BUSINESS BUILDER 6

HOW TO ANALYZE YOUR BUSINESS USING FINANCIAL RATIOS

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how to analyze your business using financial ratios

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What You Should Know Before Getting Started 4

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Common Size Ratios 6

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Liquidity Ratios 10
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Operating Ratios 12
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Solvency Ratios 15
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Business Ratios 18

Financial Ratio Definitions 19

Checklist 20

Resources 21

Notes 22
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The Purpose of Financial Ratio Analysis
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Why Use Financial Ratio Analysis?

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A ratio can be expressed in several ways. A ratio of two-to-one can be shown as:
2:1 2-to-1 2/1

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Types of Ratios
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Common Size Ratios from the Balance Sheet

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Here is what a common size balance sheet looks like for the fictional From the Roots Up Company:

From the Roots Up Company Balance Sheet

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Current Assets
Cash $223 7.5%
Accts/Notes Rec-Trade 884 29.7%
Bad Debt Reserve (-) 18 .06%
Total Accts/Rec-Net 886 29.1%
Accts/Notes Rec-Other 214 7.2%
Raw Materials 399 13.4%
Finished Goods 497 16.7%
Other Inventory 264 8.9%
Total Inventory 1,160 39.0%
Total Current Assets 2,463 82.8%
Non-Current Assets
Machinery & Equipment 402 13.5%
Furniture & Fixtures 30 1.0%
Leasehold Improvements 28 0.9%
Transportation Equipment 92 3.1%
Gross Fixed Assets 552 18.6%
Accumulated Depreciation (-) 110 3.7%
Total Fixed Assets - Net 442 14.9%
Operating Non-Current Assets 68 2.3%
Total Non-Current Assets 510 17.2%
Total Assets 2,973 100.0%
Current Liabilities
ST Loans Payable-Bank 50 1.7%
Accounts Payable-Trade 442 14.9%
Wages/Salaries Payable 50 1.7%
Non-Op Current Liabilities 231 7.8%
Total Current Liabilities 773 26.0%
Non-Current Liabilities
Long-Term Dept-Bank 400 13.5%
Due to Officers/Stakeholders 450 15.1%
Total Non-Current Liabilities 850 28.6%
Total Liabilities 1,623 54.6%
Net Worth
Paid in Capital 698 23.5%
Retained Earnings 652 21.9%
Total Net Worth 1,350 45.4%
Total Liabilities & Net Worth 2,973 100.0%
Working Capital 1,690 56.8%
Tang Net Worth-Actual $1,350 45.4%
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$223,000 / $2,973,000 x 100 = 7.5%

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Common Size Ratios from the Income Statement

Id egZeVgZ Xdbbdc h^oZ gVi^dh [gdb ndjg ^cXdbZ hiViZbZci! h^bean XVaXjaViZ ZVX]
^cXdbZVXXdjciVhVeZgXZciV\Zd[hVaZh#I]^hXdckZgihi]Z^cXdbZhiViZbZci^cidVedlZg[ja
VcVani^XVaidda#

Here is what a common size income statement looks like for the fictional From the Roots Up
Company:

From the Roots Up Company Income Statement

 ;dgi]ZFjVgiZg:cYZY9ZXZbWZg(&!'%%M>cI]djhVcYh

Sales/Revenues $8,158 100%

Cost of Sales/Revenues 4,895 60%
Gross Profit 3,263 40%
General & Administration Expense 367 4.5%
Lease/Rent Expense 188 2.3%
Operating Expense 1,468 18%
Personnel Expense 816 10%
Bad Debt Expense 33 0.4%
Total Operating Expense 2,872 35.2%
Net Operating Profit 391 4.8%
Interest Expense (-) 122 1.5%
Total Other Income (exp) (122) (1.5%)
Net Profit $269 3.3%

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hiViZbZcih [dg ndjg dlc XdbeVcn VcY id VhhZhh igZcYh! Wdi] edh^i^kZ VcY cZ\Vi^kZ! ^c ndjg ÒcVcX^Va
hiViZbZcih#
zions business resource center &%

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Wjh^cZhh dlcZgh h]djaY eVn eVgi^XjaVg ViiZci^dc# Dc V Xdbbdc h^oZ ^cXdbZ hiViZbZci! i]ZhZ bVg\^ch
VeeZVgVhi]Za^cZ^iZbhÆ\gdhhegdÒiÇVcYÆcZiegdÒi#Ç;dgi]Z;gdbi]ZGddihJe8dbeVcn!i]ZXdbbdc
h^oZgVi^dhh]dli]Z\gdhhegdÒibVg\^c^h)d[hVaZh#I]^h^hXdbejiZYWnY^k^Y^c\\gdhhegdÒiWnhVaZhVcY
bjai^ean^c\Wn&%%idXgZViZVeZgXZciV\Z#

$3,263,000 / $8,158,000 x 100 = 40%

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ndjgegdÒibVg\^cYgdeh[gdb*d[hVaZhid)!i]VibZVchndjgegdÒih]VkZYZXa^cZYWn'%#

GZbZbWZg!ndjg\dVa^hidjhZi]Z^c[dgbVi^dcegdk^YZYWni]ZXdbbdch^oZgVi^dhidhiVgiVh`^c\l]n
X]Vc\Zh ]VkZ dXXjggZY! VcY l]Vi ndj h]djaY Yd ^c gZhedchZ#
;dgZmVbeaZ!^[egdÒibVg\^ch]VkZYZXa^cZYjcZmeZXiZYan!ndj
GZbZbWZg! ndjg \dVa ^h id jhZ i]Z egdWVWanl^aalVciidXadhZanZmVb^cZVaaZmeZchZhV\V^c!jh^c\
^c[dgbVi^dc egdk^YZY Wn i]Z Xdbbdc i]ZXdbbdch^oZgVi^dh[dgZmeZchZa^cZ^iZbhid]Zaendjhedi
h^oZgVi^dhidhiVgiVh`^c\l]nX]Vc\Zh h^\c^ÒXVciX]Vc\Zh#
]VkZ dXXjggZY! VcY l]Vi ndj h]djaY Yd
^cgZhedchZ#

