IIC Ratio Definitions

Formula: Average Trade Receivables Before Allowance for Doubtful Accounts / Annualized Sales (not including grain sales and before discounts, returns, allowances) X 365
Definition: Measures the average in days that receivables are outstanding.
Analysis: The higher the number, the greater collection risk. A high number may suggest concern over credit control and collections.

Formula: Sales (before discounts, returns, allowances) / Average Total Assets
Definition: Measures how efficiently assets are used to generate sales. Calculates the total sales for each dollar of assets a company owns.
Analysis: A high number indicates efficient use of assets. Compare your ratio to similar companies. Note: Companies that lease their facilities and equipment, will have a higher ratio than companies that own. Be sure to compare to companies that have similar arrangements.

Formula: (Earnings after paying taxes and interest expense but before depreciation, amortization, non-cash patronage income, cash patronage dividends, and non-operating revenues and costs) / current portion of long term debt
Definition: Measures ability of operations to generate adequate cash flow to service term debt payments.
Analysis: The larger the number, the greater the ability to make debt service payments. A good rule of thumb is a ratio of 2:1 or more.

Formula: current assets / current liabilities
Definition: Measures short-term debt-paying ability. Current assets are the sum of assets that typically convert to cash within 12 months. Current liabilities are the sum of amounts owed by the company and due within 12 months.
Analysis: 1.0 ratio means the company has $1.00 in current assets to cover each $1.00 in current liabilities. Look for a current ratio above 1.0.

Formula: Depreciation and Amortization Expenses / Net Revenue
Definition: All depreciation and amortization expenses divided by net revenue. Includes depreciation for buildings, equipment, delivery vehicles, sales vehicles, etc. as well as amortization for leasehold improvements, closing cost, etc. Measures how depreciation and amortization expense is related to revenue.
Analysis: Since depreciation and amortization are non-cash expenses, they can be "added back" to net profit to determine cash flow from operations. If' this number is low compared to a peer group, reinvestment in the business is probably low. Astute bankers will look at this ratio to calculate both operating cash flow and to determine whether the business is reinvesting enough to stay competitive in the long run.

Formula: net income before interest expenses, federal, state, county, and city income taxes, depreciation and amortization
Definition: A ratio that reflects core earnings of the business, regardless of debt, tax levees, and depreciation/amortization.
Analysis: Allows you to make better comparisons with your peer group, regardless of the amount of loans, taxes, and depreciation. Companies that reinvest back in their business may show a lower net profit, especially soon after the investment, due to depreciation expense. This measure indicates profitability without depreciation and is an indicator of operating cash flow.

Formula: General and Administrative Expenses / Net Revenue
Definition: All administrative related expenses divided by net revenue. Measures how administrative expense is related to revenue.
Analysis: Are administrative expenses increasing as a percent of revenue? How does your ratio compare with similar businesses?

Formula: Governance Expenses / Net Revenue
Definition: All Governance related expenses (except for payroll) divided by net revenue. Includes board of director and membership related expenses. Measures how Governance expense is related to revenue.
Analysis: Are your Governance expenses significantly different than other businesses?

Formula: (Net Sales + Service Revenue – Cost of Goods Sold) / Net Sales
Definition: Measures the percentage of net sales and service revenue remaining after subtracting cost of goods sold. Indicator of how much profit is earned on your products without consideration of selling and administration costs. Makes explicit that service revenue is included in this ratio.
Analysis: A low margin - especially in relation to industry norms - could indicate you are under pricing or paying too high of a price for goods. On the other hand, your low prices may be increasing sales. A low gross margin is not necessarily "bad", especially if it helps increase sales. A high gross profit margin indicates either high prices and/or lower cost of goods. However, high prices may decrease sales, and disguise failure with something that looks like success. See the Turns X Earns discussion. Look at the trend from quarter to quarter. Is it staying the same? Improving? Deteriorating? Is there enough gross profit in the business to cover your operating costs?

Formula: ((Gross Margin and Service Revenue Dollars this period) – (Gross Margin and Service Revenue Dollars for the same period last year)) / (Gross Margin and Service Revenue Dollars for the same period last year)
Definition: Measures the percentage growth or decrease in gross margin and service revenue dollars.
Analysis: Sometimes lowering prices can increase sales and result in more gross margin dollars, while increasing prices (gross margin) may decrease sales significantly in a competitive environment. This ratio measures the actual dollars generated from the combination of margin and sales level, and is a better indicator than either taken alone.

