Prospects and business ratios

At one stage, the US government mandated three business ratios that accredited institutions had to maintain. It is now only available as an archive, although it still seems to be very relevant. See the original for more detail. ABHE colleges reportedly found that they could spend no more than 90c in every dollar they earned to maintain acceptable ratios. The first three business ratios are listed below.

Primary Reserve Ratio: Could it survive without income for a while?

The first ratio shows whether the institution has enough available funds to cover its expenses in case it loses its sources of income.

Equity Ratio: How much does it actually own?

The second ratio measures its total net resources compared to the amount subject to claims of third parties. Intangible assets and unsecured receivables are excluded in calculating Equity and Total assets for this ratio.

Net Income Ratio: Is it profitable?

The third ratio measures profitability or ability to operate within its means.

Current Ratio

Under the terms of California Code of Regulations, Section 71240, the University must maintain a "current assets to current liabilities of 1.25 to 1.00 or greater at the end of the most recent fiscal year." This ratio is intended to indicate whether a business can pay its short-term debts. However, it is does not do well at indicating value in some industries, because a business might be overstocked (pushing the value up) or its stock might be becoming obsolete (pushing the value down).

Book to Market Ratio: How do share prices compare to the balance sheet?

As a start-up company with shareholders, a particularly relevant business ratio is the "book to market" ratio. In this ratio, the "book value" is the value of the tangible assets (cash, property, debts recievable, etc.) after liabilities have been deducted.

If the total value of the stock equals the book value, the ratio is 1:1. However, ratios vary according to industry. For example, Internet service companies have fewer tangible assets but higher relative cash flows than manufacturers. (Note: The same comparison is also expressed at the price to book ratio: Price to book ratio = Total value of stock / Book value.)

Another set

This next set of business ratios is also designed to give a full picture of the financial viability of an organization, and is not all that different. It was used by the Australian government's VetFeeHelp program to assess applicant institutions. They fall into three categories:
• Liquidity: the Current Ratio and the Net Tangible Assets Ratio
• Equity and Financing: Debt to Equity Ratio
• These measure profitability: Net Profit Ratio and Profit Growth

Current Ratio: Do you have enough short term assets to cover your short-term debts?

A ratio above one usually shows that working capital is positive. A higher ratio indicates greater stability and lower financial risks.

Net Tangible Assets Ratio: Do you have more tangible assets than liabilities?

This ratio compares tangible assets with total liabilities. A ratio above one shows that tangible assets exceed debts and other liabilities.

Debt to Equity Ratio: How does your debt compare to your equity?

This ratio measures the proportion of borrowing to the owners' investment and indicates the organisation's policy of financing its assets.

Net Profit Ratio: How much of each sale is actual profit?

This ratio shows the average profit on each dollar of sales (i.e. how much sales revenue is profit). It helps to show the pricing strategy and how intense the competition is.

Profit Growth: Is profitablity increasing?

This ratio indicates whether the profit ratios has increased or decreased over time.