HiZe'/8dbejiZXdbbdch^oZgVi^dh[gdbndjg^cXdbZhiViZbZci#

a^fj^Y^ingVi^dh
A^fj^Y^ingVi^dhbZVhjgZndjgXdbeVcnÉhVW^a^inidXdkZg^ihZmeZchZh#I]ZildbdhiXdbbdc
a^fj^Y^ingVi^dhVgZi]ZXjggZcigVi^dVcYi]Zfj^X`gVi^d#7di]VgZWVhZYdcWVaVcXZh]ZZi^iZbh#

Current Ratio
I]Z XjggZci gVi^d ^h V gZÓZXi^dc d[ ÒcVcX^Va higZc\i]# >i ^h i]Z cjbWZg d[ i^bZh V XdbeVcnÉh
XjggZciVhhZihZmXZZY^ihXjggZcia^VW^a^i^Zh!l]^X]^hVc^cY^XVi^dcd[i]ZhdakZcXnd[i]ZWjh^cZhh#

=ZgZ^hi]Z[dgbjaVidXdbejiZi]ZXjggZcigVi^d/

Current Ratio = Total current assets / Total current liabilities

Jh^c\i]ZZVga^ZgWVaVcXZh]ZZiYViV[dgi]ZÒXi^dcVa;gdbi]ZGddihJe8dbeVcn!lZXVcXdbejiZi]Z
XdbeVcnÉhXjggZcigVi^d#

;gdbi]ZGddihJe8dbeVcn8jggZciGVi^d/

$2,463,000 / $773,000 = 3.19

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VhhZih(#&.i^bZh#I]ZXjggZcigVi^dVchlZghi]ZfjZhi^dc!Æ9dZhi]ZWjh^cZhh]VkZZcdj\]XjggZciVhhZih
idbZZii]ZeVnbZcihX]ZYjaZd[XjggZcia^VW^a^i^Zhl^i]VbVg\^cd[hV[Zin4Ç
]dlidVcVanoZndjgWjh^cZhhjh^c\[^cVcX^VagVi^dh &&

6 Xdbbdc gjaZ d[ i]jbW ^h i]Vi V Æ\ddYÇ

XjggZci gVi^d ^h ' id &# D[ XdjghZ! i]Z VYZfjVXn
6XjggZcigVi^dXVcWZ^begdkZYWn^cXgZVh^c\
d[ V XjggZci gVi^d l^aa YZeZcY dc i]Z cVijgZ d[
current assets or by decreasing current
i]Z Wjh^cZhh VcY i]Z X]VgVXiZg d[ i]Z XjggZci
a^VW^a^i^Zh#
VhhZih VcY XjggZci a^VW^a^i^Zh# I]ZgZ ^h jhjVaan
kZgna^iiaZjcXZgiV^cinVWdjii]ZVbdjcid[YZWih
i]Vi VgZ YjZ! Wji i]ZgZ XVc WZ Xdch^YZgVWaZ
YdjWiVWdjii]ZfjVa^ind[VXXdjcihgZXZ^kVWaZdgi]ZXVh]kVajZd[^ckZcidgn#I]ViÉhl]nVhV[ZinbVg\^c
^hcZZYZY#

6XjggZcigVi^dXVcWZ^begdkZYWn^cXgZVh^c\XjggZciVhhZihdgWnYZXgZVh^c\XjggZcia^VW^a^i^Zh#HiZeh
idVXXdbea^h]Vc^begdkZbZci^cXajYZ/

™EVn^c\YdlcYZWi

™6Xfj^g^c\Vadc\"iZgbadVceVnVWaZ^cbdgZi]Vc&nZVgÉhi^bZ

™HZaa^c\VÒmZYVhhZi

™Ejii^c\egdÒihWVX`^cidi]ZWjh^cZhh

6]^\]XjggZcigVi^dbVnbZVcXVh]^hcdiWZ^c\ji^a^oZY^cVcdei^bValVn#;dgZmVbeaZ!i]ZZmXZhh
XVh]b^\]iWZWZiiZg^ckZhiZY^cZfj^ebZci#

Quick Ratio
I]Zfj^X`gVi^d^hVahdXVaaZYi]ZÆVX^YiZhiÇgVi^d#I]ViÉhWZXVjhZi]Zfj^X`gVi^dadd`hdcanVi
VXdbeVcnÉhbdhia^fj^YVhhZihVcYXdbeVgZhi]ZbidXjggZcia^VW^a^i^Zh#I]Zfj^X`gVi^diZhih
l]Zi]ZgVWjh^cZhhXVcbZZi^ihdWa^\Vi^dchZkZc^[VYkZghZXdcY^i^dchdXXjg#

=ZgZ^hi]Z[dgbjaV[dgi]Zfj^X`gVi^d/

Quick Ratio = (Total Current Assets - Total Inventory) / Total Current Liabilities

6hhZihXdch^YZgZYidWZÆfj^X`ÇVhhZih^cXajYZXVh]!hidX`hVcYWdcYh!VcYVXXdjcihgZXZ^kVWaZ#>c
di]ZgldgYh!Vaad[i]ZXjggZciVhhZihdci]ZWVaVcXZh]ZZiZmXZei^ckZcidgn#

