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Instructions
NeoCalc Supplement Is Designed To Be Viewed In 800 X 600 Screen Resolution
Data !ntr"
The Inco!e "tate!ent and #alance "heet are yo\$r t%o data entry %orksheets.
Na#igation\$
1. The Index Worksheet is yo\$r transportation page. All pages have a ret\$rn &\$tton to it.
%dditional Instructions\$
1. 'ook (or the red corner triangles (or additional instr\$ctions on the %orksheets. )or exa!ple*++++
&rinting\$
,. -o\$ !ay print !\$ltiple pages &y holding do%n the C./TR.'012- and clicking on individ\$al TA#" or
Right click on a ta& and select all sheets.
1. #e s\$re to 3rint 3revie% &e(ore printing a page. All pages are set\$p to print.
Instructions
NeoCalc Supplement Is Designed To Be Viewed In 800 X 600 Screen Resolution
1. 'ook (or the red corner triangles (or additional instr\$ctions on the %orksheets. )or exa!ple*++++ 3oint 4ere
,. -o\$ !ay print !\$ltiple pages &y holding do%n the C./TR.'012- and clicking on individ\$al TA#" or
Ratios Introduction
This %ork&ook prod\$ces 1, i!portant (inancial ratios. These ratios are \$s\$ally tho\$ght o( as &elonging to
(o\$r &asic categories* pro(ita&ility ratios, li7\$idity ratios, activity ratios, and leverage ratios*
Categor" Ratio
3ro(ita&ility ratios 2arnings 3er "hare
8ross 3ro(it 9argin
/et 3ro(it 9argin
Ret\$rn on Assets
Ret\$rn on 27\$ity
'i7\$idity ratios C\$rrent Ratio
:\$ick Ratio
Activity ratios Average Collection 3eriod
Inventory T\$rnover
'everage ratios ;e&t Ratio
27\$ity Ratio
Ti!es Interest 2arned
This is &y no !eans an exha\$stive list o( the ratios that have &een developed to help analy<e a co!pany=s
(inancial position and the %ay that it cond\$cts &\$siness. It is, ho%ever, representative.
%nal"'ing &ro(ita)ilit" Ratios
I( yo\$ are considering investing !oney in a co!pany, its pro(ita&ility is a !a>or concern. I( the co!pany
intends to pay dividends to its stockholders, those dividends !\$st co!e o\$t o( its pro(its. I( the co!pany
hopes to increase its %orth in the !arketplace &y enhancing or expanding its prod\$ct line, then an
i!portant so\$rce o( capital to !ake i!prove!ents is its pro(it !argin. There are several di((erent, &\$t
related, !eans o( eval\$ating a co!pany=s pro(ita&ility.
%nal"'ing *i+uidit" Ratios
The iss\$e o( li7\$idity, as yo\$ !ight expect, concerns creditors. 'i7\$idity is a co!pany=s a&ility to !eet its
de&ts as they co!e d\$e. A co!pany !ay have considera&le total assets, &\$t i( those assets are di((ic\$lt to
convert to cash it is possi&le that the co!pany !ight &e \$na&le to pay its creditors in a ti!ely (ashion.
Creditors %ant their loans to &e paid in the !edi\$! o( cash, not in a !edi\$! s\$ch as inventory or (actory
e7\$ip!ent.
%nal"'ing %cti#it" Ratios
There are vario\$s ratios that can give yo\$ insight into ho% %ell a co!pany !anages its operating and sales
activities. .ne pri!ary goal0perhaps, the pri!ary goal0o( these activities is to prod\$ce inco!e thro\$gh
e((ective \$se o( its reso\$rces. T%o %ays to !eas\$re this e((ectiveness are the Average Collection 3eriod
and the Inventory T\$rnover rate.
%nal"'ing *e#erage Ratios
The ter! leverage !eans the p\$rchase o( assets %ith &orro%ed !oney. "\$ppose that yo\$r co!pany
retails o((ice s\$pplies. When yo\$ receive an order (or &\$siness cards, yo\$ pay one o( yo\$r s\$ppliers ?5
percent o( the reven\$e to print the! (or yo\$. This is a varia&le cost* the !ore yo\$ sell, the greater yo\$r
cost.
#\$t i( yo\$ p\$rchase the necessary printing e7\$ip!ent, yo\$ co\$ld !ake the &\$siness cards yo\$rsel(. "o
doing %o\$ld t\$rn a varia&le cost into a (ixed cost* no !atter ho% !any cards yo\$ sell, the cost o( printing
the! is (ixed at ho%ever !\$ch yo\$ paid (or the printing e7\$ip!ent. The !ore cards yo\$ sell, the greater
yo\$r pro(it !argin. This e((ect is ter!ed operating leverage.
