NF Ratios

Formula: Cost of Goods Sold (annualized) / Average Payables
Definition: Number of times that you pay your average payables during the year.
Analysis: Generally, a high payables turnover indicates adequate cash and the ability to take payment term discounts. But a high ratio can also mean that a company is forced to pay COD because of bad credit or because it has not yet established credit. A low turnover may indicate inadequate cash or a decision not to take payment discounts. If cash is short, investing is salable inventory is likely preferable to taking cash discounts, but if inventory is optimized and cash is available, cash discounts normally provide a good return. Some companies improve profitability by borrowing money in order to take payment discounts.

Formula: Average Trade Receivables Before Allowance for Doubtful Accounts / Annualized Sales (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: 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: Calculated by taking the cash on hand and dividing that by the average daily amount of COGS + cash operating expenses + interest expense + taxes. This ratio doesn't include depreciation/amortization, patronage dividends, or "other expenses/income.” Note: this ratio assumes 91 days per quarter.
Definition: Measures the approximate number of days of cash the co-op currently has on hand.
Analysis: Days cash on hand, another liquidity measure, provides an indication of vulnerability. If too few days are on hand, a co-op may not be able to weather an emergency, such as a competitor opening up next door or the loss of utilities for a week.

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: debt / 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: (debt - long term member loans) / (equity + long term member loans)
Definition: Shows the ratio between capital invested by the owners and the funds provided by lenders and other creditors. Since cooperative lenders tend to consider member loans as equity, this ratio does that. Long-term member loans are subtracted from debt and added to equity.
Analysis: Comparison of how much of the business was financed through outside debt and how much was financed through equity and member loans. 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: Net Income plus Interest Expense and Federal, State, County, and City Income taxes. Does not include fuel taxes, franchise tax, etc.
Definition: A ratio that reflects core earnings of the business, regardless of debt and tax levees.
Analysis: Allows you to make better comparisons with your peer group, regardless of the amount of loans and taxes paid.

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 income before interest expenses, federal, state, county, and city income taxes, depreciation, amortization, and patronage rebates.
Definition: Measures the core earnings of a business, regardless of debt, tax levies, depreciation/amortization, and patronage rebates. EBITDAP is essentially net income with interest, taxes, depreciation, and amortization added back to it. This ratio can be used to analyze and compare profitability between co-ops by eliminating the effects of financing and accounting decisions.
Analysis: Allows you to make better comparisons with your peer group, regardless of the amount of loans, taxes, depreciation, and patronage rebates. Consumer and worker co-ops that pay a patronage rebate will show less net income, so EBITDAP is an important profitability measure.

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 earned on your products without consideration of selling and administration costs.
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 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: Interest Expense Minus Mortgage Interest
Definition: Interest Expense expressed without the portion of Interest Expense associated with a mortgage
Analysis: Some companies don't differentiate interest expense in their chart of accounts, so Interest Expense is reported separately. This ratio allows companies that do provide Interest Expense detail in their chart of accounts, to compare non-mortgage interest expense.

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: Cost of Goods Sold (annualized) / Average Inventory
Definition: Number of times that you turn over (or sell) inventory during the year. Measures inventory liquidity.
Analysis: Generally, a high inventory turnover is an indicator of good inventory management. But a high ratio can also mean there is a shortage of inventory. A low turnover may indicate overstocking, or obsolete inventory. Compare to industry standards. If possible, drill down to compare the same inventory lines with others (produce to produce, grocery to grocery, etc.). Comparing aggregate Inventory Turnover can be misleading if product mix is significantly different.

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: Gross Margin minus gross wages, payroll taxes, and personnel benefits 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, payroll taxes, and benefits.
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: Gross Margin minus Gross Wages, Payroll Taxes, Personnel Benefit, Bonuses, Recruiting, Training, etc. 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, payroll taxes, benefits and any other expenses coded to personnel cost.
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: (income statement total) / (net sales)
Definition: Measures income generated by each dollar of sale. This ratio includes other income, other expense, and taxes.
Analysis: A low net income could indicate (among other things) low sales compared to fixed expenses, low gross profit dollars, and/or high variable expenses such as a portion of your personnel expense. To assess a co-op’s finances, you will want to consider whether the net income is increasing or decreasing. (Note: patronage dividends may affect this ratio.)

Formula: Occupancy Expense + Mortgage Interest + Building Depreciation
Definition: Some companies don't differentiate interest and depreciation, so "occupancy expense" doesn't include those items. This ratio adds those 2 items to occupancy expense, so that the resulting ratio can be compared among those companies that do provide that level of detail.
Analysis: A better measure of occupancy cost for those companies that own their buildings. This ratio will allow renters and owners to compare occupancy costs, but only for renters and those owners that detail their depreciation and interest expense in a way that would allow identification of related occupancy costs.

Formula: Operating Expense + Equipment Depreciation
Definition: Some companies don't differentiate depreciation, so "operating expense" doesn't include depreciation. This ratio adds equipment depreciation to operating expense, so that the resulting ratio can be compared among those companies that do provide that level of detail.
Analysis: Provides a better ratio for operating expense, but only for those companies that detail depreciation in their chart of accounts.

Formula: (Gross Margin – 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: Net Income Plus Patronage Refunds Plus non-working Member Discounts
Definition: Net Income plus Patronage Refunds plus non-working Member Discounts. This is a measure of the returns that members realize from their membership in the co-op.
Analysis: This measure is the best indicator of total returns to members.

Formula: Patronage Rebate
Definition: Patronage Rebates to Members
Analysis: Patronage Rebates (aka Patronage Dividends or Patronage Refunds) are a classic co-op way of providing returns to owners. Normally, the more patronage rebates, the better; however, some co-ops have gotten into trouble by declaring patronage rebates inappropriately or provided too much in patronage rebates so that the business suffered, resulting in no patronage rebates in the future.

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 / Gross Profit
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 profit. Measures the percentage of gross profit 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 is decreasing.

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 / Total 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 expenses. 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 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: Inventory Turns X Gross Margin %
Definition: Measures inventory productivity.
Analysis: The higher your gross margin 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. 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: Pretax Profit / Total Assets
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 (after taxes) / 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: 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: Total Operating Expenses / Net Sales
Definition: Measures the percent of expenses before “other expenses and 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: 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.

Formula: Total Salaries / Total Expenses
Definition: Salaries as a percent of total 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. When expressed as a percent it is a percent of sales.