Jh^c\i]ZWVaVcXZh]ZZiYViV[dgi]Z;gdbi]ZGddihJe8dbeVcn!lZXVcXdbejiZi]Zfj^X`gVi^d[dg
i]ZXdbeVcn#

Fj^X`gVi^d[dgi]Z;gdbi]ZGddihJe8dbeVcn/

($2,463,000 - $1,160,000) / $773,000 = 1.69

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gZXZ^kVWaZh^hcdiZmeZXiZYidhadl#
zions business resource center &'

HiZe(/8dbejiZVXjggZcigVi^dVcYVfj^X`gVi^djh^c\ndjgXdbeVcnÉhWVaVcXZh]ZZiYViV#

deZgVi^c\gVi^dh
I]ZgZ VgZ bVcn ineZh d[ gVi^dh ndj XVc jhZ id bZVhjgZ i]Z Z[ÒX^ZcXn d[ ndjg XdbeVcnÉh
deZgVi^dch#>ci]^hhZXi^dclZl^aaadd`VihZkZci]ViVgZXdbbdcanjhZYVcYXdbeVgZY#I]ZgZ
bVnWZdi]Zghl]^X]VgZXdbbdcidVheZX^ÒX^cYjhigndgi]Vindjl^aaXgZViZ[dgVheZX^ÒX
ejgedhZ l^i]^c ndjg XdbeVcn# I]ZhZ ÆZ[ÒX^ZcXn gVi^dhÇ ji^a^oZ YViV [gdb Wdi] i]Z 7VaVcXZ
H]ZZiVcYi]ZEgdÒiAdhhHiViZbZci#
I]ZZ^\]igVi^dhlZl^aaXdkZgVgZ/

™>ckZcidgnIjgcdkZgGVi^d

™>ckZcidgn9Vnhdc=VcY

™6XXdjcihGZXZ^kVWaZIjgcdkZgGVi^d

™6XXdjcihGZXZ^kVWaZ9Vnhdc=VcY

™6XXdjcihEVnVWaZIjgcdkZg

™6XXdjcihEVnVWaZ9Vnh

™8Vh]8nXaZ

™GZijgcdc6hhZih

Inventory Turnover Ratio

I]Z >ckZcidgn IjgcdkZg GVi^d bZVhjgZh i]Z cjbWZg d[ i^bZh ^ckZcidgn ÆijgcZY dkZgÇ dg lVh
XdckZgiZYidhVaZhYjg^c\Vi^bZeZg^dY#>ibVnVahdWZXVaaZYi]Z8dhid[HVaZhid>ckZcidgnGVi^d#
>i^hV\ddY^cY^XVi^dcd[ejgX]Vh^c\VcYegdYjXi^dcZ[ÒX^ZcXn#

>c \ZcZgVa! i]Z ]^\]Zg i]Z gVi^d! i]Z bdgZ [gZfjZcian i]Z ^ckZcidgn ijgcZY dkZg# Ndj b^\]i ZmeZXi V
XdbeVcnl^i]VeZg^h]VWaZ^ckZcidgn!hjX]VhV\gdXZgnhidgZ!id]VkZVkZgn]^\]>ckZcidgnIjgcdkZgGVi^d#
8dckZghZan!V[jgc^ijgZhidgZb^\]i]VkZVadl>ckZcidgnIjgcdkZgGVi^d#

IdXVaXjaViZi]ZgVi^dlZjhZi]Z[dgbjaV/

Inventory Turnover Ratio = Cost of Goods Sold / Total Inventory

;gdbi]ZGddihJe8dbeVcn]VhVc>ckZcidgnIjgcdkZgGVi^dd[/

$4,895,000 / $896,000 = 5.463

 ;gdbi]ZGddihJe8dbeVcn]VhÆDi]Zg>ckZcidgnÇdci]Z7VaVcXZH]ZZi#I]^hÒ\jgZ^hZmXajYZY
[gdbi]ZXVaXjaVi^dc!Vh^i^hcdiXdch^YZgZYdeZgVi^c\^ckZcidgn#
]dlidVcVanoZndjgWjh^cZhhjh^c\[^cVcX^VagVi^dh &(

Inventory Days on Hand

DcXZndj]VkZXVaXjaViZYi]Z>ckZcidgnIjgcdkZgGVi^d!ndjXVcXdckZgi^iidi]ZVXijVacjbWZgd[
YVnhd[^ckZcidgnndj]VkZdc]VcY#I]^h`ZngVi^dXdbW^cZYl^i]i]Z6XXdjcihGZXZ^kVWaZ9Vnh
dc=VcYVcY6XXdjcihEVnVWaZ9VnhXdckZgiidl]Vi^hXVaaZYi]Z8Vh]8nXaZ#

IdXVaXjaViZi]Z>ckZcidgn9Vnhdc=VcYlZjhZi]Z[dgbjaV/

365 days / Inventory Turnover Ratio

;gdbi]ZGddihJe8dbeVcn]Vh>ckZcidgn9Vnhdc=VcYd[/

365 / 5.463 = 66.81 days

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YZÒc^iZanlVciidXdbeVgZid^cYjhignhiVcYVgYh#@ZZe^cb^cY!^ihh^\c^ÒXVcXZYZeZcYhdci]ZVbdjcid[
XVh]hVaZhVXdbeVcn]Vh#;dgVXdbeVcnl^i]djibVcnXVh]hVaZh!^ibVncdiWZ^bedgiVci#6ahd!^i^hV
bZVhjgZVidcandcZed^ci^ci^bZVcYYdZhcdiiV`Z^cidVXXdjcihZVhdcVaÓjXijVi^dch#