I( yo\$ &orro% !oney to ac7\$ire the printing e7\$ip!ent, yo\$ are \$sing another type o( leverage, ter!ed
(inancial leverage. The cost is still (ixed at ho%ever !\$ch !oney yo\$ !\$st pay, at reg\$lar intervals, to retire
the loan. Again, the !ore cards yo\$ sell, the greater yo\$r pro(it !argin. #\$t i( yo\$ do not sell eno\$gh cards
to cover the loan pay!ent, yo\$ co\$ld lose !oney. In that case, it !ight &e di((ic\$lt to (ind (\$nds either to
!ake the loan pay!ents or to cover yo\$r other expenses. -o\$r credit rating !ight (all, !aking it !ore
costly (or yo\$ to &orro% other !oney.
'everage is a (inancial tool that accelerates changes in inco!e, &oth positive and negative. A co!pany=s
creditors and investors are interested in ho% !\$ch leverage has &een \$sed to ac7\$ire assets. )ro! the
standpoint o( creditors, a high degree o( leverage represents risk &eca\$se the co!pany !ight not &e a&le
to repay a loan. )ro! the investors= standpoint, i( the ret\$rn on assets is less than the cost o( &orro%ing
!oney to ac7\$ire assets, then the invest!ent is \$nattractive. The investor co\$ld o&tain a &etter ret\$rn in
di((erent %ays0one %ay %o\$ld &e to loan (\$nds rather than to invest the! in the co!pany.
Summar"
This %ork&ook has so!e o( the (inancial ratios that are i!portant to \$nderstanding ho%, and ho% %ell, a
co!pany cond\$cts its &\$siness. There are variations on virt\$ally every ratio disc\$ssed here, and there are
ratios that %ere not covered at all, &\$t their principal (or!s (ollo% the (or!\$las ill\$strated.
.nly occasionally can yo\$ calc\$late one o( these indicators and gain i!!ediate insight into a &\$siness
operation. 9ore (re7\$ently, it is necessary to kno% the sort o( &\$siness that a co!pany cond\$cts, &eca\$se
the !arketplace i!poses di((erent de!ands on di((erent lines o( &\$siness. )\$rther!ore, yo\$ can \$s\$ally
\$nderstand one ratio &y considering it in the context o( another ratio @the de&t ratio and the ret\$rn on assets
is a good exa!ple o( one ratio providing the context (or anotherA.
1eep in !ind that it=s i!portant to eval\$ate a (inancial ratio in ter!s o( its trend over ti!e, o( a standard
s\$ch as an ind\$stry average, and in light o( other ratios that descri&e the co!pany=s operations and
(inancial str\$ct\$re.
Ratios Introduction
This %ork&ook prod\$ces 1, i!portant (inancial ratios. These ratios are \$s\$ally tho\$ght o( as &elonging to
(o\$r &asic categories* pro(ita&ility ratios, li7\$idity ratios, activity ratios, and leverage ratios*
Categor" Ratio
3ro(ita&ility ratios 2arnings 3er "hare
8ross 3ro(it 9argin
/et 3ro(it 9argin
Ret\$rn on Assets
Ret\$rn on 27\$ity
'i7\$idity ratios C\$rrent Ratio
:\$ick Ratio
Activity ratios Average Collection 3eriod
Inventory T\$rnover
'everage ratios ;e&t Ratio
27\$ity Ratio
Ti!es Interest 2arned
This is &y no !eans an exha\$stive list o( the ratios that have &een developed to help analy<e a co!pany=s
(inancial position and the %ay that it cond\$cts &\$siness. It is, ho%ever, representative.
%nal"'ing &ro(ita)ilit" Ratios
I( yo\$ are considering investing !oney in a co!pany, its pro(ita&ility is a !a>or concern. I( the co!pany
intends to pay dividends to its stockholders, those dividends !\$st co!e o\$t o( its pro(its. I( the co!pany
hopes to increase its %orth in the !arketplace &y enhancing or expanding its prod\$ct line, then an
i!portant so\$rce o( capital to !ake i!prove!ents is its pro(it !argin. There are several di((erent, &\$t
related, !eans o( eval\$ating a co!pany=s pro(ita&ility.
%nal"'ing *i+uidit" Ratios
The iss\$e o( li7\$idity, as yo\$ !ight expect, concerns creditors. 'i7\$idity is a co!pany=s a&ility to !eet its
de&ts as they co!e d\$e. A co!pany !ay have considera&le total assets, &\$t i( those assets are di((ic\$lt to
convert to cash it is possi&le that the co!pany !ight &e \$na&le to pay its creditors in a ti!ely (ashion.
Creditors %ant their loans to &e paid in the !edi\$! o( cash, not in a !edi\$! s\$ch as inventory or (actory
e7\$ip!ent.
%nal"'ing %cti#it" Ratios
There are vario\$s ratios that can give yo\$ insight into ho% %ell a co!pany !anages its operating and sales
activities. .ne pri!ary goal0perhaps, the pri!ary goal0o( these activities is to prod\$ce inco!e thro\$gh
e((ective \$se o( its reso\$rces. T%o %ays to !eas\$re this e((ectiveness are the Average Collection 3eriod
and the Inventory T\$rnover rate.
