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Financial ratios calculator from Profits Plus Solutions

These calculations were tabulated on

When you were in school, there were ways of measuring your success. In the classroom, you most likely received a letter grade of A, B, C, D, or F. If you participated in sports, there was probably a scoreboard, or a way of timing or measuring your efforts. As you worked to improve, you could simply look at your previous grade or score, and compare it to your most recent efforts.

Now that you are a part of a business, you may think there are no more grades or scoreboards. As you are now dealing with money as compared to athletics or classrooms, knowing the score is even more important.

Profits Plus Solutions has created for you this interactive page that will allow you to enter information from your financial statements, both the Profit & Loss Statement and the Balance Sheet, to get an idea of where your business is. You will receive the answers to 21 key formulas.

To maximize this page to help your business, we would suggest:

* Get the most recent copy of your financial sheets
* Enter the requested numbers
* Any number that is in more than one formula is automatically, placed into each of the appropriate formulas
* Print a copy of the page with your key formula information
* Repeat the exercise when you have your next set of financial sheets
* Compare the results
* Reread the information on formulas of interest to you

To go directly to a particular formula click on its name. The ratios are grouped according to the type of ratio information they provide.

Liquidity:
Acid Ratio
Cash to Current Liabilities Ratio
Current Ratio

Activity:
Accounts Receivable Aging
Accounts Receivable Turnover
Days of Inventory On Hand
Days Sales Outstanding
Turn Rate - cost method
Turn Rate - retail method

Profitability:
Cost of Goods Sold
Gross Margin Return On Inventory
Gross Profit Percentage
Individual Item Margin

Operating Expenses as a Percentage
Operating Margin Per Square Foot
Personal productivity Ratio
Return on Assets
Return on Equity
Sales per employee
Sales to Inventory Ratio
Space productivity

Coverage:
Debt to Equity Ratio
Debt to Net Worth

 

 

Individual Item Margin
Defined:
You have heard the question of, 'What is your margin on this item?' Where we have a space for price, this must be the price the item is sold for. This is where you could have an initial markup, and an actual or final markup. For example if you originally marked an item $10, and have marked it down to $8, then $8 is the price you would enter. The cost can be the cost from your supplier; it can also include the cost of freight. Some businesses have freight as a separate line, while others add the cost of freight to the cost of the item.

Computed: The Individual Item Margin is calculated by taking the selling price of the item, subtract the cost, and then divide the answer by the selling price.

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Price
$
Cost
$

%

Cost of Goods Sold
Defined: You have probably seen this item appear on a financial statement. To the surprise of most people the cost of goods sold is a calculation involving both products you have sold and not sold.

Computed: Cost of Goods Sold is calculated by taking the inventory, at cost, at the beginning of the month, add the cost of all of the inventory purchases during the month, and then subtracting the inventory on hand at the end of the month. The resulting number is the cost of goods sold for that month.

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Beginning Inventory at Cost

$

Purchases at Cost

$

Ending Inventory at Cost

$

$

Turn Rate - cost method
Defined: Ever have anyone ask you how often you turn your merchandise? This is the number they are looking for. The desirable answer varies from industry to industry. For example, a grocery store is looking for a double-digit turn rate. Most of general and specialty retail is looking for a greater than 3.0 turn.

Computed: Taking the Cost of Goods Sold, and dividing that number by the average inventory at cost on hand calculates the Turn Rate. The average inventory on hand is determined by taking the total of the 12 end of month inventory figures, and diving by 12.

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Cost of Goods Sold

$

Average Inventory

$

Turn Rate - retail method
Defined: There are two ways to calculate the inventory turn rate. One is based on the cost of inventory while the other is based on inventory at retail. Totaling inventory at retail involves knowing the cost of the inventory and the gross margin. However, you have to know if you are considering the initial gross margin or the maintained gross margin. The initial gross margin is the percentage calculated as you first price the inventory. However, as merchandise is often sold for less than the original price, the resulting gross margin is referred to as maintained gross margin. You will see the maintained gross margin on the profit and loss (income) statement. Comparing the two methods of calculating inventory turn, the inventory turn rate at retail will be lower than the inventory turn rate at cost.

