Business Ratios and Formulas: A Comprehensive Guide


Business Ratios and Formulas
A Comprehensive Guide
Third Edition

Whether you're starting, running, or growing a business,Business Ratios and Formulas, Third Edition is essential reading,with nearly 250 operational criteria and clear, easy-to-understandexplanations that can be used right away.

An ideal tool for measuring corporate performance, thisauthoritative resource allows...

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Business Ratios and Formulas
A Comprehensive Guide
Third Edition

Whether you're starting, running, or growing a business,Business Ratios and Formulas, Third Edition is essential reading,with nearly 250 operational criteria and clear, easy-to-understandexplanations that can be used right away.

An ideal tool for measuring corporate performance, thisauthoritative resource allows managers and auditors to pick andchoose the tools they need to best assess their organization'sperformance. Each formula includes a complete description,explanation of the calculation, an example, and cautions regardingits use. The cautions are of particular use, since they describethose elements of a measurement that can be modified to delivermisleading results, different measurements that may work better incertain situations, usage on a trend line basis, and which othermeasurements should be used to reinforce indicated results.

The Third Edition includes approximately twenty new ratios andformulas covering fixed-charge coverage ratio; free cash flowformula; capital-labor ratio; cash coverage ratio; value at riskformula; cash conversion efficiency metric; and open/closerequisition ratio. For professionals needing to compile informationabout a company's long-term performance, the new edition describeshow to use an electronic spreadsheet to compile a standard set ofmeasurements, using Microsoft Excel as the template.

Author and renowned accounting expert Steve Bragg categorizesperformance measurements for accounting, engineering, logistics,production, and sales departments and also discusses topics relatedto efficiency, effectiveness, capacity, and market share. Chaptertopics include measurements related to asset utilization, operatingperformance, cash flows, liquidity, capital structure, return oninvestment, and market performance.

Accounting professionals, business managers, and operationalconsultants will turn to Bragg's peerless guide again and again toassess a host of organizational performance standards.

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"It is an important, Quick Reference item that should be in every business collection." (Choice, April 2003)
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Product Details

  • ISBN-13: 9781118169964
  • Publisher: Wiley
  • Publication date: 4/3/2012
  • Series: Wiley Corporate F&A Series, #577
  • Edition description: New Edition
  • Edition number: 3
  • Pages: 355
  • Product dimensions: 7.20 (w) x 10.00 (h) x 1.40 (d)

Meet the Author

Steven M. Bragg, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte. He is the author of over thirty books primarily targeted toward corporate financial leaders (controllers, treasurers, and CFOs) and their needs. Bragg received a master's degree in finance from Bentley College, an MBA from Babson College, and a bachelor's degree in economics from the University of Maine.

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Business Ratios and Formulas

A Comprehensive Guide
By Steven M. Bragg

John Wiley & Sons

ISBN: 0-471-39643-5

Chapter One


Every department in every business produces some kind of information that can be used by its manager to measure performance. This information may be related to operational considerations within the department, the financial condition of the entire company, or the performance of a company's suppliers and customers. Unfortunately, managers may not be aware of the multitude of measurements that can be used to track these different levels of performance or of the ways that these measurements can yield incorrect or misleading information.

This book is designed to help managers select the best possible set of measurements for a given situation. Chapters 2 through 13 itemize a series of performance measurements for different aspects of a company. Chapter 2 contains asset utilization measurements that can be used to determine a company's ability to sustain its sales, the level of asset and expense usage required to do so, and the sustainability of its current sales and expense levels. There are also specialized ratios that deal with such issues as sales returns, repairs and maintenance, fringe benefits, interest expense, and overhead rates.

Chapter 3 contains operating performance measurements, which describe an organization's operating performance in such areas as sales, gross margins, investment income, operatingprofit, and net profit.

Chapter 4 contains cash flow measurements, which are useful in determining the ability of a company's cash flows to keep it in business. These measurements should be used in conjunction with the liquidity measurements in Chapter 5, which focus on additional measurements related to cash flows, such as a company's ability to collect accounts receivable in an efficient manner, use its inventory within a short time frame, pay its accounts payable when due, and generally maintain a sufficient amount of liquid funds to pay off short-term liabilities. Chapter 6 contains capital structure and solvency measurements, which determine the relationship between a company's debt and equity, as well as the comparative proportions of different types of stock. It also addresses a company's ability to remain solvent and so can be used in conjunction with Chapters 4 and 5.

Chapter 7 contains return on investment measurements, which encompass net worth, several types of return on assets and equity, earnings per share, economic value added, and return on dividends. Chapter 8 addresses a company's financial market performance by describing such measurements as the price/earnings ratio, several variations on the stock options to common shares ratio, market value added, and the cost of capital.