%nal"'ing *e#erage Ratios
The ter! leverage !eans the p\$rchase o( assets %ith &orro%ed !oney. "\$ppose that yo\$r co!pany
retails o((ice s\$pplies. When yo\$ receive an order (or &\$siness cards, yo\$ pay one o( yo\$r s\$ppliers ?5
percent o( the reven\$e to print the! (or yo\$. This is a varia&le cost* the !ore yo\$ sell, the greater yo\$r
cost.
#\$t i( yo\$ p\$rchase the necessary printing e7\$ip!ent, yo\$ co\$ld !ake the &\$siness cards yo\$rsel(. "o
doing %o\$ld t\$rn a varia&le cost into a (ixed cost* no !atter ho% !any cards yo\$ sell, the cost o( printing
the! is (ixed at ho%ever !\$ch yo\$ paid (or the printing e7\$ip!ent. The !ore cards yo\$ sell, the greater
yo\$r pro(it !argin. This e((ect is ter!ed operating leverage.
I( yo\$ &orro% !oney to ac7\$ire the printing e7\$ip!ent, yo\$ are \$sing another type o( leverage, ter!ed
(inancial leverage. The cost is still (ixed at ho%ever !\$ch !oney yo\$ !\$st pay, at reg\$lar intervals, to retire
the loan. Again, the !ore cards yo\$ sell, the greater yo\$r pro(it !argin. #\$t i( yo\$ do not sell eno\$gh cards
to cover the loan pay!ent, yo\$ co\$ld lose !oney. In that case, it !ight &e di((ic\$lt to (ind (\$nds either to
!ake the loan pay!ents or to cover yo\$r other expenses. -o\$r credit rating !ight (all, !aking it !ore
costly (or yo\$ to &orro% other !oney.
'everage is a (inancial tool that accelerates changes in inco!e, &oth positive and negative. A co!pany=s
creditors and investors are interested in ho% !\$ch leverage has &een \$sed to ac7\$ire assets. )ro! the
standpoint o( creditors, a high degree o( leverage represents risk &eca\$se the co!pany !ight not &e a&le
to repay a loan. )ro! the investors= standpoint, i( the ret\$rn on assets is less than the cost o( &orro%ing
!oney to ac7\$ire assets, then the invest!ent is \$nattractive. The investor co\$ld o&tain a &etter ret\$rn in
di((erent %ays0one %ay %o\$ld &e to loan (\$nds rather than to invest the! in the co!pany.
Summar"
This %ork&ook has so!e o( the (inancial ratios that are i!portant to \$nderstanding ho%, and ho% %ell, a
co!pany cond\$cts its &\$siness. There are variations on virt\$ally every ratio disc\$ssed here, and there are
ratios that %ere not covered at all, &\$t their principal (or!s (ollo% the (or!\$las ill\$strated.
.nly occasionally can yo\$ calc\$late one o( these indicators and gain i!!ediate insight into a &\$siness
operation. 9ore (re7\$ently, it is necessary to kno% the sort o( &\$siness that a co!pany cond\$cts, &eca\$se
the !arketplace i!poses di((erent de!ands on di((erent lines o( &\$siness. )\$rther!ore, yo\$ can \$s\$ally
\$nderstand one ratio &y considering it in the context o( another ratio @the de&t ratio and the ret\$rn on assets
is a good exa!ple o( one ratio providing the context (or anotherA.
1eep in !ind that it=s i!portant to eval\$ate a (inancial ratio in ter!s o( its trend over ti!e, o( a standard
s\$ch as an ind\$stry average, and in light o( other ratios that descri&e the co!pany=s operations and
(inancial str\$ct\$re.
Forecasted Total
,ST -TR .ND -TR /RD -TR 0T1 -TR ,222
Sales
"ales B,,555,555 B1,?55,555 B1,655,555 B,,515,155 BC,D15,155
Cost o( sales B9E?,555 BDC?,555 BD66,555 B9EC,C1C B6,?D9,C1C
3ross pro(it B1,5??,555 BC6?,555 BECF,555 B1,5C6,EDE B6,,,5,EDE
!4penses
.perating expenses BE,E,555 B61D,555 B,F?,C55 BE,C,1E1 B1,EE6,FE1
Interest B1C,,?5 B1C,,?5 B1C,,?5 B1C,,?5 BC?,555
;epreciation B6,,?55 B66,9?D B66,9?D B66,9?D B16E,6FE
A!orti<ation B1,,?5 B1,,?5 B1,,?5 B1,,?5 B?,555
Total e4penses BEFE,555 B6C9,E?D B6,F,5?D BEFF,?99 B1,CED,11?
