Calculating Financial Ratios

There are a number of tools for analyzing the numbers that you will find in a nonprofit’s financial statements. The most common tools are “ratio analyses”—interpreting the revenues and expenses, the assets and liabilities by putting them in some relation to each other. Here are the 10 most common ratio analysis tools for nonprofit corporations:

i.
Profitability Ratios

1.
Profit Margin = Net Income/Revenue (How much of each
dollar in revenue received get turned into net income)

2.
Return on Assets (ROA) = Net Income/Total Assets (How
much the value of assets increases--should be at least as high as the inflation
rate)

ii.
Liquidity Ratios (ability to convert noncash assets
into cash)

1.
Current Ratio = Current Assets/Current Liabilities
(varies, but should be at least 2.0)

2.
Quick Ratio = (Cash + Marketable Securities + Net
Accounts Receivable) / Current Liabilities (eliminates inventory, prepaid
expenses and other items not readily converted into cash; answers the question
of whether you could pay all debts if called in today; sometimes called the
“acid test.”)

3.
Average Days Receivable = Net Accounts Receivable /
(Revenue/365) (average number of days
needed to collect an account receivable)

iii.
Asset Management Ratios

1.
Asset Turnover = Revenue / Total Assets (how much
revenue is earned for each dollar invested in assets)

iv.
Long-Term Solvency Ratios

1.
Debt-Equity Ratio = Total Liabilities / Equity [Fund
Balance] (measures use of external funds
to supplemental internal funds

2.
Leverage = Total Assets / Equity [Fund Balance]
(variation on debt/equity ratio)

3.
Long-Term Debt-Equity = Noncurrent Liabilities / Equity
[Fund Balance] (over time, will reveal reliance on long-term debt to finance
asset acquisition)

4.
Debt Service Coverage = (Net Income + Depreciation +
Interest Payments) / (Principal Payments + Interest Payments) (measures ability to meet debt service
obligation)

© 2004 A.J.Filipovitch

Revised 18 February 2011