The debt management utility of creditworthiness ratio analysis of level six universities as accredited by the Southern Association of Colleges and Schools

Dan R. McFall

Abstract

The purpose of the study was to determine the utility of creditworthiness ratio analysis as a debt management tool in level six public institutions, as accredited by the Southern Association of Colleges and Schools. Ratio analysis of a firm's financial statements is management technique that has been used by private industry for decades. In more recent years, administrators in public higher education have been turning their attention to ratio analysis as a viable management tool in assessing the financial health of their respective institution. The study focused on institutions located in the southeastern region of the United States. Data was secured from approximately 90% of the sample. Data was secured for capital funding related financial ratios of expendable net assets to plant debt, plant equity to plant debt, expendable net assets to total expenditures, unrestricted and temporally restricted net assets to total debt, debt service to total expenditures, and adjusted change in net assets to debt service. Also, the non-financial ratios of age of the institution to total debt and enrollment-FTE to total debt were examined. The ratio of debt service to total expenditures had a significantly positive correlation. The ratio of adjusted change in net assets to debt service lacked significance within the parameters of this study. The non-financial ratios of age of the institution to total debt, and enrollment-FTE to total debt resulted in positive correlations indicating a financial relationship. The ratios of plant equity to plant debt, unrestricted and temporally restricted net assets to total debt, expendable net assets to total expenditures, and expendable net assets to plant debt resulted in very strong positive correlations. The findings of this study provide support for the use of creditworthiness ratios in debt management for public universities. Research also indicates that these ratios will be of more importance in the near future as financial statements become more homogeneous within not-for-profit public institutions.