5perating income B?D1,555 B,C?,?E, B169,9E, B?D?,DD? B1,?F,,6C9
5t6er income and e4penses
8ain @lossA on sale o( assets B155,555 B15,555 B6,555 BE5?,F55 B?1D,F55
.ther @netA B,5,555 B?5,555 B155,555 B,55,555 B6F5,555
"\$&total B1,5,555 BC5,555 B156,555 BC5?,F55 BDDD,F55
Income )e(ore ta4 BF51,555 B6,?,?E, B,E,,9E, B1,191,?D? B,,EC1,5C9
3lease enter a tax percentage
Taxes G 65H B,15,655 B9F,CC6 BF,,DD6 B6?F,EF? BF6D,6,1
Net income BE95,F55 B,,F,DF9 B1F5,5?9 BD6E,159 B1,F,,,FED
Detailed Supporting In(ormation
Cost o( sales
;irect la&or B6,5,555 B,E5,555 B,5D,555 B6,1,C1C B1,5D9,C1C
9aterials B?55,555 B?55,555 B?55,555 B?55,555 B,,555,555
.ther costs B1,?,555 B1,?,555 B1,?,555 B1,?,555 B?55,555
ANNUAL INCOME STATEMENT
C.93A/- /A92
City, "tate II3 Code
3hone /\$!&er (ax )ax /\$!&er
sample6
Page 7
0.3
sample6
Page 8
2000000 1500000 1300000 2010100
1250 1250 1250 1250
100000 10000 3000 405700
20000 50000 100000 200000
Actual Forecast
.00. ,ST -TR .ND -TR /RD -TR 0T1 -TR
%SS!TS
Current %ssets
Cash and cash e7\$ivalents BE?1,555 B95,6C5 B,,9,,66 BEC9,19C @B9E?,?DCA
Acco\$nts receiva&le B6?5,555 BC?F,?6E BE96,1?1 BE,F,69F BCC5,D??
Inventory BE55,555 BC65,E11 B?95,9?9 B?F?,1FD B1,1DC,55,
.ther c\$rrent assets B15,555 BC5,555 BE?,595 BFC,6,5 B?5,555
Total Current %ssets B1,,11,555 B1,E6D,65? B1,6?D,E66 B1,?ED,591 B9?1,,F1
7i4ed %ssets
'and B155,555 B11,,?55 B1,?,555 B16F,?55 B1?5,555
#\$ildings B1,?55,555 B1,E?5,555 B1,E?5,555 B1,E?5,555 B1,E?5,555
27\$ip!ent BD55,555 BDF?,555 BDF?,555 BDF?,555 BDF?,555
"\$&total B,,E55,555 B,,E6F,?55 B,,E?5,555 B,,EC,,?55 B,,EF?,555
'ess0acc\$!\$lated depreciation BE55,555 BE6,,?55 BECC,E?D B?55,E1C B?6E,6FE
Total 7i4ed %ssets B,,555,555 B,,55?,555 B1,9D6,?E, B1,9C,,5DE B1,9E5,C,C
Intangi)le %ssets
Cost B?5,555 B?5,555 B?5,555 B?5,555 B?5,555
'ess0acc\$!\$lated a!orti<ation B,5,555 B,1,,?5 B,,,?55 B,6,F?5 B,?,555
Total Intangi)le %ssets B65,555 B,D,F?5 B,F,?55 B,C,,?5 B,?,555
5t6er assets B,?,555 B66,555 B1,5,555 B?,555 B,6,555
Total %ssets B6,,CC,555 B6,?5?,5?? B6,ED9,EF? B6,?E1,E,? B,,969,D9F
Actual Forecast
*I%BI*ITI!S %ND ,222 ,ST -TR .ND -TR /RD -TR 0T1 -TR
ST5C815*D!RS9 !-:IT;
Current *ia)ilities
Acco\$nts paya&le BC55,555 B6,D,FCF B6,D,FCF B6,D,FCF B6,D,FCF
/otes paya&le B155,555 B?5,555 B?5,555 B?5,555 B?5,555
C\$rrent portion o( long0ter! de&t B155,555 B155,555 B155,555 B155,555 B155,555
Inco!e taxes B65,555 B1D6,655 B?,,CC6 B1E,9D6 @B1DD,F6?A
Accr\$ed expenses B95,555 BD6,,DD BC,,ECC B?E,16F BD6,F5D
.ther c\$rrent lia&ilities B1C,555 B1,,555 B1,,555 B1,,555 B1,,555
Total Current *ia)ilities B96C,555 BF?F,6?? BC5?,D9C B??9,DDF B6D?,FE5
Non<Current *ia)ilities
'ong0ter! de&t BC55,555 B?55,555 B?55,555 B?55,555 B?55,555
;e(erred inco!e B155,555 B95,555 B95,555 B95,555 B95,555
;e(erred inco!e taxes B65,555 B,F,555 B,F,555 B,F,555 B,F,555
.ther long0ter! lia&ilities B?5,555 B95,555 BE5,555 BE5,555 BE5,555
Total *ia)ilities B1,F1C,555 B1,ECE,6?? B1,,C,,D9C B1,,1C,DDF B1,5E,,FE5
=== "hares .\$tstanding 1,555 1,555 1,555 1,555 1,555
Capital stock iss\$ed B155,555 B155,555 B155,555 B155,555 B155,555
Additional paid in capital B?5,555 B?5,555 B?5,555 B?5,555 B?5,555
Retained earnings B1,E55,555 B1,D95,F55 B,,5FC,?F9 B,,1FE,?6D B1,FEF,1?F
B1,??5,555 B,,5E5,F55 B,,,,C,?F9 B,,6,E,?6D B1,D9F,1?F
Total *ia)ilities and !+uit" B6,,CC,555 B6,?5?,5?? B6,ED9,EF? B6,?E1,E,? B,,969,D9F
ANNUAL BALANCE SHEET
C.93A/- /A92
City, "tate II3 Code
3hone /\$!&er (ax )ax /\$!&er
sample3
Page 10
sample3
Page 11
451000
350000
400000
10000 60000 45090 76320 50000
100000 112500 125000 137500 150000
1500000 1450000 1450000 1450000 1450000
800000 875000 875000 875000 875000
50000 50000 50000 50000 50000
20000 21250 22500 23750
sample4
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sample4
Page 13
sample4
Page 14
25000
25000 33000 120000 5000 23000
600000
100000
100000
30000
90000
16000 12000 12000 12000 12000
sample4
Page 15
600000
100000 90000 90000 90000 90000
30000 27000 27000 27000 27000
50000 90000 40000 40000 40000
sample5
Page 16
sample5
Page 17
sample5
Page 18
sample5
Page 19
100000
50000
1400000
Copyright, 2003, Jaxor!s, "ll #ights #eser\$e%.