Chapters 9 through 13 cover measurements for individual departments. These chapters are devoted to performance measurements for the accounting, engineering, logistics, production, and sales departments. In contrast to Chapters 2 through 8, which are devoted to measurements that are primarily used by the accounting and finance functions, Chapters 9 through 12 are more concerned with such issues as work capacity levels, efficiency, and effectiveness, which in many cases require no financial information at all. For example, measurements in Chapter 11, which deals with logistics, cover such topics as production schedule accuracy, the on-time parts delivery percentage, and picking accuracy for assembled products.

Chapter 14 covers a variety of topics related to measurements using the Microsoft Excel electronic spreadsheet, including how to set up comprehensive sets of measurements that can be used for proportional, leverage, ratio, and trend analyses. It also covers a variety of spreadsheet formulas and report formats for forecasting, cash flow analysis, capital asset purchase analysis, interest compounding, investment analysis, and risk analysis.

The book concludes with an appendix and glossary. The Appendix lists the names and formulations of every measure in the book, sorted by chapter. This list should only be used with the precautions given for them in their respective chapters to ensure their proper use. The Glossary covers the definitions of the terms found in many of the measurements listed in this book, to clarify the exact types of information needed.

The chapters containing measurements (Chapters 2 through 13) have an identical structure. Each begins with a table that lists the measurements described in it, which one can use to quickly access a needed calculation. Thereafter, each chapter is broken down into the discussion of individual measurements. Within each measurement section there are a description, formula, example, and discussion of cautionary items. The description typically notes how the measurement is used and who uses it. The formula shows any variations on the calculation and what types of data to include or exclude from it. The example is generally a complete scenario that describes how the measurement is used in a simulated business situation. Finally, any cautionary items are noted; these can include the ways in which the measurement can be altered to yield incorrect results, or what other measurement should be used with it in order to yield a more comprehensive set of information.

The reader may use this book to search for a single calculation, which can be used for highly targeted needs. However, a better approach is to peruse the entire book, with the objective of developing a complete set of measurements that will yield a more comprehensive view of a company's entire operating and financial situation. For example, a CFO might be interested in a company's stock market performance and therefore watches only the price/earnings ratio. However, this single measurement focuses only on the perception of investors with regard to a company's future earnings potential. A more rounded set of measurements might include the days of sales backlog (since it indicates future changes in sales volume), production capacity utilization (since it shows the ability of the company to produce its incoming sales), and the days of accounts receivable (since it shows the company's ability to convert sales into cash). The exact set of measurements will change in accordance with a company's industry, size, operational configuration, and degree of financial leverage, but one issue will remain the same: A single measurement is not enough to yield a clear view of a company's financial and operating condition.

Even if a company has developed a reasonable set of measurements, this does not mean that they should never be changed. On the contrary, measured items will generally gather a great deal of management attention and then improve to the point where they no longer change-thereby resulting in a stale set of measurements. For example, inventory accuracy can improve only to 100%. At this point, the measurement is needed on a monitoring basis to ensure that it does not degrade, while a new measurement can be created to be the focus of corporate attention. However, there will be a few measurements, usually involving sales levels and break-even points, that will always be the centerpiece of any measurement system, since they bring attention to bear on the most crucial revenue and cost elements of the business. Thus, a properly designed measurement system should include a few key items that will be constant for many years, accompanied by other measures that are used for internal improvement purposes and will change in concert with corporate objectives.

This book is filled with nearly 200 financial and operational measurements that have proven to be of considerable use to the author in tracking the performance of many companies in a variety of industries. If you would like to see other measurements in the next edition of this book, please send your request to the author at


Excerpted from Business Ratios and Formulas by Steven M. Bragg Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Preface xv