Calculated: This is a multi step calculation. While your balance sheet will have the inventory at cost, the number you want is the inventory at retail which is likely to be a calculation performed by your point of sale system. Take the inventory at retail for each of the last 12 months, add them together and divide by 12. The resulting number is the average inventory at retail. Take the total sales, which is always calculated at retail, for these same 12 months and add those 12 months together. Divide the total sales by the average inventory at retail and the resulting number will be the inventory turn at retail.

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Total Sales at Retail

$

Average Inventory at Retail

$

Current Ratio:
Defined: The current ratio tells you how 'liquid' your business is, or in other words, how easy you can turn your assets into cash. The more 'liquid' your business is, the healthier it is considered to be. You want this number to be 1.5 or higher. If your ratio is lower, you may be having cashflow problems. However service businesses can be in the 1.1 to 1.3 range. With a higher ratio, you may have too much money sitting in accounts receivable, prepaid expenses, or inventory. The answer to this calculation is stated as a ratio (i.e. 2.0:1).

Computed: Current Ratio is determined by dividing the current assets by the current liabilities. Your financial sheet is probably already divided into current assets and long-term assets as well as current liabilities and long-term liabilities. Current assets are those that can be converted to cash within the next 12 months. This usually includes your cash on hand, inventory, accounts receivable, as well as investments such as c.d.s. Current liabilities are those that are expected to be paid in the next 12 months. This would include your accounts payable, and the next 12 months principle amount of any loan you have.

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Current Assets

$

Total Liabilities

$

Debt to Net Worth
Defined:
This is another measure of the health of a business. The Debt to Net Worth compares the total debt to the net worth of a company. The answer to this calculation is stated as a ratio (i.e. 2.0:1).

Computed: Debt to Net Worth is calculated by taking the total debt of your company and dividing it by the net worth. Your net worth is the difference in your assets and liabilities.

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Current Assets

$

Total Debt

$

Acid Ratio
Defined:
Much like the Current Ratio, the Acid Ratio is a measurement of liquidity. This calculation however, does not include inventory. You want this number to be in a range of .8 to 1. If the answer is lower than this, you may have a cashflow problem. If it is higher than this, you may not be wisely using your assets. The answer to this calculation is stated as a ratio (i.e. 1.01:1).

Computed: The Acid Ratio is calculated by taking the current assets, less the inventory, and divide that number by the current liabilities.

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Current Assets

$

Inventory

$

Current Liabilities

$

Days Sales Outstanding
Defined: This calculation deals with your accounts receivable collections. If you offer credit terms, you probably do so with a Net 30. This calculation tells you how quickly people are paying. If the number you receive for an answer is higher than 50, it is indicating you may have a cashflow problem, but definitely you have customers who are paying approximately 3 weeks after the due date. If your answer is in the low 30s your collections are better, but do not take this as an indication that you should extend credit to more people. Accounts receivable requires cash, and if you have a choice of spending money on inventory or accounts receivable, inventory is often the wiser choice.

Calculated: Days Sales Outstanding is calculated by taking your receivables and multiplying them by 365. The answer is then divided by your net sales. The number you receive as an answer is stated as a number of days.

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Receivables

$

Net Sales

$

Debt to Equity Ratio
Defined: Although similar to the Debt to Net Worth calculation, we are now comparing the debt (total current liabilities and long term debt) to the equity of the ownership of the company.

Computed: Debt to Equity Ratio is calculated by taking the total of the debt, and dividing it by the equity. Equity is calculated by adding the net worth and the stockholder (or owner) equity. The answer is stated as a ratio (i.e. 1.5:1). For a small business, 1:1 is unrealistic, but 3:1 indicates you owe a lot, and a bank is probably not going to look at you favorably with regard to a loan.