&ro(ita)ilit" Ratios
!arnings &er S6are >!&S? Ratio -uarter , -uarter . -uarter / -uarter 0
/et inco!e J/A92K J/A92K J/A92K J/A92K
"hares o( co!!on stock o\$tstanding 1,555 1,555 1,555 1,555
23" J/A92K J/A92K J/A92K J/A92K
!arnings &er S6are >!&S?
;epending on yo\$r (inancial o&>ectives, yo\$ !ight consider investing in a co!pany to o&tain a steady
ret\$rn on yo\$r invest!ent in the (or! o( reg\$lar dividend pay!ents, or to o&tain a pro(it &y o%ning the
stock as the !arket val\$e o( its shares increases. These t%o o&>ectives !ight &oth &e !et, &\$t in
practice they o(ten are not. Co!panies (re7\$ently (ace a choice o( distri&\$ting inco!e in the (or! o(
dividends, or retaining that inco!e to invest in research, ne% prod\$cts, and expanded operations. The
hope, o( co\$rse, is that the retention o( inco!e to invest in the co!pany %ill s\$&se7\$ently increase its
inco!e, th\$s !aking the co!pany !ore pro(ita&le and increasing the !arket val\$e o( its stock.
In either case, 2arnings 3er "hare @23"A is an i!portant !eas\$re o( the co!pany=s inco!e. Its &asic
(or!\$la is*
!&S @ Income %#aila)le (or Common StocA B S6ares o( Common StocA 5utstanding
23" is \$s\$ally a poor candidate (or vertical analysis, &eca\$se di((erent co!panies al%ays have di((erent
n\$!&ers o( shares o( stock o\$tstanding. It !ay &e a good candidate (or hori<ontal analysis, i( yo\$ have
access &oth to in(or!ation a&o\$t the co!pany=s inco!e and shares o\$tstanding. With &oth these ite!s,
yo\$ can control (or !a>or (l\$ct\$ations over ti!e in shares o\$tstanding. This sort o( control is i!portant* it
is not \$n\$s\$al (or a co!pany to p\$rchase its o%n stock on the open !arket to red\$ce the n\$!&er o(
o\$tstanding shares. "o doing increases the val\$e o( the 23" ratio, perhaps !aking the stock appear a
!ore attractive invest!ent.
/ote that the 23" can decline steadily thro\$gho\$t the year. #eca\$se, the n\$!&er o( shares o\$tstanding
is constant thro\$gho\$t the year, the 23" changes are d\$e solely to changes in net inco!e.
9any co!panies iss\$e at least t%o di((erent kinds o( stock* co!!on and pre(erred. 3re(erred stock is
iss\$ed \$nder di((erent conditions than co!!on stock. 3re(erred stock is o(ten calla&le at the co!pany=s
discretion, it pays dividends at a di((erent @\$s\$ally, higherA rate per share, it !ight not carry voting
privileges, and o(ten has a higher priority than co!!on stock as to the distri&\$tion o( li7\$idated assets i(
the co!pany goes o\$t o( &\$siness.
Calc\$lating 23" (or a co!pany that has iss\$ed pre(erred stock introd\$ces a slight co!plication.
#eca\$se the co!pany pays dividends on pre(erred stock &e(ore any distri&\$tion to shareholders o(
co!!on stock, it is necessary to s\$&tract these dividends (ro! net inco!e*
!&S >Net Income < &re(erred Di#idends? B S6ares o( Common StocA 5utstanding
Copyright, 2003, Jaxor!s, "ll #ights #eser\$e%.