Accounts Receivable Turnover Ratio

I]Z 6XXdjcih GZXZ^kVWaZ IjgcdkZg GVi^d bZVhjgZh i]Z cjbWZg d[ i^bZ VXXdjcih gZXZ^kVWaZ
ijgcZYdkZgYjg^c\Vi^bZeZg^dY#6]^\]ZggVi^d^cY^XViZhVh]dgiZgi^bZWZilZZcbV`^c\VhVaZ
VcYXdaaZXi^c\i]ZXVh]#

I]ZgVi^d^hWVhZYdcCZiHVaZhVcYCZi6XXdjcihGZXZ^kVWaZ#GZbZbWZg!CZiHVaZhZfjVahHVaZh
aZhhVcnVaadlVcXZh[dggZijgchdgY^hXdjcih#CZi6XXdjcihGZXZ^kVWaZZfjVah6XXdjcihGZXZ^kVWaZaZhh
VcnVY_jhibZcih[dgWVYYZWih#

IdXVaXjaViZi]ZgVi^dlZjhZi]Z[dgbjaV/

Accounts Receivable Turnover Ratio = Net Sales / Net Accounts Receivable

;gdbi]ZGddihJe8dbeVcn]VhVc6XXdjcihGZXZ^kVWaZIjgcdkZgGVi^dd[/#

$8,158,000 / $866,000 = 9.42

I]^hbZVch6XXdjcihGZXZ^kVWaZijgcZYdkZgVeegdm^bViZan.#*i^bZhYjg^c\i]ZnZVg#

Accounts Receivable Days on Hand

L]Zc ndj ]VkZ XVaXjaViZY ndjg 6XXdjcih GZXZ^kVWaZ IjgcdkZg GVi^d! ndj XVc XdckZgi ^i id i]Z
VXijVacjbWZgd[YVnhVXXdjcihgZXZ^kVWaZVgZdjihiVcY^c\#

I]Z\dVaVhVWjh^cZhh^hid`ZZei]ZcjbWZgd[YVnhndjgVXXdjcihgZXZ^kVWaZVgZdjihiVcY^c\Vhadl
Vhedhh^WaZ#6[iZgVaa!ndjcZZYi]ZXVh]idWj^aYndjgXdbeVcn!cdiÒcVcXZndjgXjhidbZgh

IdXVaXjaViZi]Z9Vnhd[6XXdjcihGZXZ^kVWaZdc=VcYlZjhZi]Z[dgbjaV/

365 days / Accounts Receivable Turnover Ratio

zions business resource center &)

;gdbi]ZGddihJe8dbeVcn]Vh>ckZcidgn9Vnhdc=VcYd[/

365 days / 9.42 = 38.75 days

I]^h^hVgVi^dndjl^aaXZgiV^canlVciidXdbeVgZl^i]di]ZgÒgbh^cndjg^cYjhign#

Accounts Payable Turnover Ratio

I]Z 6XXdjcih EVnVWaZ IjgcdkZg GVi^d bZVhjgZh i]Z cjbWZg d[ i^bZ 6XXdjcih EVnVWaZ ijgcZY
dkZgYjg^c\Vi^bZeZg^dY#BjX]a^`ZdjgegZk^djhijgcdkZggVi^dh!ndjlVciidjcYZghiVcY]dl
adc\ndjg6XXdjcihEVnVWaZVgZdcndjgWdd`h#

I]^h^h^bedgiVciVh6XXdjcihEVnVWaZVgZVÆhdjgXZd[XVh]#ÇI]ZgZ^hVWVaVcXZWZilZZceVn^c\ndjg
hjeea^Zghl^i]^ci]ZiZgbhi]Zn\gVcindjVcYbVm^b^o^c\i]ZjhZd[i]ZXVh]^cndjgWjh^cZhh#

IdXVaXjaViZi]Z6XXdjcihEVnVWaZIjgcdkZgGVi^dlZjhZi]Z[dgbjaV/

Accounts Payable Turnover Ratio = Cost of Goods Sold / Inventory

;gdbi]ZGddihJe8dbeVcn]VhVc6XXdjcihEVnVWaZIjgcdkZgGVi^dd[/

$4,895,000 / $442,000 = 11.075

Accounts Payable Days

I]Z6XXdjcihEVnVWaZ9VnhXdckZgihi]Z6XXdjcihEVnVWaZIjgcdkZgGVi^didi]ZcjbWZgd[YVnh
ndjg6XXdjcihEVnVWaZVgZdjihiVcY^c\#6\V^c!i]^h^h^bedgiVciVhndjbVcV\ZndjgXVh]idbV`Z
hjgZndj]VkZZcdj\]dc]VcYidgjcndjgWjh^cZhhVcY`ZZendjghjeea^ZgheV^Ydci^bZ#

IdXVaXjaViZi]Z6XXdjcihEVnVWaZ9VnhlZjhZi]Z[dgbjaV/

365 days / Accounts Payable Turnover Ratio

;gdbi]ZGddihJe8dbeVcn]Vh6XXdjcihEVnVWaZ9Vnhdc=VcYd[/

365 days / 11.075 = 32.96 days

Cash Cycle
DcXZ ndj ]VkZ XVaXjaViZY i]Z cjbWZg d[ YVnh ^c 6XXdjcih GZXZ^kVWaZ! >ckZcidgn VcY 6XXdjcih
EVnVWaZ[dgndjgXdbeVcn!ndjXVcjhZi]ZbidXVaXjaViZndjg8Vh]8nXaZ#

