INFRA Ratio Definitions

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: 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: (Net Sales – Cost of Goods Sold) / Net Sales
Definition: Measures the percentage of net sales remaining after subtracting cost of goods sold. Indicator of how much profit is leftover for other business operations.

Formula: ((Gross Profit Dollars this period) – (Gross Profit Dollars for the same period last year)) / (Gross Profit Dollars for the same period last year)
Definition: Measures the percentage growth or decrease in gross profit dollars.
Analysis: Sometimes lowering prices can increase sales and result in more gross profit 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 Wages, not including taxes and benefits
Definition: Gross wages - one of the most significant expenses a store has. Useful to compare Gross Wages by department. When comparing at the store level , be sure to take into consideration differences in product mix.

Formula: Cost of Goods Sold / Inventory Definition: Measures the fraction of the year on average, an item remains in the store.
Analysis: The greater the number, the faster the inventory turnsover throughout the year.

Formula: 365 days/Inventory Turns
Definition: The average number of days that inventory is owned by the store before it is sold
Analysis: The greater the number, the longer the inventory sits in the backroom or on the shelf before it is sold.

Formula: Gross Margin minus Gross Wages as a Percent of Revenue
Definition: The percent of revenue available to pay all other expenses, after paying for the cost of goods and gross wages.
Analysis: In addition to being a good profitability indicator, this ratio is also useful for comparing companies that have different product mixes. It is a better comparison than either margin or personnel expense alone.

Formula: (Total Revenue - Total Expenses) / Total Revenue
Definition: Measures what a company has earned (or lost) over a given period of time as a percent of Total Revenue.
Analysis: The greater the percent, the more net profit the company has. This number is sometimes called the 'bottom line'.

Formula: (current assets - inventory) / current liabilities
Definition: Measures short-term debt-paying ability. The quick ratio, often referred to as the acid-test ratio, is obtained by subtracting inventories from current assets and then dividing by current liabilities.
Analysis: 1.0 ratio means the company has $1.00 in current assets less inventory to cover each $1.00 in current liabilities.

Formula: (sales from this period - sales from the equivalent period last year) / (sales from the equivalent period last year)
Definition: 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: 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: Inventory Turns * (Margin Minus Labor)
Definition: A ratio that reflects net dollars earned, taking into consideration not only margin, but also personnel expense and sales growth.
Analysis: If a reduction in margin leads to significantly greater sales, margin minus labor (MML) may increase - so more dollars may be earned even with a lower margin. However, if margin decreases and sales don't increase commensurately, MML may decrease and you earn fewer dollars. For example, you might have a wine sale and end up lowering overall wine margin by 5%. This leads to a 25% sales increase, but you also had to add staff to handle the volume. Did the gross profit dollars generated by the additional sales increase more than the lower margin cost you? If you considered the additional payroll expense, are you still ahead? You could determine this by calculating the gross profit dollars less personnel cost. Turns X Earns converts this dollar amount to a ratio so that you can compare results of the wine promo to the increased margin, decreased labor, and lower sales you tried in the HABA department. The same principle applies to comparisons between stores.