Appendix F

Financial health metrics definitions

Figure 123

Metric Definition

Primary reserve ratio The primary reserve ratio compares expendable net assets to total expenses and provides an indication of an institution’s financial strength and flexibility by determining how long the institution could function using its expendable reserves without relying on additional net assets generated by operations. Expendable Net Assets include unrestricted surplus (deficit), internally restricted net assets, and internally restricted endowments, adjusted for the non-cash component of employee future benefits. Primary reserve ratio = expendable net assets/ total expenses

Debt burden ratio (Non-cash basis)

The debt burden ratio measures how an institution utilizes a greater portion of its annual expenditures to fund debt obligations. The ratio is calculated by dividing total current debt obligations, which include interest expenses and principal payments, by operating expenses.

Interest burden % The Interest burden ratio compares the level of current debt service with the institution's total expenses. It is an indicator of debt affordability, as it examines the percentage of total expenses used to cover an institution’s cost of servicing its debt. The ratio is calculated as interest expense over total expenses (adjusted for amortization of capital assets).

Interest coverage ratio Interest coverage ratio measures how many times an institution could pay its current interest payment with its available earnings. The ratio is calculated by dividing earnings before interest, depreciation and amortization (EBIDA) during a given period by the amount an institution must pay in interest on its debts during the same period.

Viability ratio

The viability ratio is a basic determinant of an institution’s financial health, as it provides an indication of the funds on hand to settle its long-term obligations. It is calculated as expendable net assets over long-term debt. Expendable net assets include unrestricted surplus (deficit), internally restricted net assets and internally restricted endowments, adjusted for the non-cash component of employee future benefits. Long-term debt is total external long-term debt as disclosed in the institution’s financial statements without adding the current portion that may be included in accounts payable. Viability ratio = expendable net assets/ long-term debt

Net operating revenues ratio

The net operating revenues ratio provides an indication of the extent to which institutions are generating positive cash flows in the long run to be financially sustainable. The ratio is calculated as cash flow from operating activities over total revenues. Net operating revenues ratio = cash flow from operating activities/total revenues

Formula

Debt burden ratio = (interest expense + principal payments)/ total expenses

Interest burden ratio = interest expense/ (total expenses – amortization)

Interest coverage ratio = EBIDA/interest expense

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