Formula: Gross Margin and Service Revenue / Total Personnel Expenses including taxes and benefits
Definition: Measures the gross margin and service revenue generated for every dollar of personnel expense.
Analysis: This is key productivity index and is often called the Personnel Productivity Index. A higher ratio compared to peers implies higher efficiency, good systems, and/or favorable payroll expenses.

Formula: Interest Expense / Net Revenue
Definition: Interest Expense expressed as a percent of Net Revenue
Analysis: If higher than peers, this ratio might suggest overleveraging or inappropriate loan terms; if lower than peers, this ratio might indicate an underleveraged position and borrowing capacity.

Formula: Investments in Cooperatives. When expressed as a percent, divided by Total Assets.
Definition: Investments in Cooperatives such as CHS and CoBank

Formula: Total Equity less Regional Investments. Note: if a co-op has only one investment account in their chart of accounts, the program assumes that the majority of the amount is invested in other cooperatives and subtracts the full amount from equity. If some of that single investment line is not in regional co-ops, LLCs, etc., local equity will be understated. Most co-ops detail their investments in other cooperatives, so this is only an issue for the few co-ops that do not have these types of investments broken out in their chart of accounts.
Definition: Capital invested by the owners less the amount regionally invested in other cooperatives, non-local LLCs, etc.
Analysis: By subtracting out regional investments, local equity shows how much of members' investments is working at the local level.

Formula: Total Income before taxes and regional patronage.
Definition: Income derived from operations before taxes are paid and regional patronage is received.
Analysis: This is a measure of core operations.

Formula: Long Term Liabilities / (Equity less Regional Investments)
Definition: Shows the ratio between capital invested by the owners (less the amount regionally invested in other cooperatives, non-local LLCs, etc.) and the long term funds provided by lenders and other creditors.
Analysis: Comparison of how much of the business was financed through long term debt and how much was financed through equity. A higher debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. Too much debt can put your business at risk... but too little debt may mean you are not realizing the full potential of your business and may actually hurt your overall profitability. By subtracting out regional investments, this ratio gets at the core business proposition in terms of debt and equity.

Formula: Net Fixed Assets (including building, equipment, vehicles, land, goodwill, etc.) / Depreciation
Definition: Net Fixed Assets (fixed assets after adjusting for depreciation and amortization) divided by depreciation expense (not accumulated depreciation) . Includes depreciation for buildings, equipment, delivery vehicles, sales vehicles, etc. Measures how depreciation expense is related to net fixed assets. Gives a broad indication of how many years it will take to depreciate fixed assets based on the current period's deprecation schedule, assuming current depreciation and fixed assets amounts.
Analysis: This indicator may shed light on whether the company is reinvesting enough or too much back into assets. Too little may increase short terms profits, but dampen long terms earnings. Too much may imply too much risk and depress short term earnings.

Formula: Net Profit including Patronage Income / Net Sales
Definition: Measures income generated by each dollar of sale. This ratio includes other income, other expense, and taxes.
Analysis: A low margin could indicate either low sales or high expenses. Is the margin improving or deteriorating? How does it compare in relation to Total Expense %? Note: patronage dividends may affect this ratio.

Formula: Non-Wage Personnel Expense / Total Personnel Expense
Definition: All non-wage personnel related expenses (includes Medical, Workers Comp, Payroll Taxes, 401K, and any other specific payroll related expenses, but not including wages, bonuses, and gainsharing) divided by the total personnel expenses.
Analysis: High non-wage personnel expenses compared to peers, may mean that benefits may be out of line. It could also mean that the company has chosen to strategically augment benefits to retain valuable employees. Comparing this metric to operating profit might be the best way to gauge effectiveness of high or low non-wage costs over time.

Formula: Operations Expense / Net Revenue
Definition: All Operating related expenses (such as plant supplies, safety, credit card fees, environmental expense, etc.) divided by net revenue. Measures how operating expense is related to revenue. Note: this is not the same as Total Operating Expense.
Analysis: Are operating expenses increasing as a percent of revenue? Compare this percentage to “Gross Margin”. Are they moving in the same direction? How does your ratio compare with similar businesses?

Formula: (Gross Margin plus Service Revenue – Total Operating Expenses) / Net Sales
Definition: Measures the percent of income or loss before other income, other expense, and taxes.
Analysis: Is there enough operating profit to cover other expenses and taxes? Is the operating profit increasing or decreasing?

Formula: Other Expense / Net Revenue
Definition: All Other Expenses divided by net revenue. Measures how Other Expense is related to revenue.
Analysis: Are Other Expenses increasing as a percent of revenue? Compare this percentage to “Gross Margin”. Are they moving in the same direction? How does your ratio compare with similar businesses?

