Building Your Technical Understanding
This guide builds on concepts introduced in "Understanding Financial Health Analysis" by providing detailed technical information about each metric. You'll learn not just how to calculate these measures, but how to interpret them based on your organization's stage of development and strategic priorities.
Financial metrics tell the story of your organization's health from different angles, much like how a doctor uses multiple vital signs to assess a patient's wellbeing. Each metric provides unique insights while working together to create a complete picture of financial health.
1. Resource Sufficiency and Flexibility
A. Primary Reserve Ratio
Definition:
Expendable Net Assets divided by Total Expenses
Components:
Expendable Net Assets: Total net assets minus permanently restricted net assets and net investment in plant
Total Expenses: All expenses from unrestricted activities
Target Range: 0.4x or higher indicates good financial health
Lifecycle Patterns:
Early-stage organizations often show lower ratios (0.13x - 0.3x) as they build reserves
Growth phases might see temporary decreases during major investments
Mature organizations typically maintain ratios above 0.4x for stability
Strategic initiatives might intentionally reduce this ratio temporarily
Key Insights:
Ratio of 0.4 means about 146 days of operations could be funded from reserves
Higher ratios provide more flexibility for responding to opportunities
Lower ratios might limit strategic options
Building this ratio often takes years of consistent positive operation results
2. Debt Management
A. Viability Ratio
Definition:
Expendable Net Assets divided by Long-term Debt
Components:
Expendable Net Assets: Same as Primary Reserve Ratio
Long-term Debt: All project-related debt for calculating CFI
Target Range: 1.25x or higher suggests sound debt management
Lifecycle Patterns:
New organizations often show lower ratios as they establish operations
Growing organizations might see temporary decreases during expansion
Mature organizations typically maintain ratios above 1.25x
Strategic investments might temporarily reduce this ratio
Key Insights:
Measures ability to settle debt using existing resources
Higher ratios indicate greater debt capacity
Should be viewed alongside operating metrics
B. Debt Service Coverage Ratio
Definition: Operating Income plus Depreciation and Interest divided by Annual Principal and Interest Payments
Components:
Numerator: Net operating income + Depreciation + Interest expense
Denominator: Annual principal payments + Interest payments
Target Range: 1.25x minimum, with 2.0x or higher preferred
Lifecycle Patterns:
Early-stage organizations often maintain minimal debt service requirements
Growth phase might show tighter coverage during expansion
Mature organizations typically maintain comfortable coverage above 2.0x
Coverage might tighten during major capital projects
Key Insights:
Shows ability to meet debt obligations from operations
Critical for debt capacity assessment
Should maintain cushion above minimum requirements
C. Facilities Burden Ratio
Definition: Cost of Facilities divided by Operating Income
Components:
Cost of Facilities: Operations and maintenance costs, utilities, etc.
Operating Income: Total unrestricted operating revenue minus expenses
Target Range: Varies by organization type, but generally under 35%
Lifecycle Patterns:
New facilities often show lower costs but higher relative burden
Mid-life facilities typically show balanced costs
Aging facilities might show increasing burden from maintenance
Major renovations can temporarily increase burden
3. Financial Asset Performance
A. Return on Net Assets Ratio
Definition: Change in Net Assets divided by Total Net Assets
Components:
Change in Net Assets: Total increase or decrease in net assets
Total Net Assets: Beginning of year net assets
Target Range: 6% or higher indicates healthy returns
Lifecycle Patterns:
Early-stage organizations might see variable returns
Growth phase often shows strong returns from new investments
Mature organizations typically maintain steady returns
Strategic investments might cause temporary fluctuations
B. Physical Asset Reinvestment Ratio
Definition:
Capital Investment divided by Depreciation Expense
Components:
Capital Investment: Annual investment in facilities and equipment
Depreciation: Annual depreciation expense
Target Range:
1.0x minimum to maintain facilities
Lifecycle Patterns:
New facilities require minimal reinvestment
Mid-life facilities need consistent reinvestment near 1.0x
Aging facilities often require investment above 1.0x
Major renovations create spikes in this ratio
4. Operating Results
A. Net Income Ratio
Definition: Change in Unrestricted Net Assets divided by Total Unrestricted Revenue
Components:
Change in Unrestricted Net Assets: Annual increase or decrease
Total Unrestricted Revenue: All unrestricted revenue sources
Target Range: 2-3% minimum for sustained health
Lifecycle Patterns:
New organizations often see variable results as they establish operations
Growing organizations might see lower ratios during expansion
Mature organizations typically maintain consistent positive ratios
Strategic initiatives might temporarily reduce this ratio
B. Net Operating Revenues Ratio
Definition: Net Operating Income divided by Operating Revenues
Components:
Net Operating Income: Operating revenues minus expenses
Operating Revenues: All revenues from regular operations
Target Range: 2-4% indicates sustainable operations
Lifecycle Patterns:
Early stage shows variable results as operations stabilize
Growth phase might see pressure during expansion
Mature operations typically maintain steady positive ratios
Innovation periods might show temporary decreases
5. Composite Financial Index (CFI)
The CFI combines key ratios into a single measure of financial health, weighted to reflect their relative importance.
🔗 For details related to CFI math, see Calculating Your Composite Financial Index
Weighting (With Debt):
Primary Reserve: 35%
Net Operating Revenues: 10%
Return on Net Assets: 20%
Viability: 35%
Weighting (Without Debt):
Primary Reserve: 55%
Net Operating Revenues: 15%
Return on Net Assets: 30%
Lifecycle Patterns:
Early-stage organizations typically show scores between 1-2
Growing organizations might see temporary decreases during expansion
Mature organizations often maintain scores above 3
Strategic initiatives might cause temporary score reductions
Understanding Your Score:
Below 1: Shows financial stress
Around 3: Indicates financial health
Above 7: Demonstrates exceptional strength
Remember to interpret CFI alongside:
Your organization's lifecycle stage
Current strategic initiatives
Market conditions
Operating environment
Using This Guide
This guide serves as both a reference and a learning tool. As you work with these metrics:
Start with the metrics most relevant to your current priorities
Consider how lifecycle patterns apply to your situation
Look for relationships between different metrics
Use the information to support strategic planning
For help applying these concepts to your organization, refer back to "Understanding Financial Health Analysis" or contact our support team.
For detailed calculation steps, see "Calculating Your Composite Financial Index (CFI)"