FINANCIAL AID PROFESSIONALS
Technical Overview of Ratio Methodology
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Department of Education
Financial Responsibility Regulation

Technical Overview of Ratio Methodology

The ratio methodology combines elements from the audited financial statement into a single blended composite score. The regulatory result depends on the composite score, as illustrated in the following table.

Understanding Composite Scores

Regulatory result
Composite Score Range
Interpretation of
Score Range
Financially Responsible
1.5 to 3.0
School is financially healthy enough to participate without additional monitoring
1.0 to 1.4
"In the zone," additional monitoring needed to participate
Not Financially Responsible
-1.0 to 0.9
School is not financially healthy enough to be considered financially responsible

The composite score is calculated in four steps.

Step 1: Calculate Three Financial Ratios from Financial Statements

Primary Reserve Ratio
Equity Ratio
Net Income Ratio
Expendable Resources

Total Expenses
Net Assets

Total Assets
Net Income

Total Income

Step 2: Convert Ratio Results to Strength Factor Scores

Stren-
gth Factor Score
Inter-
pretation of Score
Primary Reserve Ratio
Equity Ratio
Net Income Ratio
Private Non-profit
Pro-
prie-
tary
Private Non-profit
Pro-
prie-
tary
Private Non-profit
Pro-
prie-
tary
-1.0
Liabilities exceed resources
-0.10
-0.050
-0.167
-0.167
-0.08
-0.060
0.0
No demon-
strable net resources
0.00
0.000
0.000
0.000
-0.04
-0.030
1.0
Minimal resources, but not enough for clear financial health
0.10
0.050
0.167
0.167
0.00
0.000
1.5
Minimal level of resources to indicate financial health
0.15
0.075
0.250
0.250
0.01
0.015
3.0
Clearly financially healthy on that resource
0.30
0.150
0.500
0.500
0.04
0.060

Step 3: Multiply the Strength Factor Scores by a Weighting Factor

Postsecondary Educational Sector
Primary Reserve Strength Factor
Equity Strength Factor
Net Income Strength Factor
Private Non-profit
40%
40%
20%
Proprietary
30%
40%
30%

Step 4: Add the Weighted Strength Factor Scores to Obtain the Composite Score

See "Understanding Composite Scores" table above.

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Last Modified: 12/02/2008