&ro(ita)ilit" Ratios
3ross &ro(it Cargin -uarter , -uarter . -uarter / -uarter 0
"ales J/A92K J/A92K J/A92K J/A92K
Cost o( sales J/A92K J/A92K J/A92K J/A92K
8ross pro(it !argin J/A92K J/A92K J/A92K J/A92K
3ross &ro(it Cargin
The gross pro(it !argin is a &asic ratio that !eas\$res the added val\$e that the !arket places on a
co!pany=s non0!an\$(act\$ring activities. Its (or!\$la is*
3ross pro(it margin @ >Sales < Cost o( 3oods Sold? B Sales
The cost o( goods sold is, clearly, an i!portant co!ponent o( the gross pro(it !argin. It is \$s\$ally
calc\$lated as the s\$! o( the cost o( !aterials the co!pany p\$rchases pl\$s any la&or involved in the
!an\$(act\$re o( (inished goods, pl\$s associated overhead.
The gross pro(it !argin depends heavily on the type o( &\$siness in %hich a co!pany is engaged. A
service &\$siness, s\$ch as a (inancial services instit\$tion or a la\$ndry, typically has little or no cost o(
goods sold. A !an\$(act\$ring, %holesaling, or retailing co!pany typically has a large cost o( goods sold,
%ith a gross pro(it !argin that varies (ro! ,5 percent to E5 percent.
The gross pro(it !argin !eas\$res the a!o\$nt that c\$sto!ers are %illing to pay (or a co!pany=s prod\$ct,
over and a&ove the co!pany=s cost (or that prod\$ct. As !entioned previo\$sly, this is the val\$e that the
co!pany adds to that o( the prod\$cts it o&tains (ro! its s\$ppliers. This !argin can depend on the
attractiveness o( additional services, s\$ch as %arranties, that the co!pany provides. The gross pro(it
!argin also depends heavily on the a&ility o( the sales (orce to pers\$ade its c\$sto!ers o( the val\$e
This added val\$e is, o( co\$rse, created &y other costs s\$ch as operating expenses. In t\$rn, these costs
!\$st &e !et largely &y the gross pro(it on sales. I( c\$sto!ers do not place s\$((icient val\$e on %hatever
the co!pany adds to its prod\$cts, there %ill not &e eno\$gh gross pro(it to pay (or the associated costs.
There(ore, the calc\$lation o( the gross pro(it !argin helps to highlight the e((ectiveness o( the co!pany=s
sales strategies and sales !anage!ent.
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&ro(ita)ilit" Ratios
Net &ro(it Cargin -uarter , -uarter . -uarter / -uarter 0
/et Inco!e J/A92K J/A92K J/A92K J/A92K
"ales J/A92K J/A92K J/A92K J/A92K
/et pro(it !argin J/A92K J/A92K J/A92K J/A92K
Net &ro(it Cargin
The net pro(it !argin narro%s the (oc\$s on pro(ita&ility, and highlights not >\$st the co!pany=s sales
e((orts, &\$t also its a&ility to keep operating costs do%n, relative to sales. The (or!\$la generally \$sed to
deter!ine the net pro(it !argin is*
Net &ro(it Cargin @ !arnings %(ter Ta4es B Sales
When net pro(it !argin (alls dra!atically (ro! the (irst to the (o\$rth 7\$arters, a principal c\$lprit is cost o(
sales.
Another place to look %hen yo\$ see a discrepancy &et%een gross pro(it !argin and net pro(it !argin is
operating expenses. When the t%o !argins covary closely, it s\$ggests that !anage!ent is doing a good
>o& o( red\$cing expenses %hen sales (all, and increasing expenses %hen necessary to s\$pport
prod\$ction and sales in &etter ti!es.
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&ro(ita)ilit" Ratios
Return on %ssets 7ull ;ear
2#IT;A B1,FFC,FE6
Total assets B6,6CD,9C6
Ret\$rn on assets ?,.FH
Return on %ssets
.ne o( !anage!ent=s !ost i!portant responsi&ilities is to &ring a&o\$t a pro(it &y e((ective \$se o( the
reso\$rces it has at hand. .ne ratio that speaks to this 7\$estion is ret\$rn on assets. There are several
%ays to !eas\$re this ret\$rnL one \$se(\$l !ethod is*
Return on %ssets @ >3ross &ro(it < 5perating !4pense? B Total %ssets
This (or!\$la %ill ret\$rn the percentage earnings (or a co!pany in ter!s o( its total assets. The &etter the
>o& that !anage!ent does in !anaging its assets0the reso\$rces availa&le to it0to &ring a&o\$t pro(its, the
greater this percentage %ill &e.
It=s nor!al to calc\$late the ret\$rn on total assets on an ann\$al &asis, rather than on a 7\$arterly &asis.

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&ro(ita)ilit" Ratios
Return on !+uit" -uarter , -uarter . -uarter / -uarter 0
2arnings a(ter taxes J/A92K J/A92K J/A92K J/A92K
"tockholder=s e7\$ity J/A92K J/A92K J/A92K J/A92K
Ret\$rn on e7\$ity J/A92K J/A92K J/A92K J/A92K
Return on !+uit"
Another related pro(ita&ility !eas\$re to Ret\$rn on Assets is the Ret\$rn on 27\$ity. Again, there are
several %ays to calc\$late this ratioL here, it is !eas\$red according to this (or!\$la*
Return on !+uit" @ Net Income B StocA6older9s !+uit"
-o\$ can co!pare ret\$rn on e7\$ity %ith ret\$rn on assets to in(er ho% a co!pany o&tains the (\$nds \$sed
to ac7\$ire assets.
