Cinnamon Clubs goes in a partnership agreement with UAP Old Mutual

Cinnamon Clubs, a Ugandan Information Technology solutions provider offering premier Investment Club Management software has signed a partnership agreement with UAP Old Mutual. The software that automates bookkeeping and investment efficiencies will provide comprehensive loan insurance cover and financial services to investment clubs, savings groups and SACCOS.

An investment club is a group of people that pool their resources on a monthly basis as a long term investment. Majority of these clubs are informal in nature and find it hard to access services like group insurance and investments.

We therefore saw a need to bridge that gap between the formal corporate insurers, fund managers and investment clubs, which makes the partnership with Old Mutual rather significant and beneficial to investment and savings groups.

In an exclusive interview, Dickson Mushabe, CEO and co-founder of Cinnamon Clubs said: “We are excited about this partnership that will solve a big problem for these investment and saving clubs. Investment Clubs are formed on the basis of trust, unfortunately some of these clubs have crumbled, while others have made loses as a result of broken trust. This breakdown in trust is a result of some members failing to repay their loans in addition to inconsistencies in the monthly contributions

There are many circumstances under which one may fail to repay their loans e.g. the accidental death of members, critical illness that may lead to inability to engage in income generating activities, retrenchment or involuntary loss of employment and the risk associated with the non-renewal of contracts.

With the introduction of the Cinnamon Insure product underwritten by UAP Old Mutual, clubs will no longer run the risk of losing their money which will be insured providing guaranteed reimbursement in the case of failure to pay. From an investment perspective the partnership will enable investment clubs to make more money through managed investment by UAP Old Mutual Unit Trust.

This is a good partnership that will definitely offer many investment options to Investment Clubs. It will bring an alternative source of income to the groups whose money is sometimes lying around doing nothing”: said Daniel Opiyo, Head of Agency, UAP Financial Services.

About UAP Old Mutual Insurance Uganda Ltd

UAP Old Mutual Group is a subsidiary of Old Mutual Limited (OML) based in South Africa and operates in 13 markets across the region including Uganda.

We are an integrated financial services provider in East Africa, leveraging off the strength of our capabilities in local expertise and the global group. We’re glad to partner with individuals and corporates to provide financial solutions including, General Insurance, Life Insurance, Asset Management, Investment and Banking.

Contact us: 0800132700  0707700903 UAPOldMutualUg

Dickson Mushabe, CEO and founder Cinnamon Clubs, pitching Startupbootcamp AfriTech 2019 in Uganda

Cinnamon Clubs selected for Cape Town-based accelerator

Cinnamon Clubs has been selected to face off with 19 other startups in the Startup bootcamp AfriTech 2019 Final Selection Days. Cinnamon Clubs is a software that helps investment clubs to track and manage their records.

To participate in this round of the prestigious accelerator, the startup beat over 2000 startups from different countries that had applied.

Of the twenty startups that were selected from across Africa, only Cinnamon Clubs came from Uganda. South Africa sent seven, Nigerian (six), Kenya (two) and the rest are from Togo, Senegal, Morocco and Zimbabwe (each of these sent one).

Startupbootcamp AfriTech, which is based in Cape Town, is an accelerator focused on high-growth startups in blockchain, connected devices, payment solutions, capital markets and asset management, integrated supply chain, e-commerce, retailtech, insurtech, alternative financing, identity management, digital connectivity, data and behavioral analytics and enabling technologies.

“I really want to thank God for this opportunity and for making to the top 20.This is a huge step in the right direction for Cinnamon Clubs to go global and be accelerated by one of the best in the world. Special thanks to the entire Cinnamon team for the tireless work to have this platform ready. I am praying for the best as we go to present in Cape Town” Dickson Mushabe, the founder and CEO of Cinnamon Clubs said

Cinnamon Clubs is currently operating in Uganda, Zambia, and Ethiopia.

On July 10-11, the 20 startups will be in Cape Town for the Startupbootcamp AfriTech 2019 Final Selection Days.

Officials say that during this period the startups will also meet over 2000 mentors and participate in “an intensive week allowing for networking, training, as well as pitching.”

The mentors, who range from corp-orates, ecosystem partners and VC Funds will be from across the continent, the US, and EU among others.

After the competition, the ten best startups will then participate in the Cape Town-based accelerator program, which kicks off in August and culminates in a demo day in November.

Over the three-month period, the selected startups will have the opportunity to scale at speed and seal pilots and proofs-of-concept with the corporate sponsors of the program and others.

Officials told media that they received a number of incredible projects and they proved that there’s more talent in Africa.

“The startups that applied in 2019 were exceptionally impressive and are significantly later-stage, showing more market traction than applicants from previous years. What’s more, the talent originating out of different regions in the African continent is astounding,” said Motlhabane Koloi, legal and scouting manager for Startupbootcamp AfriTech, according to Disrupt Africa.