I]Z 8Vh] 8nXaZ ^h hdbZi^bZh gZ[ZggZY id Vh i]Z IgVY^c\ 8nXaZ dg i]Z 8Vh] 8dckZgh^dc 8nXaZ VcY
bZVhjgZhi]Zi^bZ^cYVnh^iiV`ZhidVXfj^gZVcYhZaa^ckZcidgnVcYXdckZgihVaZhidXVh]#>ibZVhjgZh
ndjgZ[[ZXi^kZcZhhVhbVcV\Zgd[i]^hegdXZhh#

IdXVaXjaViZndjg8Vh]8nXaZjhZi]Z[dgbjaV/

Accounts Receivable Days + Inventory Days – Accounts Payable Days = Cash Cycle
]dlidVcVanoZndjgWjh^cZhhjh^c\[^cVcX^VagVi^dh &*

;gdbi]ZGddihJe8dbeVcn]VhV8Vh]8nXaZd[/

38.75 + 66.81 – 32.96 = 72.6 days

I]^hbZVch^iiV`Zh;gdbi]ZGddihJe8dbeVcnVeegdm^bViZan,(YVnh[gdbi]Zi^bZi]ZnejgX]VhZ
^ckZcidgn!XdbeaZiZi]ZhVaZd[i]Z^ckZcidgnVcYXdaaZXidci]ZhVaZd[i]Z^ckZcidgn#NdjXdjaYhVni]Zn
cZZYid]VkZ,(YVnhd[deZgVi^c\ZmeZchZh^cgZhZgkZdgVkV^aVWaZidXdkZgi]ZXVh]XnXaZ#

I]ZhZi]gZZhiZehÅejgX]Vh^c\^ckZcidgn!hZaa^c\^ckZcidgnVcYXdaaZXi^c\VXXdjcihgZXZ^kVWaZÅVgZ
Xg^i^XVaidi]ZXVh]ÓdlVcYegdÒiVW^a^ind[ndjgXdbeVcn#Ndj!VcYdcanndj!Vhi]ZWjh^cZhhdlcZg]VkZ
i]ZVW^a^inidV[[ZXiX]Vc\Z^ci]^hcjbWZg#NdjVgZgZhedch^WaZ[dgY^gZXi^c\]dlZVX]d[i]ZhiZeh^h
bVcV\ZYidbVm^b^oZndjggZijgc#

Return on Assets Ratio

I]ZGZijgcdc6hhZihGVi^d^hi]ZgZaVi^dch]^eWZilZZci]ZegdÒihd[ndjgXdbeVcnVcYndjg
idiVaVhhZih#>i^hVbZVhjgZd[]dlZ[[ZXi^kZanndjji^a^oZYndjgXdbeVcnÉhVhhZihidbV`ZV
egdÒi# >i ^h V Xdbbdc gVi^d jhZY id XdbeVgZ ]dl lZaa ndj eZg[dgbZY ^c gZaVi^dch]^e idndjg
eZZgh^cndjg^cYjhign#

IdXVaXjaViZi]ZGZijgcdc6hhZihGVi^djhZi]Z[dgbjaV/

Return on Assets = Profit Before Taxes / Total Assets

;gdbi]ZGddihJe8dbeVcn]VhVGZijgcdc6hhZihGVi^dd[/

$269,000 / $2,973,000 = .09

I]^hbZVch%#%.^cegdÒi^h\ZcZgViZYWnZVX]&#%%^cVhhZih#Ndjl^aalVciidXdbeVgZi]^hgVi^d
idndjg]^hidg^XVaeZg[dgbVcXZVcYidndjgeZZg^cYjhignidjcYZghiVcY^[^i^hVcVXXZeiVWaZgVi^ddgcdi#

hdakZcXngVi^dh
HdakZcXngVi^dhbZVhjgZi]ZhiVW^a^ind[VXdbeVcnVcY^ihVW^a^inidgZeVnYZWi#I]ZhZgVi^dhVgZ
d[eVgi^XjaVg^ciZgZhiidWVc`adVcd[ÒXZgh#I]Znh]djaYWZd[^ciZgZhiidndj!idd!h^cXZhdakZcXn
gVi^dh\^kZVhigdc\^cY^XVi^dcd[i]ZÒcVcX^Va]ZVai]VcYk^VW^a^ind[ndjgWjh^cZhh#
LZl^aaadd`Vii]Z[daadl^c\hdakZcXngVi^dh/

™9ZWi"id"Ldgi]GVi^d

™Ldg`^c\8Ve^iVa

™CZiHVaZhidLdg`^c\8Ve^iVa

™O"HXdgZ
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Debt-to-Worth Ratio

I]Z9ZWi"id"Ldgi]GVi^ddgAZkZgV\ZGVi^d^hVbZVhjgZd[]dlYZeZcYZciVXdbeVcn^hdc
YZWiÒcVcX^c\VhXdbeVgZYiddlcZgÉhZfj^in#>ih]dlh]dlbjX]d[VWjh^cZhh^hdlcZYVcY
]dlbjX]^hdlZY#

I]Z9ZWi"id"Ldgi]GVi^d^hXdbejiZYVh[daadlh/

Debt-to-Worth Ratio = Total Liabilities / Net Worth

6gZb^cYZg/CZiLdgi]2IdiVa6hhZihÄIdiVaA^VW^a^i^Zh#

;gdbi]ZGddihJe8dbeVcn]VhV9ZWi"id"Ldgi]GVi^dd[/

$1,623,000 / $1,350,000 = 1.20

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&! i]Z XVe^iVa egdk^YZY Wn aZcYZgh ZmXZZYh i]Z
XVe^iVa egdk^YZY Wn dlcZgh# 7Vc` adVc d[ÒXZgh Ldg`^c\ XVe^iVa h]djaY ValVnh WZ V edh^i^kZ
l^aa \ZcZgVaan Xdch^YZg V XdbeVcn l^i] V ]^\] cjbWZg#AZcYZghjhZ^iidZkVajViZVXdbeVcnÉh
9ZWi"id"Ldgi] GVi^d id WZ V \gZViZg g^h`# VW^a^inidlZVi]Zg]VgYi^bZh#
9ZWi"id"Ldgi] GVi^dh l^aa kVgn l^i] i]Z ineZ d[
Wjh^cZhhVcYi]Zg^h`Vii^ijYZd[bVcV\ZbZci#

