portrait of a geniusIf colleges and universities were traded like stocks based on their listed tuition prices, higher education would be a short-seller's paradise. College pricing is perversely inefficient--blue chips and penny stocks tend to be priced in the same narrow range. Except for a small number of elite institutions that don't need to engage in discounting, listed tuition rates rarely represent actual fair values or real transaction prices. And they almost never reflect the underlying financial well-being of a college.

To do that we created the FORBES College Financial Grades, which measure the fiscal soundness of more than 900 four-year, private, not-for-profit schools with more than 500 students (public schools are excluded). For the purposes of our analysis we used the two most recent fiscal years available from the Department of Education--2011 and 2010. The grades measure financial fitness as determined by nine components broken into three categories.

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--Balance Sheet Health (40%): As determined by looking at endowment assets per full-time equivalent (15%), expendable assets (assets that can be sold in a pinch) to debt, otherwise known as a college's viability ratio (10%) and a similar measure known as the primary reserve ratio (15%). Primary reserve measures how long a college could survive if it had to sell assets to cover its expenses. Schools like Pomona and Swarthmore are so asset-rich, for example, that they could cover expenses for ten years without collecting a penny in tuition. Other well-known schools like Carnegie Mellon and Syracuse have primary ratios of about 1.0, meaning they could last about a year.

--Operational Soundness (35%): A blend of return on assets (10%), core operating margins (10%) and perhaps most important, tuition and fees as a percentage of core revenues (15%). Tuition dependency is the most serious risk facing middling colleges today.

--Admissions Yield (10%): The percentage of accepted students who choose to enroll tells not only how much demand there is from a specific school's target customers but also gives an indication of the effectiveness of its admissions staff.

--Freshmen Receiving Institutional Grants (7.5%): The most desperate schools use "merit aid" as a tool to lure more than 90% of incoming freshmen.

--Instructional Expenses per Full-Time ?Student (7.5%): Struggling schools tend to skimp in this area.

Forbes College Financial Grades, As and Bs

Forbes College Financial Grades, Cs and Ds

For more details on our financial grading metric, read below:

College Financial Grading Rubric

In order to come up with a financial grading methodology for Forbes new College Financial Grades I consulted with numerous experts in the field, including authors of  “Strategic Financial Analysis for Higher Education: “Identifying,Measuring & Reporting Financial Risks” , which is widely considered by to be one of the most important financial publications in higher education.  Included among them are Phil Tahey and Fred Prager of Prager & Co. I also spoke with senior management of colleges and various financial consultants in the field. Herewith are the nine variables considered in Forbes ratings:

1. Endowment Assets Per FTE  (15%)  This is year-end endowment assets divided by the number of 12 month full-time equivalent students.  Full credit was awarded for anyone with more than $100,000 per FTE.

2. Primary Reserve Ratio  (15%)- How well do a university’s “expendable assets” cover its annual expenses? Expendable assets are defined as total unrestricted net assets, plus temporarily restricted net assets plus debt related to property, plant and equipment, minus property, plant and equipment net of accumulated distribution, divided by total annual expenses.  Full credit was awarded to schools with ratios of more than 2.0, or two years.

3. Viability Ratio (10%) - This is similar to the primary reserve ratio but it measures the amount of expendable assets a college has relative to its debt load.  Many colleges carry no debt and therefore received full credit.  Any college that has more than two years of assets to debt coverage got full credit.

4. Core Operating Margin (10%) - This measures sheer operating profit, otherwise known as “surplus.” We looked at essential or core revenues for education, as measured by the DOE, minus core expenses. In other words, is college meeting its obligations, like instruction expenses, student service etc, from the tuition, grants, gifts, contracts and investment revenue it takes in. In the year ending June 30, 2009 there was a lot of red ink , mostly because colleges suffered heavy investment losses. Generally speaking schools with over 50% operating margins got full credit but half credit was awarded to those core operating margins of at least 10%.


6. Return On Assets (10%) – This is a simple measure looking at the change in net assets over the year for an institution and dividing it by the assets at the beginning of the year.  This answers the simple question of whether an institution’s assets are actually growing.  In order to get full credit under my scoring system an institution would need to have an ROA of in excess of 10% in a given year.  Those with ROA’s of 5% would receive half credit.

7. Admission Yield (10%):  This widely watched measure looks at the percentage of admitted students that actually chooses to attend a college. It not only speaks to demand, but also gives an indication of the effectiveness of a schools admissions team.  For colleges like Harvard it can run as high as 80% or more, but even for well-regarded schools like New Orlean’s, Tulane that often play “safety” to the more elite colleges, the yield can be as low as 2 in 10. For this measure we were able to obtain 2012 data and looked at averages going back to 2009. Schools with admissions yields greater than 50% got full credit and half credit was given to those with yields of 25%.