Zachariah George, Startupbootcamp AfriTech’s co-founder and chief investment officer, said several of the 2017 and 2018 alumni startup had gone on to establish strategic commercial partnerships with leading institutions both within Africa and globally, helping them significantly in raising capital.

“There are high expectations for the applicants of the 2019 cohort, and if the caliber of the startups at this stage is any indication, this year’s program promises to be a great success for the African tech and innovation ecosystem,” he said.

Dickson Mushabe (L) and Wilson Cristancho at the Mobile World Congress in Barcelona

Cinnamon Clubs names IT guru Wilson Cristancho to its board

Ugandan-grown software company Cinnamon Clubs has appointed seasoned IT professional Wilson Cristancho to its board as an advisor.

Cristancho, who has more than two decades of experience in the IT industry, having worked with global companies like Assurant and Ericsson, brings his expertise to a startup that is already operational in three African countries, namely: Uganda, Ethiopia, and Zambia.

Developed by Hostalilte, Cinnamon Clubs helps investment clubs to manage a number of things, including record keeping, collections, and managing members.

According to Dickson Mushabe, the chief executive officer of the company, he met Wilson Cristancho at the Mobile World Congress in Barcelona, which ran from Feb. 25-28.

Currently working with Network Media Communications as a chief technology officer, the IT guru is expected to enormously contribute the Cinnamon’s growth plans.

Before joining Network Media Communications, Cristancho worked with Resources Global Professionals, a business and IT consulting firm headquartered in California.

A holder of a master’s degree in Business Administration and a bachelor’s in Computer and Information Sciences from Barry University, he also worked with Ericsson as a solutions manager, heading a region that covers Brazil, Mexico, New York, Dallas, Latin America and Boca Raton. This was between February 2001 and December 2004, according to his LinkedIn profile.

Wilson Cristancho also obtained a certificate in telecommunications management from Miami University and another in management information systems from Miami Dade College.

Joining Cinnamons Club

Dickson Mushabe says he met Cristancho at the sidelines of the Mobile World Congress in Barcelona. As they interacted during the social hour, Mushabe says, Wilson Cristancho was surprised by his dress code: He was wearing a suit.

So Cristancho asked him (Mushabe) why he was dressed in a suit at a gathering full of nerds that are known for slobby dressing.

“Why are you dressed like that?” Cristancho wondered, according to Mushabe. “Whom are you trying to impress? I just checked your social media pages and the Dickson I see is a freestyle Headmaster in either a Cinnamon or Hostalite t-shirt. Just be yourself, people will trust that simple guy.”

It’s this kind of casual conversation that drew Mushabe to Cristancho, who is also a founding member and sits on the Board of Directors at American Association of Colombian Engineers and Architects (AACE), and they ended up deciding to work together.

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Call or Whats App: +256 704 530 486

Download the Cinnamon Clubs Mobile App on Google Play store manage more than one club on the plaftorm.

CINNAMON is a product of Hostalite

Hostalite spreads wings to Ethiopia

Hostalite, a Ugandan web and software development company is celebrating another milestone with the establishment of its footprint in Ethiopia.

The company’s Ethiopian subsidiary was launched on June 4 in Addis Ababa, the Ethiopian capital where it is trading as Cinnamon.

According to a statement issued by Hostalite Cheif Executive Officer Dickson Mushabe, the company entered into a partnership agreement with MOSS ICT which will enable investment clubs in Ethiopia to take advantage of the premium club management software solutions provided by Cinnamon.

Developed by Hostalite, Cinnamon Clubs is a cloud based management portal that has helped several clubs and savings groups to manage their records and improve their efficiency in collections, activity monitoring, financial analysis and reconciliation.

Its features and processes are developed for a typical investment club, micro-finance institution or SACCO. It is fully integrated to cover all aspects of clubs management right from membership to
collections, penalties, meetings, investments, loan management and accounting (reports). Cinnamon eliminates the need for complex Excel sheets and bulky write-ups.

MOSS ICT owns M-BIRR, Ethiopia’s largest mobile payments solution provider. The partnership with Hostalite will enable direct collections of investment club savings from mobile money wallets to

M-BIRR is a mobile money service, provided by a group of five partnering Ethiopian financial institutions. It enables the banked and unbanked people of Ethiopia to conduct financial transactions from the convenience of their mobile phone 24/7. It is the only payments service to allow across-MFI and bank payments.

Speaking at the launch ceremony, Endashaw Tesfaye, the Commercial Manager for MOSS ICT welcomed the the partnership with Hostalite.

“This has been the missing ingredient in the savings industry in Ethiopia,” Tesfaye said.

He explained that the prevailing situation had been for savings groups to collect money and give it to individuals in a rotational format, and on monthly basis. With this, the biggest challenge has been record keeping and poor attendance of monthly meetings.

