 Self-Assessment

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

1. Does my company have enough working capital?
2. Do I know how much working capital is "enough" for my business's size and industry?
3. How profitable is my business?
4. Will our income cover payroll and other liabilities/debts?
5. Are we carrying too much debt?
6. Do I know how much debt is "too much" for my business's size and industry?
7. Are we leveraging our assets properly?
8. 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

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

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:

1. How much profit did your company make during the last fiscal year?
2. Was the wealth of the owners increased during the year as a result of business operations?
3. Does your average markup on goods normally cover your expenses, and therefore result in a profit?
4. 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

1. If your business needed to come up with cash quickly to settle on its debts, could it? If so, how quickly?
2. Does your company actually generate enough capital to cover those debts in a one-year period?
3. Do you have too much or too little cash tied up in inventory?
4. Do you know what the proper level of inventory is for your business?
5. How efficient are your collection practices?
6. 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.

1. Does your company need to borrow money to meet short-term obligations?
2. Is the amount of debt (both short- and long-term) you carry greater than the funds company owners have invested in the firm?
3. 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.

1. Is your business currently experiencing or trending toward an operating loss?
2. Has your investment in the business allowed you to achieve ongoing profits?
3. Has your ability to generate revenue increased over time, decreased or remained stable?
4. 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.

1. Does your company have adequate working capital to cover both short- and long-term debts?
2. Does your firm's net worth outweigh its debts?
3. 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

1. What percentage of your company's total funds are provided by creditors?
2. What percentage is provided by owners?
3. Do you generate enough cash in-house to cover liabilities?
4. 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