulting manager at Ernst & Youngand auditor at Deloitte & Touche He received a master’s degree in finance fromBentley College, an MBA from Babson College, and a bachelor’s degree in eco-nomics from the University of Maine He has been the two-time president of theColorado Mountain Club, is an avid alpine skier and mountain biker, and is a cer-tified master diver Mr Bragg resides in Centennial, Colorado with his wife andtwo daughters He has published the following books through John Wiley & Sons:

Accounting and Finance for Your Small Business

Accounting Best Practices

Accounting Controls Best Practices

Billing and Collections Best Practices

Controller’s Guide to Costing

Controller’s Guide to Planning and Controlling Operations

Controller’s Guide: Roles and Responsibilities for the New Controller Controllership

Payroll Best Practices

Sales and Operations for Your Small Business

The Controller’s Function

The New CFO Financial Leadership Manual

The Ultimate Accountants’ Reference

Also:

Advanced Accounting System (Institute of Internal Auditors)

Run the Rockies (CMC Press)

Subscribe to Steve’s FREE accounting best practices newsletter, podcast, and blog at www.stevebragg.com His podcast is also available through iTunes.

xvi / About the Author

Preface

This book is designed for all corporate managers who need to understand theperformance levels of their departments It contains performance measure-ments for the accounting, engineering, logistics, production, and sales departments.These measurements cover not only financial matters, but also those related to ef-ficiency, effectiveness, capacity, and market share In addition, the book includesmeasurements related to asset utilization, operating performance, cash flows, liq-uidity, capital structure, return on investment, and market performance These lattercategories are of great interest not only to the accounting and finance departments,but also to a company’s creditors and investors

There are nearly 200 measurements itemized in this book Each one is nied by a complete description, an explanation of the calculation, an example, andcautions regarding its use The cautions are of particular use, as they describe the el-ements of a measurement that can be modified to deliver misleading results, differ-ent measurements that may work better in certain situations, use on a trend-linebasis, and other measurements that should be used to reinforce indicated results.The book also describes how to use an electronic spreadsheet to compile a stan-dard set of measurements, using Microsoft Excel as the template This is especiallyuseful for investors and financial personnel, who need to compile information about

accompa-a compaccompa-any’s long-term performaccompa-ance

Anyone who wishes to create a complete set of performance-tracking ments for an entire company or for a specific function can use this book as a ref-erence source Managers can choose the correct blend of measurements to achieve

measure-an information set that cmeasure-an be used for feedback on strategy initiatives measure-and specificefficiency projects, as well as for performance evaluations This is the ideal toolfor measuring corporate performance

Centennial, ColoradoOctober 2006

Acknowledgments

To Sheck Cho, the editor I have known longer than anyone else in the ing business Sheck, I value your experience and advice—you are the best

1

Introduction

Every department in every business produces some kind of information that can

be used by its manager to measure performance This information may be lated to operational considerations within the department, the financial condition

re-of the entire company, or the performance re-of a company’s suppliers and tomers Unfortunately, managers may not be aware of the multitude of measure-ments that can be used to track these different levels of performance or of the waysthat these measurements can yield incorrect or misleading information

cus-This book is designed to help managers select the best possible set of surements for a given situation Chapters 2 through 14 itemize a series of perfor-mance measurements for different aspects of a company Chapter 2 contains assetutilization measurements that can be used to determine a company’s ability to sus-tain its sales, the level of asset and expense usage required to do so, and the sus-tainability of its current sales and expense levels There are also specialized ratiosthat deal with such issues as sales returns, repairs and maintenance, fringe bene-fits, interest expense, and overhead rates

mea-Chapter 3 contains operating performance measurements, which describe anorganization’s operating performance in such areas as sales, gross margins, in-vestment income, operating profit, and net profit

Chapter 4 contains cash flow measurements, which are useful in determiningthe ability of a company’s cash flows to keep it in business These measurementsshould be used in conjunction with the liquidity measurements in Chapter 5, whichfocus on additional measurements related to cash flows, such as a company’s abil-ity to collect accounts receivable in an efficient manner, use its inventory within

a short time frame, pay its accounts payable when due, and generally maintain asufficient amount of liquid funds to pay off short-term liabilities Chapter 6 con-tains capital structure and solvency measurements, which determine the relation-ship between a company’s debt and equity, as well as the comparative proportions

of different types of stock It also addresses a company’s ability to remain solventand so can be used in conjunction with Chapters 4 and 5

Chapter 7 contains return on investment measurements, which encompass networth, several types of return on assets and equity, earnings per share, economicvalue added, and return on dividends Chapter 8 addresses a company’s financial