“The club administrator ends up having to move to the club members’ shops and residences to collect money in order to hand it to the month’s recipient,” Tesfaye said.

This tiresome and rudimentary system will now come to an end as a more efficient option can now be offered.

Ethiopia boasts of being the 14th fastest-growing economy in the world and is attracting a great deal of foreign direct investment. The challenge, however, is that over 40% of the economy is in the
informal sector. The limitations in regulation have led to difficulties like young people working in unsafe conditions. Village Savings Associations for the Youth are helping to transform the lives
of these young people.

At the signing ceremony, Mushabe expressed excitement over the fact that Africa is now able to use her own resources to find solutions to Africa’s challenges.

“Our decision to come to Ethiopia was in response to the many signups from Ethiopian savings groups in the last few months. The interest from this region has shown us that there is demand for the solutions that Cinnamon Clubs software has to offer,” Mushabe said.

The project is supported by the Netherlands Trust Fund (NTF4).

“NTF4 has provided training, support in identification of markets, fine tuning Hostalite’s export market plans, and fostering business linkages with international customers. Through their generosity, we continue to enhance our company’s export competitiveness,” Mushabe said.

“Our product is ready for any market as long as we find a suitable mobile payments partner,” he added.

Rotating Savings and Credit Associations (ROSCA)

Rotating Savings and Credit Associations (ROSCA) are among the oldest and most prevalent savings institutions found in the world and play an important role in savings mobilization in many developing economies. They are locally organized groups that meet at regular intervals; at each meeting members contribute funds that are given in turn to one or more of the members. Once every participant has received funds, they can either disband or begin another round.

Communities have developed organically in many rural areas of the developing world that lack formal banking services, providing another option toward gaining access to financial capital. Savings groups vary from informal rotating savings and credit associations (ROSCAs) to more structured accumulating savings and credit associations (ASCAs). Common to all associations is voluntary membership based on trust, full transparency, and the existence of a strong social unity between group members.

ROSCAs are based on seasonal cycles in which, once each group member has contributed to the pot, it is then taken home by one or more members, thereby negating the need for formal records. This model is well adapted to communities with low literacy levels and weak systems for protecting property rights. ASCAs appoint a group member to manage an internal savings fund and keep detailed records. After the group has agreed to an interest rate and loan period, funds are lent out. Once the loans are paid off on the fund, plus profit accumulated from loan interest, the proceeds are distributed to members. The group may then re-form, perhaps with some changes in membership, and a new cycle begins.

The more formalized and sophisticated savings and credit associations may request a business plan to be submitted in order to gain loan approval, and some aspect of business and money management training might be provided. However, the basic model always ensures that group members uniformly benefit from the process; i.e., there is no one individual who profits more than others, and above all, the associations benefit the whole village as funds remain within the community. Loans acquired from within the community may be used to purchase land or livestock, or even create a new enterprise, thus additionally contributing to the growth of the community.

In the absence of traditional banking services, participating in savings and credit associations is an excellent method for the rural poor to self-manage their finances and ensure a basic level of economic stability. Hugh Allen, a microfinance expert with over three decades of experience, states: “The very poor may, then, be best served by member-managed micro-institutions that can operate flexibly and profitably and can offer appropriate services at a smaller scale until such time as the economy grows to the extent that the pot of money and the scale of the average microenterprise are large enough to attract the regulated formal sector.”

The World Savings Day

The World Savings Day was established on October 31, 1924, during the 1st International Savings Bank Congress (World Society of Savings Banks) in Milano, Italy. The Italian Professor Filippo Ravizza declared this day the “International Saving Day” on the last day of the congress. In the resolutions of the Thrift Congress it was decided that ‘World Thrift Day’ should be a day devoted to the promotion of savings all over the World. In their efforts to promote thrift the savings banks also worked with the support of the schools, the clergy, as well as cultural, sports, professional, and women’s associations.

Representatives of 29 countries wanted to bring to mind the thought of saving to the worldwide public and its relevance to the economy and the individual. The World Savings Day is usually held on October 31 except in countries where this day is a public holiday, since the idea is for the banks to be open, so that the people are able to transfer their savings into their account.

The idea of World Thrift Day was not born out of nothing. There had been some examples of days that were committed to the idea of saving money in order to gain a higher standard of life and to secure the economy, for example in Spain where the first national thrift day was celebrated in 1921, or in the United States. In other countries, such as Germany, the peoples’ confidence in savings had to be restored since many of them had lost their savings in the German monetary reform of 1923.

After the Second World War, World Thrift Day continued and reached the peak of its popularity in the years between 1955 and 1970. It practically became a veritable tradition in certain countries

Nowadays the focus of the banks that organize the World Savings Day is on developing countries, where many people are unbanked. Savings banks play an important role in enhancing savings in these countries with certain campaigns and initiatives such as working with nongovernmental organizations in order to double the number of savings accounts held by the poor.