Formula: Other Income / Net Revenue
Definition: All Other Income divided by net revenue. Measures how Other Income is related to revenue.
Analysis: Is Other Income increasing as a percent of revenue? How does your ratio compare with similar businesses?

Formula: Patronage Income / Net Sales
Definition: The percentage of sales represented by patronage income (patronage received primarily from regional cooperatives)
Analysis: This figure represents the patronage income, some of which may be paid in cash and some retained as equity in other cooperatives.

Formula: Average Payables / Average Inventory
Definition: The percent of Inventory represented by payables.
Analysis: This ratio indicates how much of inventory is financed by who you purchased the inventory from. Whether the ratio is good or bad depends on the terms and a comparison to industry norms. A relatively high ratio often indicates a cash shortage.

Formula: Payroll Benefits Expenses / Net Revenue
Definition: Payroll benefits include insurance, time off (vacation, holidays, etc.), retirement plan contributions, union dues (if a company expense), etc.
Analysis: Payroll benefits that are too high may create an unsustainable expense structure, but payroll benefits that are too low may lead to rapid turnover and lower productivity.

Formula: Personnel Expenses / Net Revenue
Definition: All personnel related expenses (includes Payroll, Medical, Workers Comp, Payroll Taxes, 401K, and any other specific payroll related expenses) divided by net revenue. Measures how payroll expense is related to revenue.
Analysis: Are personnel expenses increasing as a percent of revenue? Compare this percentage to “Gross Margin”. Are they moving in the same direction? How does your ratio compare with similar businesses?

Formula: Personnel Expenses / Gross Margin and Service Revenue
Definition: All personnel related expenses (includes Payroll, Medical, Workers Comp, Payroll Taxes, 401K, and any other specific payroll related expenses) divided by the total gross margin and service revenue. Measures the percentage of gross margin and service revenue used on personnel expenses.
Analysis: Look at the trend from quarter to quarter. Is the ratio increasing or decreasing? An increasing ratio indicates personnel expenses are increasing or gross margin and service revenue is decreasing.

Formula: Personnel Expenses / Total Operating Expenses
Definition: All personnel related expenses (includes Payroll, Medical, Workers Comp, Payroll Taxes, 401K, and any other specific payroll related expenses) divided by the total operating expenses such as delivery costs, occupancy expense, etc. Measures how much expense is related to payroll costs.
Analysis: Are personnel expenses increasing as a percent of expenses? Compare this percentage to “Wages to Total Operating Expense”. Are they moving in the same direction? Is total personnel expense increasing while wages are staying flat? How does your ratio compare with similar businesses?

Formula: Plant and Building Expenses / Net Revenue
Definition: All occupancy (plant and building) related expenses divided by net revenue. Measures how occupancy expense is related to revenue.
Analysis: Are occupancy expenses increasing as a percent of revenue? How does your ratio compare with similar businesses?

Formula: Sales related to products such as grain or feed. Does not include service revenue nor miscellaneous revenue. When expressed as a percent, product sales are divided by total sales.
Definition: Measures revenue from products. Analy

Formula: Sales related to products such as grain or feed less the cost of goods for these same items. Expressed as a percent, gross margin is divided by product sales.
Definition: Measures gross profit from product sales.
Analysis:

Formula: Product Sales this period / Product Sales for the same period last year
Definition: Measures the percentage growth or decrease in product sales.
Analysis: Best used when comparing to peer data to determine if your sales g

Formula: Inventory Turns X (Gross Margin and Service Revenue / Net Revenue)
Definition: Measures inventory productivity.
Analysis: The higher your gross margin and service revenue and inventory turns, the higher your profitability indicator will be. Sometimes it makes sense to lower your prices (gross margin), if your sales increase substantially, and sometimes a high gross margin (non-competitive sales price) will show up as low inventory turns.

Formula: (Current Assets - Inventory) / Current Liabilities
Definition: Measures short-term debt-paying ability.
Analysis: 1.0 ratio means the company has $1.00 in current assets less inventory to cover each $1.00 in current liabilities.

Formula: Net Profit / Total Assets (average)
Definition: Considered a measure of how effectively assets are used to generate a return.
Analysis: ROA shows the amount of income for every dollar tied up in assets. Indicator of how efficiently the company manages its assets. Year to year trends may be an indicator ... but watch out for changes in the total asset figure as you depreciate your assets (a decrease or increase in the denominator can affect the ratio and doesn’t necessarily mean the business is improving or declining. Note: Companies that lease their facilities and equipment, will have a higher ratio than companies that own. Be sure to compare to companies that have similar arrangements.