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Total Debt

$

Total Equity

$

Return on Equity
Defined: Many people think this is the most important ratio. It sure is one of the most popular. What can cause this number to be incorrectly calculated is that it begins with the net income.

Computed: To calculate Return on Equity, divide the Net Income by the Equity (Net worth plus the stockholder or owner equity). The number you receive as an answer is an indication of how well your invested money is working for you.

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Net Income

$

Total Equity

$

Return on Assets
Defined: This is a variety from the "Return on Equity" calculation as this number looks at all of your assets as compared to just your net income.

Computed: To calculate Return on Assets, divide the net income of your business by the Total of your assets from your balance sheet.

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Net Income

$

Total Assets

$

Accounts Receivable Turnover
Defined:
Your terms are probably net 30 or net 10 eom. Net 30 means the bill is due within 30 days of the date of the invoice. Net 10 EOM means the bill is due within 10 days of the end of the month. While these may be your terms, you want to know just how quickly you are actually collecting your money. If the answer for your business to this exercise is 40 to 45, then you are in an acceptable range. When this number exceeds 50, it indicates you have numerous accounts, or sizable accounts that are slow in paying. As this number increases, you are probably experiencing a cash crunch.

Computed: The Accounts Receivable Turnover is calculated by taking the credit sales and dividing by the average of your accounts receivable.

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Net Credit Sales

$

Average Account Receivables

$

Accounts Receivable Aging
Defined:
Many of the accounts receivable packages will create this chart for you. This calculation tells you what percentage of your accounts receivable falls into each of the five aging groups we have created.

Computed: In our calculation of Accounts Receivable Aging, we have created 5 aging groups; Receivables due in less than 30 days, 30 to 60 days, 60 to 90, 90 to 120, and over 120 days. The answer for each group is by taking the amount of accounts receivable in that category and dividing by the total of all accounts receivable.

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Under 30 Days Accounts Receivable

$

30-60 Days Accounts Receivable

$

60-90 Days Accounts Receivable

$

90-120 Days Accounts Receivable

$

120-plus Days Accounts Receivable

$

Total Accounts Receivable

$

Under 30 Days Percentage

Under 30-60 Days Percentage

Under 60-90 Days Percentage

Under 90-120 Days Percentage

Over 120 Days Percentage

Days of Inventory On Hand
Defined:
This calculation tells you that if you were to stop ordering merchandise, how soon would you have an empty building. Of course, that idea is incorrect because some of the merchandise is being reordered very frequently while other items may be such slow sellers that you order only one per year. This calculation gives another indication of inventory turn. With a smaller number, it is expected that your inventory is not very old, and that more of it is in saleable condition. It also represents a business that is in a more liquid position.

Computed: Days of Inventory On Hand is calculated by first dividing the cost of goods sold by 360. Then divide the current inventory by the number you have just obtained with the first step.

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Inventory

$

Cost of Goods Sold

$

Gross Profit Percentage
Defined:
You see this calculation on every financial sheet. We have included it so that you can understand how this most important number is created. When you place an order for an item, and you decide the selling price, you can easily determine the gross profit percentage for that item. As your business is likely to have items with very low percentage as well as very high percentages, what you do not know is what quantity each of the various items are being sold. The gross profit percentage is the number that tells you what your percentage is for all that you have sold during the last month.

Computed: Gross Profit Percentage is calculated by subtracting the cost of goods sold from the net sales. Take the answer from this calculation and divide it by the net sales.

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Net Sales

$

Cost of Goods Sold

$

%

Operating Expenses as a Percentage
Defined:
This calculation is another twist to your gross profit percentage. With this calculation, we are comparing the total of your operating expenses (where you spend money with the exception of inventory) with the sales of your business. Of course, the lower you can make this number, the higher your profit will be.

Computed: Operating Expenses as a Percentage is calculated by dividing the operating expenses by the net sales.