T6e principal di((erence )etween t6e (ormula (or return on assets and (or return on e+uit" is t6e
use o( e+uit" rat6er t6an total assets in t6e denominatorD and it is 6ere t6at t6e tec6ni+ue o(
comparing ratios comes into pla" B" e4amining t6e di((erence )etween Return on %ssets and
Return on !+uit"D "ou can largel" determine 6ow t6e compan" is (unding its operations
Assets are ac7\$ired thro\$gh t%o !a>or so\$rces* creditors @thro\$gh &orro%ingA and stockholders @thro\$gh
retained earnings and capital contri&\$tionsA. Collectively, the retained earnings and capital contri&\$tions
constit\$te the co!pany=s e7\$ity. When the val\$e o( the co!pany=s assets exceeds the val\$e o( its e7\$ity,
yo\$ can expect that so!e (or! o( (inancial leverage !akes \$p the di((erence* i.e., de&t (inancing.
There(ore, i( the Ret\$rn on 27\$ity ratio is !\$ch larger than the Ret\$rn on Assets ratio, yo\$ can in(er that
the co!pany has (\$nded so!e portion o( its operations thro\$gh &orro%ing.
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*i+uidit" Ratios
Current ratio -uarter , -uarter . -uarter / -uarter 0
C\$rrent assets J/A92K J/A92K J/A92K J/A92K
C\$rrent lia&ilities J/A92K J/A92K J/A92K J/A92K
C\$rrent ratio J/A92K J/A92K J/A92K J/A92K
Current Ratio
The c\$rrent ratio co!pares a co!pany=s c\$rrent assets @those that can &e converted to cash d\$ring the
c\$rrent acco\$nting periodA to its c\$rrent lia&ilities @those lia&ilities co!ing d\$e d\$ring the sa!e periodA.
The \$s\$al (or!\$la is*
Current Ratio @ Current %ssets B Current *ia)ilities
The c\$rrent ratio !eas\$res the co!pany=s a&ility to repay the principal a!o\$nts o( its lia&ilities.
The c\$rrent ratio is closely related to the concept o( %orking capital. Working capital is the di((erence
&et%een c\$rrent assets and c\$rrent lia&ilities.
Is a high c\$rrent ratio good or &adK Certainly, (ro! the creditor=s standpoint, a high c\$rrent ratio !eans
that the co!pany is %ell0placed to pay &ack its loans. Consider, tho\$gh, the nat\$re o( the c\$rrent assets*
they consist !ainly o( cash and cash e7\$ivalents. )\$nds invested in these types o( assets do not
contri&\$te strongly and actively to the creation o( inco!e. There(ore, (ro! the standpoint o( stockholders
and !anage!ent, a c\$rrent ratio that is very high !eans that the co!pany=s assets are not &eing \$sed
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*i+uidit" Ratios
-uicA ratio -uarter , -uarter . -uarter / -uarter 0
C\$rrent assets J/A92K J/A92K J/A92K J/A92K
Inventory J/A92K J/A92K J/A92K J/A92K
C\$rrent lia&ilities J/A92K J/A92K J/A92K J/A92K
:\$ick ratio J/A92K J/A92K J/A92K J/A92K
-uicA Ratio
The 7\$ick ratio is a variant o( the c\$rrent ratio. It takes into acco\$nt the (act that inventory, %hile it is a
c\$rrent asset, is not as li7\$id as cash or acco\$nts receiva&le. Cash is co!pletely li7\$idL acco\$nts
receiva&le can nor!ally &e converted to cash (airly 7\$ickly, &y pressing (or collection (ro! the c\$sto!er.
#\$t inventory cannot &e converted to cash except &y selling it. The 7\$ick ratio deter!ines the
relationship &et%een 7\$ickly accessi&le c\$rrent assets and c\$rrent lia&ilities*
-uicA Ratio @ >Current %ssets < In#entor"? B Current *ia)ilities
The 7\$ick ratio sho%s %hether a co!pany can !eet its lia&ilities (ro! 7\$ickly0accessi&le assets.
In practice, a 7\$ick ratio o( 1.5 is nor!ally considered ade7\$ate, %ith this caveat* the credit periods that
the co!pany o((ers its c\$sto!ers and those granted to the co!pany &y its creditor !\$st &e ro\$ghly
e7\$al. I( reven\$es %ill stay in acco\$nts receiva&le (or as long as 95 days, &\$t acco\$nts paya&le are d\$e
%ithin 65 days, a 7\$ick ratio o( 1.5 %ill !ean that acco\$nts receiva&le cannot &e converted to cash
7\$ickly eno\$gh to !eet acco\$nts paya&le.
