Liquidity Analysis Ratios Current Ratio Current Ratio = Quick Ratio Quick Ratio = Quick Assets ---------------------Current Liabilities

Current Assets -----------------------Current Liabilities

Quick Assets = Current Assets - Inventories Net Working Capital Ratio Net Working Capital Ratio = Net Working Capital -------------------------Total Assets

Net Working Capital = Current Assets - Current Liabilities

Profitability Analysis Ratios Return on Assets (ROA) Return on Assets (ROA) = Net Income ---------------------------------Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 Return on Equity (ROE) Return on Equity (ROE) = Net Income -------------------------------------------Average Stockholders' Equity

Average Stockholders' Equity = (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2 Return on Common Equity (ROCE) Return on Common Equity = Net Income -------------------------------------------Average Common Stockholders' Equity

Average Common Stockholders' Equity = (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2 Profit Margin Profit Margin = Net Income ----------------Sales

Earnings Per Share (EPS) Earnings Per Share = Net Income --------------------------------------------Number of Common Shares Outstanding

Activity Analysis Ratios Assets Turnover Ratio Assets Turnover Ratio = Sales ---------------------------Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 Accounts Receivable Turnover Ratio Accounts Receivable Turnover Ratio = Sales ----------------------------------Average Accounts Receivable

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2 Inventory Turnover Ratio Inventory Turnover Ratio = Cost of Goods Sold --------------------------Average Inventories

Average Inventories = (Beginning Inventories + Ending Inventories) / 2

Capital Structure Analysis Ratios Debt to Equity Ratio Debt to Equity Ratio = Total Liabilities ---------------------------------Total Stockholders' Equity

Interest Coverage Ratio Interest Coverage Ratio = Income Before Interest and Income Tax Expenses ------------------------------------------------------Interest Expense

Income Before Interest and Income Tax Expenses = Income Before Income Taxes + Interest Expense

Capital Market Analysis Ratios

Price Earnings (PE) Ratio Price Earnings Ratio = Market Price of Common Stock Per Share -----------------------------------------------------Earnings Per Share

Market to Book Ratio Market to Book Ratio = Market Price of Common Stock Per Share ------------------------------------------------------Book Value of Equity Per Common Share

Book Value of Equity Per Common Share = Book Value of Equity for Common Stock / Number of Common Shares Dividend Yield Dividend Yield = Annual Dividends Per Common Share -----------------------------------------------Market Price of Common Stock Per Share

Book Value of Equity Per Common Share = Book Value of Equity for Common Stock / Number of Common Shares Dividend Payout Ratio Dividend Payout Ratio = Cash Dividends -------------------Net Income

ROA = Profit Margin X Assets Turnover Ratio ROA = Profit Margin X Assets Turnover Ratio Net Income ROA = ------------------------ = Average Total Assets Profit Margin = Net Income / Sales Assets Turnover Ratio = Sales / Averages Total Assets Net Income -------------- X Sales Sales -----------------------Average Total Assets

Earnings per Share SFAS 128, February 1997 "Earnings per Share" Earnings per Share (EPS) 1. Basic Earnings per Share 2. Diluted Earnings per Share

Basic EPS Basic EPS = (A) / (B) (A) = income available for common stockholders (B) = weighted-average number of common shares outstanding Diluted EPS Diluted EPS = (C) / (D) (C) = (A) + (A1) (D) = (B) + (B1) (A1) The effects of dilutive potential common shares (DPCS) on income (B1) The effects of dilutive potential common shares (DPCS) on number of shares DPCS = Dilutive Potential Common Shares Potential common shares 1. convertible securities 2. options 3. warrants 4. contingent stock agreements Dilutive --> if the effect of potential common shares is --> a "decrease" in EPS Antidilutive --> if the effect of potential common shares is --> an "increase" in EPS (A1) The effects of DPCS on income --> add back (A2) and (A3) to income (A2) dividends to convertible preferred shares (A3) interest for convertible debt (B1) The effects of DPCS on number of shares --> add (B2) to the number of shares (B2) net increase in common shares = (B3) - (B4) (B3) additional common shares assumed to be issued (B4) number of shares assumed to be bought back --> using the proceeds from the exercise of options and warrants "If-converted method" for convertible securities 1. It is assumed that convertible securities were converted --> at the beginning of the period --> or at the time of issuance if issued during the period 2. Add additional number of common shares --> that would have been issued if they were converted 3. For convertible preferred shares