Working Capital
Ldg`^c\XVe^iVa^hVbZVhjgZd[XVh]ÓdlVcY^hcdiVgZVagVi^d#

>igZegZhZcihi]ZVbdjcid[XVe^iVa^ckZhiZY^cgZhdjgXZhi]ViVgZhjW_ZXiidgZaVi^kZangVe^YijgcdkZg
hjX]VhXVh]!VXXdjcihgZXZ^kVWaZVcY^ckZcidg^ZhaZhhi]ZVbdjciegdk^YZYWnh]dgi"iZgbXgZY^idgh#

Ldg`^c\XVe^iVah]djaYValVnhWZVedh^i^kZcjbWZg#AZcYZghjhZ^iidZkVajViZVXdbeVcnÉhVW^a^in
idlZVi]Zg]VgYi^bZh#AdVcV\gZZbZcihd[iZcheZX^[ni]Vii]ZWdggdlZgbjhibV^ciV^cVheZX^ÒZYaZkZa
d[ldg`^c\XVe^iVa#

Ldg`^c\XVe^iVa^hXdbejiZYVh[daadlh/

Working Capital = Total Current Assets - Total Current Liabilities

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$2,463,000 - $773,000 = $1,690,000

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Net Sales to Working Capital

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lVnldg`^c\XVe^iVa^hWZ^c\jhZYWni]ZWjh^cZhh#>ih]dlh]dlldg`^c\XVe^iVa^hhjeedgi^c\hVaZh#

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Net Sales to Working Capital Ratio = Net Sales / Net Working Capital

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$8,158,000 / $1,690,000 = 4.83

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bVn^cY^XViZVc^cZ[ÒX^ZcijhZd[ldg`^c\XVe^iVa0i]Vi^h!ndjXdjaYWZYd^c\bdgZl^i]ndjggZhdjgXZh!
hjX]Vh^ckZhi^c\^cZfj^ebZci#6]^\]gVi^dXVcWZYVc\Zgdjh!h^cXZVYgde^chVaZh!l]^X]XVjhZhV
hZg^djhXVh]h]dgiV\Z!XdjaYaZVkZndjgXdbeVcnkjacZgVWaZidXgZY^idgh#

Z-Score
I]ZO"HXdgZ^hVii]ZZcYd[djga^hicdiWZXVjhZ^i^hi]ZaZVhi^bedgiVci!dgWZXVjhZ^iÉhVii]ZZcY
d[i]ZVae]VWZi#>iÉh]ZgZWZXVjhZ^iÉhVW^ibdgZXdbea^XViZYidXVaXjaViZ#

>cgZijgc[dgYd^c\Va^iiaZbdgZVg^i]bZi^Xndj\ZiVcjbWZg!VO"HXdgZ!l]^X]bdhiZmeZgihgZ\VgY
VhVkZgnVXXjgViZ\j^YZidndjgXdbeVcnÉhÒcVcX^VahdakZcXn#>cWajciiZgbh!VO"HXdgZd[&#-&dgWZadl
bZVchndjVgZ]ZVYZY[dgWVc`gjeiXn#8dckZghZan!VO"HXdgZd['#..bZVchndjgXdbeVcn^hhdjcY#

I]Z O"HXdgZ lVh YZkZadeZY Wn :YlVgY ># 6aibVc! V egd[Zhhdg Vi i]Z AZdcVgY C# HiZgc HX]dda d[
7jh^cZhhViCZlNdg`Jc^kZgh^in#9g#6aibVcgZhZVgX]ZYYdoZchd[XdbeVc^Zhi]Vi]VY\dcZWVc`gjei!
VcYdi]Zghi]VilZgZYd^c\lZaa#=ZZkZcijVaan[dXjhZYdcÒkZ`ZnWVaVcXZh]ZZigVi^dh#=ZVhh^\cZYV
lZ^\]iidZVX]d[i]ZÒkZ!bjai^ean^c\ZVX]gVi^dWnVcjbWZg]ZYZg^kZY[gdb]^hgZhZVgX]id^cY^XViZ^ih
gZaVi^kZ^bedgiVcXZ#I]Zhjbd[i]ZlZ^\]iZYgVi^dh^hi]ZO"HXdgZ#

A^`ZbVcndi]ZggVi^dh!i]ZO"HXdgZXVcWZjhZYWdi]idhZZ]dlndjgXdbeVcn^hYd^c\dc^ihdlc!
VcY]dl^iXdbeVgZhiddi]Zgh^cndjg^cYjhign#

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[dgndjgXdbeVcn#
zions business resource center &-

Calculating the Z-Score

Weighting Weighted
Ratio Formula Factor Ratio

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IdiVa6hhZih >ciZgZhiVcYIVmZh$ m(#(
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IdiVa6hhZih IdiVa6hhZih m%#...