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Operating Expenses

$

Net Sales

$

%

Sales to Inventory Ratio
Defined: Sales to Inventory ratio lets you know how well your inventory is producing sales. For the retail industry, the average ratio is 1.0 to 1.2

Computed: The Sales to Inventory Ratio is calculated by a two step process. The first step is to calculate the average monthly inventory. The average monthly inventory is calculated by taking the total of the end of the month inventory for each of the past 12 months and divide that number by 12.

The second step is to take the net annual sales of your business and divide that number by the average monthly inventory (shown at cost). The answer is your sales to inventory ratio.

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Sales

$

Inventory

$

Gross Margin Return On Inventory
Defined:
The gross margin return on inventory shows the relationship of your gross margin to the sales and inventory (at cost) of your business. While this number varies from retail industry to retail industry, may we suggest you use 140% as a measuring stick.

Computed: Gross Margin Return on Inventory is calculated by taking the gross margin, shown as a percentage on your profit and loss statement (also known as an income statement), and multiply it by the sales to inventory ratio. The formula for calculating the sales to inventory ratio is shown in the previous calculation.

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Gross margin
%
Sales/Inventory

%

Sales per Employee Ratio:
Defined: The sales per employee lets a business know how well their employees produce sales for the store.

Computed: The Sales per Employee Ratio is calculated by taking the annual net sales of your business and divide that number by the total number of full time employees. This number includes all employees employed by the business. Full time employees is calculated as the total number of hours worked in a business each week and divided by 40.

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Net Sales

$

Total Number of Full Time Employees

Weekly Total Number of Hours

Space Productivity:
Defined: Your business owns or rents a certain amount of square footage. While a large portion of this square footage is dedicated to sales, you probably have a portion of it utilized as office and storage. This ratio tells you how well your business is utilizing that amount of space.

Computed: The Space Productivity is calculated by taking the annual net sales and dividing that number by the total square footage of the business.

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Net Sales

$

Total Square Footage

$
Personal Productivity Ratio
Defined:
Other than calculating the sales per employee, this ratio lets you know well they are selling items that are more profitable for your business.

Computed: The Personal Productivity Ratio is calculated by taking the total payroll for a year and dividing that number by the gross profit. The answer to that calculation is then multiplied by 100.

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Total Payroll

$

Gross Profit

$

Operating Margin Per Square Foot
Defined:
The title for this calculation is a bit off as it mentions margin and the computation uses gross profit. The idea of this calculation is to get a business to consider the value of each square foot within the building. Note it is total square footage; this would include any rest rooms, office, storage, basement, and lofts. For a multi-story building, you do include the square footage of each floor.

Computed: The Operating Margin Per Square Foot is calculated by taking the Gross Profit for a year and dividing that number by the Square Footage of a Building. The answer to that calculation is then multiplied by 100.

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Gross Profit

$

Square Footage of Building

$
Cash to Current Liabilities Ratio
Defined:
The cash to current liabilities ratio is a variation from the current ratio. The reasoning behind the cash to current liabilities ratio is that we are only measuring the cash on hand. If a business sells off inventory at a reduced price in an effort to pay bills, the business is going to struggle because the margin has not been maintained.

Computed: The cash to current liabilities ratio requires the cash on hand from the balance sheet and divide it by the total of the current liabilities which is also on the balance sheet.

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Cash

$

Current Liabilities

$

%

In creating this interactive page we have had the calculations tested by an accounting firm, and believe it to be accurate. As with any Internet activity page, errors outside our control can occur. This is why we have included the instructions of how each item is created; you can verify the accuracy of any item with the use of a calculator.

This interactive page is provided with the compliments of:
Profits
Plus Solutions
PO Box 1577
St. Petersburg, Fl 33731


Copyright Notice

Profits Plus Solutions, Inc.
PO Box 1577
St. Petersburg, Fl 33731
(727) 464-2182
Fax: (727) 898-3179