**Self-Assessment**

Ask yourself the following questions to determine how much you know
about each of the following financial concepts:

- Does my company have enough working capital?
- Do I know how much working capital is "enough" for
my business's size and industry?
- How profitable is my business?
- Will our income cover payroll and other liabilities/debts?
- Are we carrying too much debt?
- Do I know how much debt is "too much" for my business's
size and industry?
- Are we leveraging our assets properly?
- Are we carrying the proper level of inventory, and do we turn
it over efficiently?

Are you able to answer all of these questions accurately? When you
have finished this workshop, you will be armed with the tools and
information you need to do so.

**A. Income Ratios**

Ask yourself the following questions:

- Do you know how effective your assets are in attaining revenue?
- Do you have the proper level of operating assets for your company's
sales level?
- Do you have too little or too much working capital on hand?
- How much revenue does our core business operations produce?

**The Income Ratios will help you obtain the
answers to these questions and more.**

** 1. Asset Turnover **

Calculate your Asset Turnover by using the following equation:

__Total Revenue__

Average Assets for Period

**2. Sales to Tangible Net Worth **

Calculate your Sales to Tangible Net Worth Ratio by using the following
equation:

__Total Sales__

Tangible Net Worth

**3. Operating Income to Net Sales Ratio **

Calculate your Operating Income to Net Sales Ratio by using the
following equation:

__Operating Income__

Net Sales

**B. Profitability Ratios **

**Take the following mini-quiz:**

- How much profit did your company make during the last fiscal
year?
- Was the wealth of the owners increased during the year as a result
of business operations?
- Does your average markup on goods normally cover your expenses,
and therefore result in a profit?
- Does the company generate enough cash that you can avoid loans
or other external debt?

These questions will all be addressed by computing the Profitability
Ratios.

**1. Gross Profit Margin (GPM)**

Calculate your Gross Profit Margin by using the following equation:

__Net Sales - Cost of Goods Sold__

Total Revenue

**2. Net Profit Margin (NPM)**

Calculate your Net Profit Margin by using the following equation:

__Earnings After Taxes__

Total Revenue

**3. Return on Assets (ROA) **

Calculate your Return on Assets by using the following equation:

__Net Income__

Average Assets for Period

**4. Return on Equity (ROE)**

Calculate your Return on Equity by using the following equation:

__Net Income__

Average Shareholder Equity for Period

**5. Net Operating Profit Rate of Return **

Calculate your Net Operating Profit Rate of Return by using the
following equation:

__Earnings Before Interest and Taxes__

Average Shareholder Equity for Period

**6. Management Rate of Return **

Calculate your Management Rate of Return Ratio by using the following
equation:

__Operating Income__

Fixed Assets + Net Working Capital

**7. Earning Power **

Calculate your Earning Power by using the following equation:

__Earnings Before Interest and Taxes__

Total Assets

**C. Liquidity Ratios **

**Ask yourself the following questions:**

- If your business needed to come up with cash quickly to settle
on its debts, could it? If so, how quickly?
- Does your company actually generate enough capital to cover those
debts in a one-year period?
- Do you have too much or too little cash tied up in inventory?
- Do you know what the proper level of inventory is for your business?
- How efficient are your collection practices?
- Are you getting paid in a timely manner by your customers?

The following ratios will provide clarity on all of these liquidity-related
issues.

**1. Current Ratio**

Calculate your Current Ratio by using the following equation:

__Total Current Assets__

Total Current Liabilities

**2. Quick Test Ratio (a.k.a. The "Acid
Test")**

Calculate your Quick Ratio by using the following equation:

__Current Assets - Inventory__

Total Current Liabilities

**3. Absolute Liquidity Ratio **

Calculate your Absolute Liquidity Ratio by using the following equation:

__Cash + Marketable Securities__

Current Liabilities

**4. Basic Defense Interval **

Calculate your Basic Defense Interval by using the following equation:

__Cash + Receivables + Marketable Securities__

(Operating Expenses + Interest + Income Taxes)/365 days

**5. Receivables Turnover **

Calculate your Receivables Turnover by using the following equation:

__Total Credit Sales__

Average Receivables Balance

**
6. Average Collection Period (ACP)**

Calculate your Average Collection Period by using the following
equation:

__365 days__

Receivables Turnover

**7. Inventory Turnover **

Calculate your Inventory Turnover by using the following equation:

__Cost of Goods Sold__

Average Value of Inventory

**D. Working Capital Ratios **

Before delving into the Working Capital Ratios, consider the following
questions.