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:fj^inid9ZWi m%#+
A^VW^a^i^Zh

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idIdiVa6hhZih IdiVa6hhZih m&#'

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idIdiVa6hhZih IdiVa6hhZih m&#)

Total of all Weighted Ratios = Z-Score:

From the Roots Up Business Ratios

>cI]djhVcYh
12/31/2001 12/31/2002 12/31/2003 12/31/2004 3/31/2002

Working Capital 837 1,123 1,352 1,690 80

Quick Ratio 1.61 1.62 1.59 1.69 0.77
Current Ratio 3.41 3.46 3.18 3.19 1.51
Net Sales / Working Capital 4.28 3.99 4.47 4.83 10.67
Return on Assets 7.94 9.56 8.51 9.05 7.84
Gross Receivables Days on Hand 40.77 40.77 42.58 39.55 -
Net Receivables Days on Hand 39.96 39.96 41.74 38.75 40.17
Raw Materials Days on Hand 33.63 35.25 34.73 29.75 69.41
Finished Goods Days on Hand 37.37 47.09 40.37 37.06 -
Inventory Days on Hand 71.00 82.34 75.09 66.81 69.41
Inventory Days on Hand (excl Depr) 71.00 82.34 75.09 66.81 69.41
Accounts Payable Days 33.97 32.88 35.53 32.96 38.49
Accounts Payable Days (excl Depr) 33.97 32.88 35.53 32.96 38.49
Net Sales / Total Assets 2.41 2.22 2.46 2.74 2.80
Net Sales / Net Worth 6.91 5.52 5.92 6.04 8.45
Net Sales / Net Fixed Assets 11.86 13.24 14.74 18.46 21.23
]dlidVcVanoZndjgWjh^cZhhjh^c\[^cVcX^VagVi^dh &.

Financial Ratio Definitions

Formula Example Meaning

Current Ratio Current Assets 1.35 There is 1.35 in current

Current Liabilities assets to pay every $1.00
in current liabilities.

Quick Ratio Cash + Accounts Receivable 0.49 There is $0.49 in quick

Current Liabilities assets (liquid) to pay
every $1.00 in current
liabilities.

Debt to Equity Total Liabilities 0.45 The creditors have put

Ratio Equity $0.45 in the business
for every $1.00 the
owners have put in.

Gross Profit Gross Profit 30.7% For every $1.00 of sales

Margin Sales there is $0.307 in gross
profit.

Pre-Tax Profit Profit Before Taxes 0.15% For every $1.00 of sales
Margin Sales there is $0.0015 in
pre-tax profit.

Sales to Assets Sales 1.98 There is $1.98 in sales for

Total Assets for every $1.00 in assets
employed in the business.

Return on Assets Profit Before Taxes 0.3% There is $0.003 in profit

Total Assets for every $1.00 in assets
employed in the business.

Return on Equity Profit Before Taxes 0.8% There is $0.008 in profit

Equity for every $1.00 in equity
invested in the business.

Inventory Cost of Goods Sold 4x On average, the inventory

Turnover Inventory turns over 4 times a year.

Inventory Days 365 Days 91 days On average, the inventory

Inventory Turnover turns over every 91 days.

Accounts Sales 10.9x On average, the accounts

Receivable Accounts Receivable receivable turn over
Turnover 10.9 times a year.

Collection Period 365 Days 33 days On average, the

Accounts Receivable Turnover accounts receivable
turn over every 33 days.
zions business resource center '%

X]ZX`a^hi
I]^hYdXjbZci]VhegZhZciZY^c[dgbVi^dcdcXdbbdch^oZgVi^dh[dgWdi]i]Z^cXdbZhiViZbZciVcY
i]ZWVaVcXZh]ZZi!eajhhZkZgVaVYY^i^dcVaÒcVcX^VagVi^dhndjXVcjhZid\V^cVWZiiZgjcYZghiVcY^c\d[
i]ZÒcVcX^Va]ZVai]d[ndjgWjh^cZhh#

I]Z gVi^dh ndj l^aa jhZ bdhi [gZfjZcian VgZ Xdbbdc h^oZ gVi^dh [gdb i]Z ^cXdbZ hiViZbZci! i]Z
XjggZcigVi^d!i]Zfj^X`gVi^dVcYgZijgcdcVhhZih#NdjgheZX^ÒXineZd[Wjh^cZhhbVngZfj^gZndjidjhZ
hdbZdgVaad[i]Zdi]ZggVi^dhVhlZaa#

;^cVcX^VagVi^dVcVanh^h^hdcZlVnidijgcÒcVcX^VahiViZbZcih!l^i]i]Z^gadc\Xdajbchd[cjbWZgh!
^cidedlZg[jaWjh^cZhhiddah#;^cVcX^VagVi^dVcVanh^hbV`Zh^iZVhnidZkVajViZi]ZeZg[dgbVcXZd[ndjg
Wjh^cZhh!idYZiZXiigZcYh^cndjgXdbeVcnVcYXdbeVgZndjgeZg[dgbVcXZl^i]ndjgeZZgh#

Common Size Ratios

TTTL]ZcXdbeji^c\Xdbbdch^oZgVi^dh[dgndjgXdbeVcnÉhWVaVcXZh]ZZi!lZgZeZgXZciV\Zh 
 [dgVhhZiXViZ\dg^ZhWVhZYdcidiVaVhhZih4LZgZa^VW^a^ineZgXZciV\ZhWVhZYdcidiVaa^VW^a^i^Zh
 eajhdlcZghÉZfj^in4

TTT=VkZndjZmVb^cZYViaZVhidcZhdjgXZd[XdbeVgVi^kZÒcVcX^VagVi^dh4

Liquidity Ratios
TTTL]ViYdZhi]ZXjggZcigVi^dndjXdbejiZY[dgndjgWjh^cZhhiZaandjVWdjindjgXdbeVcnÉh 
 VW^a^inidbZZiXjggZcia^VW^a^i^Zh4