The sooner you start, the better off you may be in the long run. It’s best to start saving and investing as soon as you start earning money. The discipline and skills you learn will likely benefit you for the rest of your life. But no matter how old you are when you start thinking seriously about saving and investing, it’s never too late to begin.

The first part of a successful lifelong investment strategy is a disciplined saving habit. Regardless of whether you are saving for retirement, a new house, or just that extravagant dining room set, you will need to develop rigid savings habits. Regular contributions to savings or investment accounts are often the most productive; and if you can automate them, they are even easier.

Your investment decisions:

Once you begin saving on a regular basis, you’ll soon have to decide how to invest the money you are saving. Regardless of what financial stage of life you are in, you will have to decide what your needs are and how comfortable you are with risk.

Your goals:

What do you need the money for? The answer to this question will help to determine whether you want to put your savings into investment products that can potentially produce income for you, or that concentrate on growing the value of your investment. For instance, a retirement fund does not need to produce income until you retire, so your investing strategy should generally focus on growth until you are close to retirement. After you retire, you may want to draw income from your investment while keeping your principal intact to the extent possible.

Your tolerance for risk:

All investing involves a certain amount of risk. How well you tolerate price fluctuations in your investments will need to be balanced against your targeted rate of return in determining the amount of risk your investments should carry.

If you plan to hold an investment for a long time, you will probably tolerate more risk because you have the time to potentially make up any losses you may experience early on. For a shorter-term investment, such as saving to buy a house, you probably want to take on less risk and have more liquidity in your investments.

Investing for life’s stages:

Even though people’s views on investing and money are different, throughout their lives, most investors face some similar situations. Where are you in your life cycle? How close you are to retirement certainly affects how you invest your retirement money, but what about other life stages that aren’t so closely related to age?

Let’s say you are 45 and just now having your first child. You will need to decide how to balance your financial situation to account for the additional expenses of a child. Perhaps you will need to supplement your income with income-producing investments. And don’t forget that your child will be entering college right around the time you are ready to retire. In this situation, your growth and income needs most certainly will change, and maybe your risk tolerance as well.

Life’s milestones:

When you get your first “real” job:

Start a savings account to build a cash reserve.

Start a retirement fund and make regular monthly contributions, no matter how small.

When you get a raise:

Increase your contribution to your company-sponsored retirement plan.

Increase your cash reserves.

When you get married:

Determine your new investment contributions and allocations, taking into account your combined income and expenses.

When you want to buy your first house:

Invest some of your non-retirement savings in a short-term investment specifically for funding your down payment, closing, and moving costs.

When you have a baby:

Increase your cash reserves.

Increase your life insurance.

Start a college fund.

When you change jobs:

Review your investment strategy and asset allocation to accommodate a new salary and a different benefits package.

When all your children have moved out of the house:

Boost your retirement-savings contributions.

When you reach age 55:

Review your retirement fund asset allocation to accommodate the shorter time frame for your investments.

Continue saving for retirement.

When you retire:

Carefully study the options you may have for taking money from your company retirement plan. Discuss your alternatives with your financial professional and tax advisor.

Review your combined potential income after retirement and reallocate your investments to help to provide the income you need while still providing for some growth in capital to help beat inflation and fund your later years.

Keys to your investment success:

One of the hardest things about investing is disciplining yourself to save an appropriate portion of your income regularly so that you can meet your investment goals. And if you’re not fascinated with investing, it’s probably also hard to force yourself to review your financial situation and investment strategy on a regular basis. Establishing a relationship with a trusted financial professional can go a long way toward helping you meet your investment goals.


How To Start An Investment ClubOne thing I’ve always wanted to do was to start an investment club.  I’ve been looking at getting a group of people together to start one, and so I’ve been looking for a good “how to start an investment club” tutorial.  The trouble is, the only one I’ve found is a book – Starting and Running a Profitable Investment Club.  While this book is great (with over 200 pages of excellent step by step examples), for a lot of investors who already have a good understanding of the stock market, it’s not needed.

So, I wanted to put together this resource in case you wanted to start you own investment club.  Here is a step by step guide on how to start an investment club.

  1. Find And Organize Potential Members

The first thing you need to do is find and organize potential members.  This is the hardest step, because the premise of an investment club is that you have to contribute money, and time, to the pot that is shared by a group of people.

The biggest thing that you want to find are people who are going to be willing to contribute to the success of the club, and not freeloaders.  From everything I’ve read, the ideal size of a group is 5-20 people.

Remember, if you have too few members, in order to get enough capital you’re all going to have to contribute more money.  If you have too many members, it may be very hard to manage and have an effective meeting.  Or, even worse, you don’t agree and have a very fragmented portfolio.