Acknowledgments xvii

Chapter 1: Introduction 1

Chapter 2: Asset Utilization Measurements 5

Sales to Working Capital Ratio 6

Sales to Fixed Assets Ratio 7

Sales to Administrative Expenses Ratio 8

Sales to Equity Ratio 9

Sales per Person 10

Sales Backlog Ratio 12

Sales Returns to Gross Sales Ratio 13

Repairs and Maintenance Expense to Fixed Assets Ratio 14

Accumulated Depreciation to Fixed Assets Ratio 15

Capital to Labor Ratio 17

Fringe Benefi ts to Wages and Salaries Expense 18

Sales Expenses to Sales Ratio 19

Discretionary Cost Ratio 19

Interest Expense to Debt Ratio 20

Foreign Exchange Ratios 21

Overhead Rate 22

Goodwill to Assets Ratio 25

Overhead to Cost of Sales Ratio 26

Investment Turnover 27

Break-Even Point 28

Margin of Safety 29

Tax Rate Percentage 30

Chapter 3: Operating Performance Measurements 31

Operating Assets Ratio 31

Sales to Operating Income Ratio 33

Sales Margin 34

Gross Profi t Percentage 34

Gross Profi t Index 35

Investment Income Percentage 36

Operating Profi t Percentage 38

Operating Leverage Ratio 39

Net Income Percentage 40

Core Operating Earnings 41

Profi t per Customer Visit 42

Profi t per Person 43

Core Growth Rate 44

Quality of Earnings Ratio 45

Chapter 4: Cash Flow Measurements 47

Cash Flow from Operations 47

Free Cash Flow 49

Cash Flow Return on Sales 50

Fixed Charge Coverage 51

Expense Coverage Days 52

Cash Flow Coverage Ratio 54

Cash Receipts to Billed Sales and Progress Payments 55

Cash to Current Assets Ratio 55

Cash Flow to Fixed Asset Requirements 56

Cash Flow Return on Assets 58

Cash to Working Capital Ratio 59

Cash Reinvestment Ratio 60

Cash to Current Liabilities Ratio 61

Cash Flow to Debt Ratio 62

Reinvestment Rate 63

Stock Price to Cash Flow Ratio 64

Dividend Payout Ratio 65

Chapter 5: Liquidity Measurements 67

Accounts Receivable Turnover 68

Average Receivable Collection Period 69

Days Delinquent Sales Outstanding 70

Days Sales in Receivables Index 71

Accounts Receivable Investment 72

Ending Receivable Balance 73

Inventory to Sales Ratio 74

Inventory Turnover 75

Inventory to Working Capital Ratio 77

Liquidity Index 78

Accounts Payable Days 79

Accounts Payable Turnover 80

Current Ratio 81

Quick Ratio 82

Cash Ratio 83

Sales to Current Assets Ratio 84

Working Capital Productivity 85

Days of Working Capital 86

Weighted Working Capital 87

Defensive Interval Ratio 88

Current Liability Ratio 89

Required Current Liabilities to Total Current Liabilities Ratio90

Working Capital to Debt Ratio 91

Risky Asset Conversion Ratio 92

Noncurrent Assets to Noncurrent Liabilities Ratio 93

Short-Term Debt to Long-Term Debt Ratio 94

Altman’s Z-Score Bankruptcy Prediction Formula 95

Chapter 6: Capital Structure and Solvency Measurements99

Times Interest Earned 99

Cash Coverage Ratio 100

Debt Coverage Ratio 101

Asset Quality Index 102

Accruals to Assets Ratio 104

Times Preferred Dividend Earned 105

Debt to Equity Ratio 107

Funded Capital Ratio 108

Retained Earnings to Stockholders’ Equity 109

Preferred Stock to Total Stockholders’ Equity 110

Issued Shares to Authorized Shares 111

Chapter 7: Return on Investment Measurements 113

Net Worth 113

Book Value per Share 115

Tangible Book Value 116

Return on Assets Employed 117

Return on Infrastructure Employed 119

Return on Operating Assets 120

Return on Equity Percentage 121

Return on Common Equity 122

Financial Leverage Index 123

Equity Growth Rate 124

Earnings per Share 125

Percentage Change in Earnings per Share 126

Economic Value Added 127

EVA Momentum 129

Relative Value of Growth 130

Dividend Payout Ratio 131

Dividend Yield Ratio 133

Chapter 8: Market Performance Measurements 135

Insider Stock Buy-Sell Ratio 135

Institutional Capture Rate 137

Market Value Added 138

Enterprise Value/Earnings Ratio 139

Stock Options to Common Shares Ratio 140

Cost of Capital 142

Sales to Stock Price Ratio 144

Price/Earnings Ratio 145

Capitalization Rate 146

Chapter 9: Measurements for the Accounting/Finance Department147

Purchase Discounts Taken to Total Discounts 148

Percentage of Payment Discounts Missed 149

Transactions Processed per Person 150

Transaction Error Rate 151

Average Time to Issue Invoices 152

Average Employee Expense Report Turnaround Time 154

Payroll Transaction Fees per Employee 155

Time to Produce Financial Statements 157

Percentage of Tax Filing Dates Missed 158

Proportion of Products Costed Prior to Release 159

Internal Audit Savings to Cost Percentage 160

Internal Audit Efficiency 161

Deduction Turnover 162

Bad Debt Percentage 163

Percent of Receivables over XX Days Old 164

Allowance Exhaustion Rate 165

