In its Form 990 or 990-EZ, a charity will report its year-end assets and liabilities and the total amount it spent. Assets minus liabilities equals net worth. Its reserve ratio is calculated by dividing its net worth by the total amount it spent.
For example: if an organization reports $800,000 in assets, $50,000 in liabilities and $300,000 spent, subtracting the $50,000 of liabilities from the $800,000 of assets produces a net worth of $750,000, and dividing that by $300,000 in spending produces a reserve ratio of 2.5.
Why calculate a reserve ratio? – An organization’s reserve ratio is an indicator of whether its financial reserves are smaller than needed, appropriate or greater than needed. An organization with inadequate reserves may be in danger of failing, while an organization with very large reserves may not need your support.