--> add back dividends to convertible preferred shares to income 4. For convertible debt --> add back interest for convertible debt to income "Treasury stock method" for written call options and warrants 1. It is assumed that call options were exercised --> at the beginning of the period 2. At the time of exercise --> option holders will pay exercise price per share --> to get common shares 3. It is assumed that the proceeds were used --> to buy back its own common shares in the market --> at the average market price during the period 4. Net increase in common shares will be the difference between (1) and (2) (1) number of shares issued due to assumed exercise of options and warrants (2) number of shares assumed to be purchased back in the market using the proceeds of (1) An example of written call options Entity A sold call options for 600 shares of common stock --> exercise price = $100 --> average market price = $120 Proceeds from the assumed exercise = 600 shares x $100 = $60,000 Number of treasury shares assumed to be bought back = $60,000 / $120 = 500 shares Entity A is assumed to sell 600 shares and buy 500 shares Increase in the number of shares = 600 - 500 = 100 shares "Reverse treasury stock method" for written put options 1. When a put option is exercised --> option holder will ask the entity to buy back common shares 2. It is assumed that the entity will issue sufficient common shares --> to raise enough proceeds to buy back common shares from the holders of put option --> at the beginning of the period --> at the average market price during the period 3. It is assumed that the proceeds were used --> to buy back common shares from the holders of put option 4. Net increase in common shares will be the difference between (3) and (4) (3) number of shares assumed to be issued to raise enough proceeds (4) number of shares assumed to be purchased back from the holders of put option An example of written put options Entity A sold put options for 400 shares of common stock --> exercise price = $100 --> average market price = $80 Proceeds required to purchase 400 shares at $100 = 400 shares x $100 = $40,000 Number of shares issued to raise $40,000 --> $40,000 / $80 = 500 shares

Entity A is assumed to issue 500 shares at the beginning of the period at $80 per share Entity A is assumed to issue 500 shares and buy 400 shares Increase in the number of shares = 500 - 400 = 100 shares Purchased call options Options will be exercised only if EP < MP EP: Exercise Price MP: Market Price If EP < MP, the effect of purchased call option is antidilutive An example of purchased call options Entity A purchased call options for 600 shares of common stock --> exercise price = $100 --> average market price = $120 Proceeds required to buy 600 shares --> 600 shares x $100 = $60,000 Number of shares issued to raise $60,000 --> $60,000 / $120 = 500 shares Entity A is assumed to issue 500 shares and buy 600 shares Number of shares decreases --> antidilutive Purchased put options Options will be exercised only if MP < EP If MP < EP, the effect of purchased put option is antidilutive An example of purchased put options Entity A purchased put options for 400 shares of common stock --> exercise price = $100 --> average market price = $80 Proceeds from the assumed exercise = 400 shares x $100 = $40,000 Number of treasury shares assumed to be bought back = $40,000 / $80 = 500 shares Entity A is assumed to sell 400 shares and buy 500 shares Number of shares decreases --> antidilutive

International Financial Reporting Standards (IFRS) IAS 33: Earnings per Share

Financial Ratios

Financial ratios are a valuable and easy way to interpret the numbers found in statements. It can help to answer critical questions such as whether the business is carrying excess debt or inventory, whether customers are paying according to terms, whether the operating expenses are too high and whether the company assets are being used properly to generate income. When computing financial relationships, a good indication of the company's financial strengths and weaknesses becomes clear. Examining these ratios over time provides some insight as to how effectively the business is being operated. Many industries compile average industry ratios each year. Average industry ratios offer the small business owner a means of comparing his or her company with others within the same industry. In this manner, they provide yet another measurement of an individual company's strengths or weaknesses. Robert Morris & Associates is a good source of comparative financial ratios. Following are the most critical ratios for most businesses, though there are others that may be computed. Note: There may be different ways to compute ratios. It is important to be consistent from year to year and use the same method when making comparisons. FisCAL calculates ratios the same way as Robert Morris Associates (RMA).

1. Liquidity
Liquidity measures a company's capacity to pay its debts as they come due. There are two ratios for evaluating liquidity. Current Ratio: The current ratio gauges how capable a business is in paying current liabilities by using current assets only. Current ratio is also called the working capital ratio. A general rule of thumb for the current ratio is 2 to 1 (or 2:1 or 2/1). However, an industry average may be a better standard than this rule of thumb. The actual quality and management of assets must also be considered. The formula is: Total Current Assets _____________________ Total Current Liabilities Quick Ratio: Quick ratio focuses on immediate liquidity (i.e., cash, accounts receivable, etc.) but specifically ignores inventory. Also called the acid test ratio, it indicates the extent to which you could pay current liabilities without relying on the sale of inventory. Quick assets are highly liquid and are immediately convertible to cash. A general rule of thumb states that the ratio should be 1 to 1 (or 1:1 or 1/1). The formula is: Cash + Accounts Receivable ( + any other quick assets ) _____________________ Current Liabilities