Percentage Collected of Dollar Volume Assigned 166

Cash Collected per Aging Bucket 167

Collection Effectiveness Index 168

Best Possible DSO 169

Partial Payment Agreement Percentage 170

Percent of Cash Applied on Day of Receipt 171

Auto Cash Hit Rate 172

Unmatched Receipts Exposure 172

Cost of Credit 173

Earnings Rate on Invested Funds 174

Brokerage Fee Percentage 175

Borrowing Base Usage Percentage 176

Chapter 10: Measurements for the Engineering Department179

Bill of Materials Accuracy 179

Labor Routing Accuracy 181

Idea Kill Rate 182

Percentage of New Products Introduced 183

Percentage of Sales from New Products 184

Percentage of New Parts Used in New Products 185

Percentage of Existing Parts Reused in New Products 186

Average Number of Distinct Products per Design Platform 187

Percentage of Products Reaching Market before Competition188

Return on Innovation Investment 189

Intangibility Index 189

Science Linkage Index 190

Ratio of Actual to Target Cost 191

Warranty Claims Percentage 192

Time from Design Inception to Production 193

Percentage of Floor Space Utilization 194

Chapter 11: Measurements for the Human Resources Department197

Employee Turnover 197

Average Time to Hire 198

Late Personnel Requisitions Ratio 199

Sendouts per Hire 200

Intern Hiring Percentage 201

Ratio of Support Staff to Total Staff 201

Employment Cost Effectiveness 202

Chapter 12: Measurements for the Logistics Department205

Production Schedule Accuracy 206

Economic Order Quantity 207

Number of Orders to Place in a Period 208

Economic Production Run Size 209

Raw Material Inventory Turns 209

Raw Material Content 210

Finished Goods Inventory Turns 211

Obsolete Inventory Percentage 212

Percentage of Inventory > XX Days Old 213

Percentage of Returnable Inventory 214

Excess Inventory Index 215

Inventory Accuracy 216

Percentage of Certified Suppliers 217

Electronic Data Interchange Supplier Percentage 218

Distribution Turnover 219

Supplier Fill Rate 220

On-Time Parts Delivery Percentage 221

Purchased Component Defect Rate 223

Incoming Components Correct Quantity Percentage 224

Percentage of Actual Payments Varying

from Purchase Order Price 225

Percentage of Purchase Orders Issued below

Minimum Dollar Level 226

Proportion of Corporate Credit Card Usage 227

Percentage of Receipts Authorized by Purchase Orders 228

Freight Audit Recovery Ratio 230

Picking Accuracy for Assembled Products 231

Order Fill Rate 231

Average Time to Ship 232

On-Time Delivery Percentage 234

Dock-to-Dock Time 234

Percentage of Products Damaged in Transit 236

Percentage of Sales through Distributors 237

Chapter 13: Measurements for the Production Department239

Constraint Productivity 240

Takt Time 240

Constraint Rework Percentage 241

Constraint Schedule Attainment 242

Constraint Utilization 243

Operational Equipment Effectiveness 244

Degree of Unbalance 245

Throughput Effectiveness 246

Manufacturing Critical Path Time 248

Manufacturing Efficiency 249

Break-Even Plant Capacity 250

Manufacturing Effectiveness 251

Productivity Index 252

Unit Output per Direct Labor Hour 253

Average Equipment Setup Time 255

Unscheduled Machine Downtime Percentage 255

Mean Time between Failures 257

Acceptable Product Completion Percentage 258

Work-in-Process Turnover 259

Work-in-Process to Standard Work-in-Process 260

Scrap Percentage 261

First-Time-Through Yield 262

Warranty Claims Percentage 263

Maintenance Expense to Fixed Assets Ratio 264

Indirect Expense Index 265

Reorder Point 266

On-Time Delivery Ratio 268

Chapter 14: Measurements for the Sales and MarketingDepartment 271

Market Share 271

Customer Turnover 272

Advertising Value Equivalency 273

Net Promoter Score 274

Browse-to-Buy Conversion Ratio 275

Recency 276

Direct Mail Effectiveness Ratio 277

Inbound Telemarketing Retention Ratio 279

Proportion of Completed Sales to Home Page Views 280

Quote to Close Ratio 281

Pull-Through Rate 282

Sales per Salesperson 283

Sales Productivity 284

Sales Effectiveness 285

Sales Trend Percentage by Product Line 286

Product Demand Elasticity 287

Days of Backlog 288

Chapter 15: Measurement Analysis with an ElectronicSpreadsheet 291

Financial Statement Proportional Analysis 292

Financial Statement Ratio Analysis 294

Automated Ratio Result Analysis 296

Leverage Analysis 297

Trend Analysis 298

Forecasting 299

Cash Flow Analysis 303

Capital Asset Analysis 305

Compounding Analysis 307

Investment Analysis 309

Risk Analysis 311

Appendix: Measurement Summary 313

Glossary 339

About the Author 345

Index 347

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