Formula: Net Profit / Net Worth (average)
Definition: Measures return of owner’s investment.
Analysis: Compare the return on equity to other investment alternatives. Compare your ratio to others in the same or similar business. Is your business generating an appropriate return on your investment in it?

Formula: (Sales from this period - sales from the equivalent period last year) / (sales from the equivalent period last year)
Definition: Measures sales growth. When measuring quarterly sales, this measure will compare to the same quarter of the previous year. When comparing annual sales, it will use the current and previous year performance. Rolling measures take a 12 month period. For example, comparing 3Q05 will include the 12 months ending in September and compare that to the 12 months ending the previous September.
Analysis: Sales growth is a key measure of health in a business.

Formula: Annualized Sales / Average Local Equity
Definition: Shows how much revenue is generated compared to the amount of local equity invested. Local Equity is the capital invested by the owners less the amount regionally invested in other cooperatives, non-local LLCs, etc. Sales are annualized. Local Equity is averaged, using the last 2 quarters, except for annual and rolling numbers which use the last 5 quarters (beginning and ending local equity, plus the local equity amounts for the quarters in between This technique smooths out large variation.).
Analysis: How hard is equity working for the members? The higher the ratio, the harder the equity is working.

Formula: Sales and Marketing Expenses / Net Revenue
Definition: All Sales and Marketing related expenses (except for payroll) divided by net revenue. Measures how Sales and Marketing expense is related to revenue.
Analysis: Are Sales and Marketing expenses increasing as a percent of revenue? Compare this percentage to “Gross Margin”. Are they moving in the same direction? How does your ratio compare with similar businesses?

Formula: Revenue related to services such as consulting. Does not include product sales nor miscellaneous revenue. When expressed as a percent, service revenue is divided by total revenue.
Definition: Measures revenue from services Anal

Formula: Service Revenue this period / Service Revenue for the same period last year
Definition: Measures the percentage growth or decrease in service revenue.
Analysis: Best used when comparing to peer data to determine if your

Formula: (2% of grain sales + 10% of all other product revenues) / Net Sales
Definition: Suggests a level of working capital reflecting product mix.
Analysis: This ratio was developed at Iowa State University by Roger Ginder and his team. Research indicates that banks and boards should target about 2% of grain sales plus 10% of all other product sales as a working capital target.

Formula: All Liabilities / Equity
Definition: Shows the ratio between capital invested by the owners and the funds provided by lenders and other creditors.
Analysis: Comparison of how much of the business was financed through debt and how much was financed through equity. A higher debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. Too much debt can put your business at risk... but too little debt may mean you are not realizing the full potential of your business and may actually hurt your overall profitability.

Formula: All Liabilities / All Assets
Definition: Shows the ratio between total liabilities and the total assets.
Analysis: Comparison of how much of your assets are financed through debt. A higher liabilities to assets ratio generally means that a company has been aggressive in financing its growth with debt. Too much debt can put your business at risk... but too little debt may mean you are not realizing the full potential of your business and may actually hurt your overall profitability.

Formula: Total Operating Expenses / Net Sales
Definition: Measures the percent of expenses before “other expenses and income”. Does not include patronage income.
Analysis: A high percentage could indicate high expenses or low sales. Look at the trend, is the percentage increasing or decreasing? Are sales increasing or decreasing? Are expenses increasing or decreasing?

Formula: Trucking and Vehicle Expense / Net Revenue
Definition: All trucking and vehicle related expenses (except for trucking payroll) divided by net revenue. Measures how trucking and vehicle expense is related to revenue.
Analysis: Are trucking and vehicle expenses increasing as a percent of revenue? Compare this percentage to “Gross Margin”. Are they moving in the same direction? How does your ratio compare with similar businesses?

Formula: Total Salaries / Total Operating Expenses
Definition: Salaries as a percent of total operating expenses. Salaries include wages only and do not include taxes and benefits. Measures the percent of expenses related to salary costs.
Analysis: Look at the trend, is the percentage increasing or decreasing? Has the number of employees increased or decreased? How does it compare to the Total Personnel Expense ratio?

Formula: Current Assets - Current Liabilities
Definition: Measures the ability to pay current liabilities. Liquidity in dollars.
Analysis: The greater the number, the more current assets the company has to cover current liabilities. This number should be positive.

Formula: Target Working Capital - Working Capital
Definition: The difference between actual working capital and target working capital determined by your product mix.
Analysis: A negative number implies that you may not have adequate working capital. Often a negative number is a result of rapid growth and is a corollary of the "Sustainable Growth Curve".