Some clubs even have an initiation fee that is much higher than the monthly contribution, say $1,000 to start, then $50 per month.  The reason is to only get members that are dedicated to helping, and by having a high entry fee, you weed out potential loafers.

Once you’ve identified potential members, ask yourself the following:

Do you trust them with your money?

Do you trust them to pay on time?

Will they do their own research?

Will they contribute to conversations?

Is unorganized and doesn’t keep records?

Has trouble pulling the trigger – either to buy or sell?

While none of those individual may be a deal-breaker, you should ask yourself and confirm.

  1. Setup An Organizational Structure

Once you’ve found some potential members, you need to setup an organizational structure for your investment club.  The smaller the club, the more informal the structure can be.  However, no matter how many or how few members you have, when it comes to dealing with money, having a pre-defined structure is always best.

For the basics, you should agree on the following:

Club Directors: President, Vice-President, Treasurer, Assistant Treasurer, and Secretary.  Once again, since you’re dealing with money, it’s always good to have two people looking after it.  Along with the positions, decide how they are elected and how long they stay in the position.  Many clubs do a one year term, but some do longer.  Also, decide on what each person does.  Who actually places the physical trade?  Who runs the educational aspect?  Who does the taxes?  These are all logistical things that are important to consider early on.

Time and Place: Decide a time and place to meet.  The smaller the club, the easier it is to meet at a home.  Many clubs meet monthly, some more often, some less often.  For example, one of the most famous investing clubs, the Beardstown Ladies, meet and invest every month.

Club Rules: You should also setup basic rules for the club.  For example, you should have semi-defined rules for buying and selling, how to handle payouts and distributions, how to payout a member if they quit, how to add a member who wants to join, how to end the club.  Remember, things happen, life changes.  You have to plan for these things early on so that the club can continue smooth sailing when they do happen.

Record Keeping: Every member will always want to know what their percentage of the equity is, so it is important that you keep accurate records at all times.  Decide on how you will do this and how you will communicate it to club members. The simplest way to do this is to have a Google Spreadsheet with everyone’s contributions visible. You can even share this with the group.

  1. Setup a Legal Structure

Next, you need to setup a legal structure for your club.  There are two key reasons for this:

Ideally, the small investment amounts you contribute will grow into a big pile of money

You cannot open a brokerage account as a club without a legal structure

The most common legal structure for an investment club is a partnership.  In that case, you need a partnership agreement and operating agreements.  There are many cheap online options that can do this for you, such as RocketLawyer or Nolo, but you may also want to consider getting professional help to set it up at first.  Spending a little on a lawyer to draft some documents can make things much easier in the future.

You’ll also need to register your club to get an EIN (Employer Identification Number) from the IRS.  This is actually the easiest step, and you can quickly do it here: How to Apply for an EIN.

Once you have a defined legal structure, you need to open an account at a brokerage.  Many full-service brokerages offer accounts for investment clubs, but they tend to charge higher fees to trade.  I’m a fan of TD Ameritrade, and they offer accounts and help to investment clubs.  No matter where you open an account, you will need to provide copies of your legal agreements and your EIN.

Depending on the company, they may be willing to help you get started investing, or even come to your club meeting to provide basic information and education.  It never hurts to ask, even at a discount brokerage like TD Ameritrade.

  1. Build a Common Agenda

Now that all the legal structures are in place for your club, you need to build a common agenda for each meeting.  This is where the magic happens!

Typically, at each meeting, you want to review your financials and performance.  Larger clubs sometimes do this only with the directors, and then email out statements to members.  Typically, they also review investment positions, so that poor performing investments can be identified and dealt with.

Once you’ve covered the legal stuff, every club does things differently, but you have a few common purposes:

Discuss/Decide how to invest

Education and/or Presentations

Research and Discussions

Many clubs will have “homework” or delegate out research for their members to complete.  Typically, the club will identify a target sector or type of investment, then delegate out companies to research.  At the next meeting, the club will regroup and discuss their findings.

Once the presentations and research has been done, the club has to decide how to invest.  Hopefully the rules you set early on aid in this process (i.e. 2/3 vote or something similar).

Finally, don’t forget the education piece.  While you don’t have to do it every meeting, it is a great idea to have presenters educate members on various topics.  Many clubs even invite in speakers to share stories and information with the club.  This is a great way to mix it up (so it doesn’t get boring), while still being helpful and educational.

  1. Have Some Fun

Finally, you have to have some fun!  If you don’t, members could get bored easily.  It starts with selecting a fun name, and maybe even fun director titles.

You should also think about food or snacks for your meetings.  If you meet at someone’s house, do they cook each time?  What about meeting at a restaurant each week?  Whatever you choose, make sure that you feed your members!