2. Safety
Safety indicates a company's vulnerability to risk, e.g., the degree of protection provided for the business' debt. Three ratios help you evaluate safety. Debt to Equity: Debt to equity is also called debt to net worth. It quantifies the relationship between the capital invested by owners and investors and the funds provided by creditors. The higher the ratio, the greater the risk to a current or future creditor. A lower ratio means your client's company is more financially stable and is probably in a better position to borrow now and in the future. However, an extremely low ratio may indicate that your client is too conservative and is not letting the business realize its potential. The formula is: Total Liabilities (or Debt) _____________________ Net Worth (or Total Equity) EBIT/Interest: This assesses the company's ability to meet interest payments. It also evaluates the capacity to take on more debt. The higher the ratio, the greater the company's ability to make its interest payments or perhaps take on more debt. The formula is: Earnings Before Interest & Taxes ________________________ Interest Charges Cash Flow to Current Maturity of Long-Term Debt: Indicates how well traditional cash flow (net profit plus depreciation) covers the company's debt principal payments due in the next 12 months. It also indicates if the company's cash flow can support additional debt. The formula is: Net Profit + Non-Cash Expenses* __________________________ Current Portion of Long-term Debt *Such as depreciation, amortization and depletion.

3. Profitability
Profitability ratios measure the company's ability to generate a return on its resources. Use the following four ratios to help your client answer the question, "Is my company as profitable as it should be?" An increase in the ratios is viewed as a positive trend. Gross Profit Margin: Gross profit margin indicates how well the company can generate a return at the gross profit level. It addresses three areas -- inventory control, pricing and production efficiency.

The formula is: Gross Profit ____________ Total Sales Net Profit Margin: Net profit margin shows how much net profit is derived from every dollar of total sales. It indicates how well the business has managed its operating expenses. It also can indicate whether the business is generating enough sales volume to cover minimum fixed costs and still leave an acceptable profit. The formula is: Net Profit _____________ Total Sales Return on Assets: This evaluates how effectively the company employs its assets to generate a return. It measures efficiency. The formula is: Net Profit Before Taxes _____________________ Total Assets Return on Equity: This is also called return on investment (ROI). It determines the rate of return on the invested capital. It is used to compare investment in the company against other investment opportunities, such as stocks, real estate, savings, etc. There should be a direct relationship between ROI and risk (i.e., the greater the risk, the higher the return). The formula is: Net Profit Before Taxes _____________________ Net Worth

4. Efficiency
Efficiency evaluates how well the company manages its assets. Besides determining the value of the company's assets, you and your client should also analyze how effectively the company employs its assets. You can use the following ratios:

Accounts Receivable Turnover: This ratio shows the number of times accounts receivable are paid and reestablished during the accounting period. The higher the turnover, the faster the business is collecting its receivables and the more cash the client generally has on hand. The formula is: Total Net Sales _____________________ Accounts Receivable Accounts Receivable Collection Period: This reveals how many days it takes to collect all accounts receivable. As with accounts receivable turnover (above), fewer days means the company is collecting more quickly on its accounts. The formula is: 365 Days _____________________ Accounts Receivable Turnover Accounts Payable Turnover: This ratio shows how many times in one accounting period the company turns over (repays) its accounts payable to creditors. A lower number indicates either that the business has decided to hold on to its money longer or that it is having greater difficulty paying creditors. The formula is: Cost of Goods Sold ___________________ Accounts Payable Days Payable: This ratio shows how many days it takes to pay accounts payable. This ratio is similar to accounts payable turnover (above.) The business may be losing valuable creditor discounts by not paying promptly. The formula is: 365 days _____________________ Accounts Payable Turnover Inventory Turnover: This ratio shows how many times in one accounting period the company turns over (sells) its inventory and is valuable for spotting under-stocking, overstocking, obsolescence

and the need for merchandising improvement. Faster turnovers are generally viewed as a positive trend; they increase cash flow and reduce warehousing and other related costs. The formula is: Cost of Goods Sold ________________ Inventory Days Inventory: This ratio identifies the average length of time in days it takes the inventory to turn over. As with inventory turnover (above), fewer days mean that inventory is being sold more quickly. The formula is: 365 Days _________________ Inventory Turnover Sales to Net Worth: This volume ratio indicates how many sales dollars are generated with each dollar of investment (net worth). The formula is: Total Sales ____________ Net Worth Sales to Total Assets: This indicates how efficiently the company generates sales on each dollar of assets. A volume indicator, this ratio measures the ability of the company's assets to generate sales. The formula is: Total Sales _____________ Total Assets

Debt Coverage Ratio: This is an indication of the company's ability to satisfy its debt obligations and its capacity to take on additional debt without impairing its survival. The formula is: Net Profit + Any Non-Cash Expenses __________________________ Principal on Debt