- Does your company need to borrow money to meet short-term obligations?
- Is the amount of debt (both short- and long-term) you carry greater
than the funds company owners have invested in the firm?
- Does the company carry an appropriate level of investments?

**
1. Working Capital **

Calculate your Working Capital by using the following equation:

Current Assets - Current Liabilities

**2. Working Capital Turnover **

Calculate your Working Capital Turnover by using the following equation:

__Net Sales__

Average Working Capital

**3. Debt to Net Worth**

Calculate your Debt to Net Worth by using the following equation:

__Total Liabilities__

Tangible Net Worth

**E. Bankruptcy Ratios **

Ask yourself these bankruptcy "red flag" questions before
reviewing the related ratios.

- Is your business currently experiencing or trending toward an
operating loss?
- Has your investment in the business allowed you to achieve ongoing
profits?
- Has your ability to generate revenue increased over time, decreased
or remained stable?
- Is your company over-invested in depreciating assets?

**1. Working Capital to Total Assets **

Calculate your Working Capital to Total Assets by using the following
equation:

__Net Working Capital__

Total Assets

**2. Retained Earnings to Total Assets **

Calculate your Retained Earnings to Total Assets by using the following
equation:

__Retained Earnings__

Total Assets

**3. EBIT to Total Assets **

Calculate your EBIT to Total Assets by using the following equation:

__Earnings Before Interest and Taxes__

Total Assets

**4. Sales to Total Assets **

Calculate your Sales to Total Assets Ratio by using the following
equation:

__Total Sales__

Total Assets

**5. Equity to Debt **

Calculate your Equity to Debt Ratio by using the following equation:

__Market Value of Stock__

Total Debt

**6. Cash Flow to Debt**

Calculate your Cash Flow to Debt Ratio by using the following equation:

__Net Income + Depreciation__

Total Debt

**F. Long-Term Analysis**

Self-Assessment:

Ask yourself these questions regarding the long-term financial outlook
of your company.

- Does your company have adequate working capital to cover both
short- and long-term debts?
- Does your firm's net worth outweigh its debts?
- In short, are your creditors protected from risk of non-payment
of debt?

**1. Current Assets to Total Debt **

Calculate your Current Assets to Total Debt Ratio by using the following
equation:

__Current Assets__

Total Debt

**2. Stockholders' Equity Ratio **

Calculate your Stockholders' Equity Ratio by using the following
equation:

__Stockholders' Equity__

Total Assets

**3. Debt to Net Worth Ratio**

Calculate your Debt to Net Worth Ratio by using the following equation:

__Total Debt__

Tangible Net Worth

**G. Coverage Ratios **

**1. Times Interest Earned (TIE)**

Calculate your Times Interest Earned by using the following equation:

__Earnings Before Interest and Taxes__

Interest Payable on Debt

**2. Total Coverage Ratio (a.k.a. "Debt
Service Ratio")**

Calculate your Total Coverage Ratio by using the following equation:

__Total Operating Income__

Total Debt Service

**H. Leverage Ratios**

**Ask yourself:**

- What percentage of your company's total funds are provided by
creditors?
- What percentage is provided by owners?
- Do you generate enough cash in-house to cover liabilities?
- Do you have an appropriate level of debt - and do you know what
that level should be?

**1. Equity Ratio **

Calculate your Equity Ratio by using the following equation:

__Common Shareholders' Equity__

Total Capital Employed

**2. Debt to Equity Ratio **

Calculate your Debt to Equity Ratio by using the following equation:

__Long-Term
Debt__

Shareholders' Equity

**3. Debt Ratio **

Calculate your Debt Ratio by using the following equation:

__Total Debt__

Total Asset