TTT>hndjgfj^X`gVi^dWZilZZc%#*VcY&4>[cdi!^hi]ZgZVcZmeaVcVi^dci]Vi^hhVi^h[VXidgnidndj4

Operating Ratios
TTTL]ZcXdbeji^c\i]ZHVaZh"id"GZXZ^kVWaZhGVi^d!Y^YndjgZbZbWZgidjhZcZihVaZhVcY
 cZigZXZ^kVWaZh4

Solvency Ratios
TTT9dZhi]ZCZiHVaZh"id"Ldg`^c\8Ve^iVaGVi^di]VindjXdbejiZYbV`ZhZchZ[dgndjg 
 Wjh^cZhh46gZVY_jhibZcihcZXZhhVgn4

Z-Score
TTTL]ZgZ^hndjgXdbeVcnÉhO"HXdgZ4>[^i^hadl!dgi]ZigZcY^hYdlc[dggZXZcinZVgh!Ydndj 
 `cdll]ViX]Vc\ZhndjcZZYidbV`Z4
]dlidVcVanoZndjgWjh^cZhhjh^c\[^cVcX^VagVi^dh '&

resources
Sources of Information on Profitability Analysis
Budgeting and Finance (First Books for Business) WnEZiZg:c\Za#BX<gVl"=^aa!&..+#

Credit Process: A Guide for Small Business OwnersWnIgVXnA#EZclZaa#;ZYZgVaGZhZgkZ7Vc`d[

CZlNdg`!&..)#

Fundamentals of Financial Management!&&i]ZY#Wn?VbZh8#KVc=dgcZVcY?d]cBVgi^cLVX]dl^Xo#

EgZci^XZ=Vaa!'%%&#

Handbook of Financial Analysis for Corporate Managers!GZk^hZYZY#WnK^cXZciBjgd#6B68DB!

&..-#

How to Read and Interpret Financial Statements#6bZg^XVcBVcV\ZbZci6hhdX^Vi^dc!&..'#

Sources of Information on Financial Ratios

RMA Annual Statement Studies, Risk Management Association.®9ViV[dg('*a^cZhd[Wjh^cZhh!
hdgiZYWnVhhZih^oZVcYWnhVaZhkdajbZidVaadlXdbeVg^hdchidXdbeVc^Zhd[h^b^aVgh^oZ^ci]ZhVbZ
^cYjhign#I]ZÆXdbbdch^oZÇeZgXZciV\Zd[idiVaVhhZihdghVaZh^hegdk^YZY[dgZVX]WVaVcXZh]ZZiVcY
^cXdbZhiViZbZci^iZb#

Almanac of Business and Industrial Financial Ratios, VccjVa!WnAZdIgdn#EgZci^XZ"=Vaa!>cX##

>c[dgbVi^dc[dg&*%^cYjhig^Zhdc''ÒcVcX^VaXViZ\dg^Zh#9ViV^hjhjVaani]gZZnZVgheg^dgidi]Z
ejWa^XVi^dcYViZ#

Financial Studies of the Small Business Wn@VgZc<ddYbVc#;^cVcX^VaGZhZVgX]6hhdX^ViZh#;dXjh^c\

dcWjh^cZhhl^i]XVe^iVa^oVi^dchjcYZg&b^aa^dc!egdk^Y^c\ÒcVcX^VagVi^dhVcYdi]Zg^c[dgbVi^dc#

Industriscope: Comprehensive Data for Industry Analysis.BZY^V<ZcZgVa;^cVcX^VaHZgk^XZh#8dbeVgZ

XdbeVcn"id"XdbeVcn!XdbeVcn"id"^cYjhign^cYjhign"id"^cYjhign0'&*^cYjhign\gdjeh0dkZg.!%%%
XdbeVc^Zh\gdjeZYl^i]^ci]Z^g^cYjhign0dkZg)%`Zn^iZbha^hiZYdcZVX]XdbeVcn^cYjhign0eg^XZ!
eg^XZX]Vc\ZgZaVi^kZeg^XZYViV0h]VgZ]daY^c\hYViV0gZkZcjZ!ZVgc^c\hY^k^YZcYYViV0gVi^d
VcVanh^h0]^hidg^XVaVgX]^kZhVkV^aVWaZWVX`idBVn&.,(#

Kauffman Business EKG!@Vj[[bVc8ZciZg[dg:cigZegZcZjg^VaAZVYZgh]^e#6Òaa"^c"i]Z"WaVc`h

XVaXjaVidg[dghZkZgVa^cXdbZVcYhVaZhgVi^dh#

Books
Healthy Business Guide, Zions First National Bank

Cash Flow Analysis!;^cVcX^VaEgd[dgbZgh!>cX#!;^[i]:Y^i^dc!HZeiZbWZg&..*#

Lg^iZg/6aZm6jZgWVX]

8deng^\]i&..."'%%*:YlVgYAdlZ;djcYVi^dc#lll#ZYlVgYadlZ#dg\#

6aag^\]ihgZhZgkZY#I]ZiZmid[i]^hejWa^XVi^dc!dgVcneVgii]ZgZd[!bVncdiWZgZegdYjXZY^cVcnbVccZgl]VihdZkZg
l^i]djilg^iiZceZgb^hh^dc[gdbi]ZejWa^h]Zg#8dchjail^i]aZ\VaVcYVXXdjci^c\egd[Zhh^dcVah[dgheZX^ÒXVYk^XZ^c
i]ZhZVgZVh#
zions business resource center 22

notes
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b-6

Zions Business Resource Center

Utah Idaho
resources@zionsbank.com idresources@zionsbank. com

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