University of Wisconsin Center for Cooperatives
Cooperative Grocer, January/February 1998, Ed. 74
Cooperative Grocer is published by Dave Gutknecht, P.O. Box 597, Athens, OH 45701   

Understanding Ratios

By Scott Beers and Margaret Lund

Scott Beers provides accounting and financial planning services to co-ops through CDS and has been active with co-ops since 1978 (400 19th Av. S., Minneapolis, MN 55454; 612/ 338- 7459, scott@lottsa.com). Margaret Lund is managing director of the Northcountry Cooperative Development Fund (NCDF: 1219 University Av. SE, Minneapolis, MN 55414; 612 /331-9103). .
 


    This month we study a case example of how the ratios presented in Cooperative Grocer can be used to analyze a co-op's financial position and direction We are grateful that Ocean Beach People's Food Co-op in San Diego has forwarded their ratio history for use in this project. You'll find their ratio results on the facing page.

    As noted in the previous column, ratio analysis is both craft and art. The craft is assembling the information, as our San Diego friends did. The art part is spotting trends and relationships. In our look at Ocean Beach People's Food Co-op, we have highlighted (*) major variances and strong correlations.

    Step one is to look at each ratio and notice which are getting stronger over time, which weaker, and which are relatively stable. This historical analysis provides context for what has been happening. It is not, however, a predictor of the future, since management can take actions to change course, and factors outside the co-op also have an impact. At Ocean Beach we find:

Stronger ratios:

Sales per Sq. Ft.
Sales per Paid Labor Hour*
Sales to Fixed Assets*
Return on Equity
Return on Assets
Gross Margin
Stable ratios: Inventory Turnover
Debt to Equity
Weaker ratios: Sales Trend*
Sales to Total Assets*
Current Ratio
Discount % of Sales
Labor % of Sales
    Step two: examine how the co-op's ratios compare with its peers from the Cooperative Grocer survey. Here, primary attention is paid to ratios that are outside the upper and lower quartiles, and the focus is on the most recent results. Major variances s at Ocean Beach:

Above Upper Quartile:

Sales per Sq. Ft.*
Inventory Turnover
Current Ratio*
Debt to Equity
Below Lower Quartile: Sales Trend*
Sales to Total Assets
Return on Equity
    Next, relationships among the ratios are sought. Since each ratio is derived by dividing one financial component by another, the analyst examines ratios containing similar elements and looks for (in)consistencies in how they compare with other trends and variances.

    Sales is a common element in nine ratios. At Ocean Beach, however, five of those are stronger while four are weaker over time. Sales ratios are also present on both sides of the variance line. The inconsistency here suggests that sales is not at the root of their strengths or weaknesses. Sales per Sq. Ft. is strong historically and compared to peers, and Inventory Turnover is high, so we can safely conclude that they are pushing a lot of product through their space. On the other side, we find that their Sales Trend is down, so perhaps they have peaked on what their present space can support.

    The co-op owns its building, so its Sales to Net Fixed Assets ratio is actually stronger than it appears. Simultaneously, its Sales to Net Fixed Assets ratio is very weak. This suggests a significant variance from norm in the composition of its assets, and this is borne out by the exceptionally strong Current Ratio. Ocean Beach has a lot of cash.

    The co-op's income statement ratios place it in the co-op mainstream, but its Return Ratios are weak, pulled down by the large amount of (relatively) nonproductive cash. It seems clear that the co-op has reached a strategic juncture that is has been planning for. They have a profitable operation that is at or near its sales capacity. With nearly $1 million in cash and little debt (Debt to Equity), the co-op is well positioned to expand if its market analysis suggests that there are additional sales dollars it can capture. If it persists in the status quo, it's likely that growth will continue to stagnate while upward pressure on the costs of doing business will erode its operating margins and result in even worse rates of return on assets and on the members' investment.

    That's how it is done. Lay out the figures, compute the ratios, provide the appropriate industry context, and look for (in)consistencies and patterns among the ratios. Expertise grows with practice, but even a novice will gain a lot of insight simply by compiling this information in one place. Please, take us up on our offer to provide the spreadsheet template for this analysis and get busy deriving a clearer picture of your store's financial outlook.
 
 
OCEAN BEACH PEOPLE'S FOOD CO-OP
FINANCIAL RATIOS
RATIO
YR-3
1994
YR-4
1995
YR-1
1996
YTD
OCT-97
Cooperative Grocer 
7/97 Results FOR 
Lg. Profitable Store
SALES 
TREND %
7.4%
4.8%
9.0%
-0.2%
UQ 
MED 
LQ
12.0%
8.5%
5.5%
SALES PER  
SQ PER WEEK
25.20
26.40
28.78
28.54
UQ 
MED 
LQ
21.18%
13.45%
12.12%
SALES PER 
PAID LABOR HOUR
34.99
33.62
37.86
52.79
UQ 
MED 
LQ
65.55%
52.96%
42.55%
SALES (annual) TO 
TOTAL ASSETS
4.07
3.70
3.52
3.20
UQ 
MED 
LQ
6.93%
5.36%
3.73%
SALES (annual) TO  
NET FIXED ASSETS
8.02
8.55
12.54
13.20
UQ 
MED 
LQ
19.59%
9.50%
8.01%
INVENTORY TURNS 
TURNS PER YEAR
14.93
14.36
14.30
16.14
UQ 
MED 
LQ
15.91%
13.73%
12.73%
CURRENT 
RATIO
14.93
14.36
14.30
16.14
UQ 
MED 
LQ
2.40%
1.69%
1.30%
DEBT TO 
EQUITY
3.55
6.99
5.79
5.56
UQ 
MED 
LQ
0.47%
0.75%
1.45%
RETURN (annual) 
ON EQUITY
0.56
0.31
0.31
0.28
UQ 
MED 
LQ
30.8%
15.8%
11.7%
RETURN (annual) 
ON EQUITY
3.1%
7.4%
16.0%
9.7%
UQ 
MED 
LQ
14.0%
8.5%
6.2%
RETURN (annual)  
ON ASSETS
2.0%
5.6%
12.3%
7.6%
UQ 
MED 
LQ
14.0%
8.5%
6.2%
GROSS 
MARGIN
32.2%
33.0%
34.8%
33.9%
UQ 
MED 
LQ
36.6%
34.6%
33.0%
DISCOUNT 
% OF SALES
1.5%
1.7%
1.8%
2.1%
UQ 
MED 
LQ
2.8%
1.2%
0.0%
LABOR EXPENSE  
% OF SALES
19.7%
20.0%
19.7%
21.2%
UQ 
MED 
LQ
21.7%
20.6%
19.9%
NET  
% OF SALES
0.5%
1.5%
3.5%
2.4%
UQ 
MED 
LQ
2.5%
1.4%
1.1%


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