Finally, you could even use some of your profits to go on fun outings.  I’ve heard of some groups committing to vacations with their investment earnings – trips to Hawaii or other fun destinations.  While not common, it certainly mixes things up and makes it fun.

What are your thoughts on how to start an investment club?  Is it something you’ve considered?

Financial Ratios Formulae

This is a quick guide to financial ratios for cooperatives and saccos, extracted from Ojijo’sSuccessful Saccos – Managers’ Guide to Acquire, Retain and Grow Membership, Savings and Assets.

Do I have enough working capital? Will I be able to make payroll and the next flock of bills? Is my debt too high? Will I have any difficulty meeting long-term obligations? Am I using my assets wisely? Is my inventory too large, or does it take too long to turn over? How profitable is my business? Financial ratios help me answer these questions.

The massive amount of numbers in a company’s financial statements can be bewildering and intimidating to many investors. However, through financial ratio analysis, I will be able to work with these numbers in an organized fashion. Financial ratios are indicators used to analyze an entity’s financial performance. Financial ratios are used by bankers, creditors, shareholders and accountants to evaluate data presented on an entity’s financial statements. Depending on the results of the evaluations, bankers and creditors may choose to extend or retract financing and potential shareholders may adjust the level of commitment in a company. Financial ratios are important tools that judge the profitability, efficiency, liquidity and solvency of an entity.

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise’s financial statements. Financial ratios may be used by managers within a firm, by current and potential shareholders/investors (owners) of a firm, and by a firm’s creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.

Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%.

There are four main categories of financial ratios:

  • Liquidity,
  • Profitability,
  • Leverage/Solvency, and
  • Activity/Efficiency

Profitability Ratios

Profitability ratios help users of an entity’s financial statements determine the overall effectiveness of management regarding returns generated on sales and investments.

Profitability ratios are designed to evaluate the firm’s ability to generate earnings. Analysis of profit is of vital concern to stockholders since they derive revenue in the form of dividends. Further, increased profits can cause a rise in market price, leading to capital gains. Profits are also important to creditors because profits are one source of funds for debt coverage. Management uses profit as a performance measure.

There are several ratios that may be used to measure profitability and the income statement contains several figures that may be used for profitability analysis.

Return on Member Equity

A measurement of the co-op’s rate of return on member investment. Always given as a percentage. It shows the interest rate net profits yield on member equity.

Formula: Net Savings X 100 / Member Equity

Net Profit Margin (NPM)

Net Profit Margin measures how much out of every of Sales a company actually keeps in earnings, and hence, our measure of profitability. Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each of sales. It is also known as Net Profit Margin.

If the company has a high average net profit margin, it is a high margin of safety, hence, a decline in sales, or lower pricing, will not negatively affect our profitability.

Gross profit margin

The average gross profit on each of sales before operating expenses:

It will depend on the industry I am in, so it is important to measure yourself against industry benchmarks. It is an excellent way of assessing the profitability of each product.

Return on Assets (ROA)/Return on Investment (ROI)

This ratio is an indicator of how profitable a company is relative to its total assets. The greater a company’s earnings in proportion to its assets, the more effectively that company is said to be using its assets. ROA/ROI gives an idea as to how efficient management is at using its assets to generate earnings.

An average ratio of above10% is acceptable shows that the company is better at converting its investment into profit, making large profits with little investment.

Return on Equity

Return on Equity measures the efficiency with which stockholder’s investment has been used. In essence, it measures the company profitability by revealing how much profit a company generates with the money shareholders have invested.  Also known as “return on net worth” (RONW).  Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder’s equity does not include preferred shares.

From the above ratio, the company is efficient at generating profits from every unit of shareholders’ equity (also known as net assets or assets minus liabilities). A high ROE shows that the company uses investment funds to generate earnings growth. A higher average of above 20% means that the company is a lean, mean profit machine.

For example, if I have invested $200,000 and the business is generating a net income of $100,000 a year, my return on owner’s equity is 50 per cent.  It tends to increase over time as the business grows, especially if my personal investment remains the same. It is a useful way to compare what I have earned from my business to what I may have earned from another investment.

Efficiency /Activity /Asset Turnover Ratios

Activity ratios also known as efficiency or turnover ratios are used to measure how efficiently a business uses its assets. Asset turnover ratios consist of the sales figure in the numerator and the balance of an asset in the denominator.

These ratios measure the effectiveness of management’s decision making.

Inventory To Working Capital Ratio

Indicates the desirable inventory level for the working capital employed.

Formula: Inventory / Net Working Capital

Accounts Receivable Turnover

An indicator of how quickly the firm is collecting from its credit sales. This calculation is Average Gross Receivables, divided by the Net Sales, divided by 365. The results from this ratio may cause the firm to rethink its credit terms. Most firms invest a significant amount of capital in accounts receivable, and for this reason they are viewed as crucial corporate resources. Accounts receivable turnover is a measure of how these resources are being managed and is computed as follows:


Annual Sales
Accounts Receivable Turnover = ——————-
Accounts Receivable

A fairly high number by most standards would be considered very strong.


Inventory Turnover

An important resource that requires considerable management attention is inventory. Particularly useful if you have trading stock. Shows how often my business’ inventory is sold and replaced in a particular period.

This is another powerful ratio. It indicates the liquidity of the inventory. This is calculated by dividing the Cost of Goods Sold by the Average Inventory. Although monthly inventory totals would generate the best average, they are usually unavailable to an outside investor. Often times the beginning and ending inventory totals are the best available numbers.

Control of inventory is important and is commonly assessed with the inventory turnover measure:

  Annual Sales
Inventory Turnover = ————-


Generally, the higher the number the better. The less time goods spend in inventory the better the return the company is able to earn from funds tied up in inventory. A large stale inventory can distort the asset position of the company and should be monitored for that reason also.

For example, if you’ve spent $200,000 on stock over the year and you keep an average of $20,000 worth of stock on hand, your inventory turnover is 10 times a year. As a general rule, it is better to have a higher than lower inventory turnover. A low turnover indicates you have a lot of money tied up in stock for long periods, which is not good for cash flow. Too high a figure could indicate that you don’t have enough stock on hand.


Accounts Payable Turnover

Cost of Sales

Average Accounts Payable

The higher the turnover, the shorter the period between purchases and payment. A high turnover may indicate unfavorable supplier repayment terms. A low turnover may be a sign of cash flow problems.


Operating Expense Ratio

Compares expenses to revenue.


Operating Expenses

Total Revenue

A decreasing ratio is considered desirable since it generally indicates increased efficiency.


Earnings Per Share

Shows the earnings available to the owners of each share of common stock

Formula is:

Net Income – Dividends

Number Of Shares (Common Stock)

Days Receivable Ratio

Another measure of a business’ liquidity is how long it takes for the company to collect payments from clients, also known as day’s receivable ratio. Figure the day’s receivable of a business by dividing its average gross receivables by its annual net sales divided by 365. For example, a company with annual net sales of $365,000 and average gross receivables of $40,000 would have a day’s receivable ratio of 40 days.

Formula= 365* Average Receivables /Annual Net Income


 Liquidity Ratios

Liquidity is a measure of the business’ ability to pay its bills on time. It is the relationship between current assets and current liabilities. Liquidity is a sensitive barometer of month to month operations.

Liquidity ratios help financial statement users evaluate a company’s ability to meet its current obligations. In other words, liquidity ratios evaluate the ability of a company to convert its current assets into cash and pay current obligations. Common liquidity ratios are the current ratio and the quick ratio. The current ratio is calculated by dividing current assets by current liabilities. A general rule of thumb is to have a current ratio of 2. The quick ratio, or acid test, helps determine a company’s ability to pay obligations that are due immediately.

Net Working Capital

The difference between total current assets and total current liabilities. It indicates the extent to which short-term debt is exceeded by short-term assets.

Formula: Current Assets – Current Liabilities


Current Ratio/ Liquidity Ratio


The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. Also known as “liquidity ratio”, “cash asset ratio” and “cash ratio”.  It compares a firm’s current assets to its current liabilities.

If an entity cannot maintain a short-term debt-paying ability, it will not be able to maintain a long-term debt-paying ability, nor will it be able to satisfy its stockholders. It is safe to assume that current liabilities will be paid with cash generated by current assets. A profitable company still may have difficulty paying its short-term debt. Many companies use accrual accounting and are able to report high profits but are unable to meet its current obligations. The liquidity ratios look at aspects of the company’s assets and their relationship to current liabilities.


Quick Ratio/ Acid Test Ratio

The quick ratio of a business is a measure of its financial liquidity. It determines how easily a business could convert assets into cash to cover its liabilities. Companies that have a low quick ratio present a higher risk to investors. Figure the quick ratio of a company by deducting the value of its inventory from its current assets and dividing the total by its current liabilities. For example, if a company has $2 million in assets, of which $1 million is tied in its inventory, and $500,000 in liabilities, it has a quick ratio of 2 to 1.

Formula= (Current Assets – Inventories) / Current Liabilities

Solvency/Leverage Ratios

Solvency is the relationship of long term debt to owners’ equity. It is a measure of the proportion of long term capital being provided by the creditors (debt) versus the owners (equity). It indicates who is financing the permanent assets of the company.

Solvency, or leverage, ratios, judge the ability of a company to raise capital and pay its obligations. Solvency ratios, which include debt to worth and working capital, determine whether an entity is able to pay all of its debts. It is important to ensure the entity can maintain operations during difficult financial periods. The debt to net worth ratio calculation is total liabilities divided by net worth. Working capital is calculated by subtracting current liabilities from current assets.

Solvency Ratio

Indicates the amount invested in the business by the creditors with that invested by the members. The lower the ratio, the higher the creditors’ claims on the assets, possibly indicating the cooperative is extending its debt beyond its ability to repay. However, an extremely high ratio may indicate that the cooperative is managing its assets too conservatively.

Long-Term Debt to Working Capital

Indicates creditor contribution to liquid assets.

Formula: Long-Term Debt / Net Working Capital (Current Assets-Current Liabilities)

Long-Term Debt to Capitalization

Indicates the proportion of total capitalization provided by long-term debt.

Formula: Long-Term Debt / Total Capitalization (Total Debt +Total Equity)

Debt to Equity Ratio/Financial Leverage/Gearing/Risk

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders’ equity and debt used to finance a company’s assets. Closely related to leveraging, the ratio is also known as Risk, Gearing or Leverage. Whereas the optimal debt-to-equity ratio is considered to be about 1, i.e. liabilities = equity; the maximum acceptable debt-to-equity ratio is 1.5-2 and less. The more non-current the assets (as in the capital-intensive industries), the more equity is required to finance these long term investments.

An average reducing D/E Ratio means the company is being financed from its own financial sources rather than by creditors which is a positive trend. Lenders and investors usually prefer low debt-to-equity ratios because their interests are better protected in the event of a business decline. Thus, with low debt-to-equity ratios, the company can be able to attract additional lending capital. Further, the low debt-to-equity ratio indicates that the company will be able to generate enough cash to satisfy its debt obligations. It also provides opportunity to exploit financial leverage.

Debt/EBITDA Ratio

This ratio gives the investor the approximate amount of time that would be needed to pay off all debt, ignoring the factors of interest, taxes, depreciation and amortization. Ratios higher than 5 indicate that a company is less likely to be able to handle its debt burden, and thus is less likely to be able to take on the additional debt required to grow the business. At a ratio of below 5, the company is able to pay off its debts.  This high ratio suggests that the company may want take on less debt, unless the cost of capital is greatly reduced.

A high debt/EBITDA ratio suggests that a firm may not be able to service their debt in an appropriate manner and can result in a lowered credit rating. Conversely, a low ratio can suggest that the firm may want take on more debt if needed and it often warrants a relatively high credit rating.


Debt Service Coverage Ratio (DSCR)

The debt service coverage ratio (DSCR), also known as “debt coverage ratio,” (DCR) is the ratio of cash available for debt servicing to interest, principal and lease payments. It is a popular benchmark used in the measurement of an entity’s (person or corporation) ability to produce enough cash to cover its debt (including lease) payments. The higher this ratio is, the easier it is to obtain a loan. The phrase is also used in commercial banking and may be expressed as a minimum ratio that is acceptable to a lender; it may be a loan condition or covenant. The average DSCR of above 1 indicating that the company is producing income which is sufficient to pay back its debts. In essence, the company will have cash flow available to meet annual interest and principal payments on debt.

Formula = Net Operating Income/ Total Debt Service (Amortization + Interest On Loans)


A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments. For example, in the context of personal finance, this would mean that the borrower would have to delve into his or her personal funds every month to keep the project afloat. Generally, lenders frown on a negative cash flow, but some allow it if the borrower has strong outside income.


Debt Ratio

Debt Ratio is a financial ratio that indicates the percentage of a company’s assets that are provided via debt. It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as ‘goodwill’). The higher the ratio, the greater risk will be associated with the firm’s operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a firm, which in turn will lower the firm’s financial flexibility. Like all financial ratios, a company’s debt ratio should be compared with their industry average or other competing firms.

Total liabilities divided by total assets. The debt/asset ratio shows the proportion of a company’s assets which are financed through debt. A debt ratio of greater than 1 indicates that a company has more debt than assets; meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt and most of the company’s assets are financed through equity. Companies with high debt/asset ratios are said to be “highly leveraged,” not highly liquid as stated above. A company with a high debt ratio (highly leveraged) could be in danger if creditors start to demand repayment of debt.



About Ojijo

Ojijo Pascal, a lawyer, author of 49 books, public speaker, consultant, entrepreneur, investor, poet, pianist, speaker of 19 languages, and InuaKijana Fellow, is the Founder & Lead at GoBigHub, a for profit social enterprise with a 10 year target of being in 1,000 African cities, connecting local entrepreneurs to local investors and contributing to 1% of Africa’s GDP. He is passionate about the role of enterprise in fighting Africa’s challenges of poverty, unemployment, and low productivity. He believes that connecting the entrepreneurs to local sources of capital while providing business mentorship and promoting group business and investment ventures through business clubs and investment clubs is the answer to build better lives in Africa. Read Ojijo’s Complete Profile Here.