It is possi&le (or a co!pany to !anip\$late the val\$es o( its c\$rrent and 7\$ick ratios &y taking certain
actions to%ard the end o( an acco\$nting period s\$ch as a (iscal year. It !ight %ait \$ntil the start o( the
next period to !ake p\$rchases to its inventory, (or exa!ple. .r, i( its &\$siness is seasonal, it !ight
choose a (iscal year that ends a(ter its &\$sy season, %hen inventories are \$s\$ally lo%. As a potential
creditor, yo\$ !ight %ant to exa!ine the co!panyMs c\$rrent and 7\$ick ratios on, (or exa!ple, a 7\$arterly
&asis.
#oth a c\$rrent and a 7\$ick ratio can also !islead yo\$ i( the inventory (ig\$re does not represent the
c\$rrent replace!ent cost o( the !aterials in inventory. There are vario\$s !ethods o( val\$ing inventory.
The 'I). !ethod, in partic\$lar, can res\$lt in an inventory val\$ation that is !\$ch di((erent (ro! the
inventory=s c\$rrent replace!ent val\$eL this is &eca\$se it ass\$!es that the !ost recently ac7\$ired
inventory is also the !ost recently sold.
I( yo\$r act\$al costs to p\$rchase !aterials are (alling, (or exa!ple, the 'I). !ethod co\$ld res\$lt in an
over0val\$ation o( the existing inventory. This %o\$ld tend to in(late the val\$e o( the c\$rrent ratio, and to
\$nderesti!ate the val\$e o( the 7\$ick ratio i( yo\$ calc\$late it &y s\$&tracting inventory (ro! c\$rrent assets,
rather than s\$!!ing cash and cash e7\$ivalents.
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%cti#it" Ratios
%#erage Collection &eriod -uarter , -uarter . -uarter / -uarter 0
Acco\$nts Receiva&le J/A92K J/A92K J/A92K J/A92K
Credit sales per day J/A92K J/A92K J/A92K J/A92K
Average Collection 3eriod J/A92K J/A92K J/A92K J/A92K
%#erage Collection &eriod
-o\$ can o&tain a general esti!ate o( the length o( ti!e it takes to receive pay!ent (or goods or services
&y calc\$lating the Average Collection 3eriod.
.ne (or!\$la (or this ratio is*
%#erage Collection &eriod @ %ccounts Recei#a)le B >Credit Sales B Da"s?
Where ;ays is the n\$!&er o( days in the period (or %hich Acco\$nts Receiva&le and Credit "ales
acc\$!\$late.
-o\$ sho\$ld interpret the average collection period in ter!s o( the co!pany=s credit policies. I(, (or
exa!ple, the co!pany=s policy as stated to its c\$sto!ers is that pay!ent is to &e received %ithin t%o
%eeks, then an average collection period o( 65 days indicates that collections are lagging. It !ay &e that
collection proced\$res need to &e revie%ed, or it is possi&le that one partic\$larly large acco\$nt is
responsi&le (or !ost o( the collections in arrears. It is also possi&le that the 7\$ali(ying proced\$res \$sed
&y the sales (orce are not stringent eno\$gh.
The calc\$lation o( the Average Collection 3eriod ass\$!es that credit sales are distri&\$ted ro\$ghly evenly
d\$ring any given period. To the degree that the credit sales cl\$ster at the end o( the period, the Average
Collection 3eriod %ill ret\$rn an in(lated (ig\$re. I( yo\$ o&tain a res\$lt that appears too long @or too shortA,
&e s\$re to check %hether the sales dates occ\$r evenly thro\$gho\$t the period in 7\$estion.
Regardless o( the ca\$se, i( the average collection period is over0long, it !eans that the co!pany is
losing pro(it. The co!pany is not converting cash d\$e (ro! c\$sto!ers into ne% assets that can, in t\$rn,
&e \$sed to generate ne% inco!e.
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%cti#it" Ratios
In#entor" Turno#er Ratio -uarter , -uarter . -uarter / -uarter 0
Cost o( 8oods "old J/A92K J/A92K J/A92K J/A92K
Average Inventory J/A92K J/A92K J/A92K J/A92K
Inventory T\$rnover J/A92K J/A92K J/A92K J/A92K
In#entor" Turno#er Ratio
/o co!pany %ants to have too large an inventory @the sales (orce excepted* salespeople pre(er to &e
a&le to tell their c\$sto!ers that they can o&tain their p\$rchase this a(ternoonA. 8oods that re!ain in
inventory too long tie \$p the co!pany=s assets in idle stock, o(ten inc\$r carrying charges (or the storage
o( the goods, and can &eco!e o&solete %hile a%aiting sale.
J\$st0in0Ti!e inventory proced\$res atte!pt to ens\$re that the co!pany o&tains its inventory no sooner
than a&sol\$tely re7\$ired in order to s\$pport its sales e((orts. That is, o( co\$rse, an \$nrealistic ideal, &\$t &y
calc\$lating the inventory t\$rnover rate yo\$ can esti!ate ho% %ell a co!pany is approaching the ideal.
The (or!\$la (or the Inventory T\$rnover Ratio is*
In#entor" Turno#er @ Cost o( 3oods Sold B %#erage In#entor"
%here the Average Inventory (ig\$re re(ers to the val\$e o( the inventory on any given day d\$ring the
period d\$ring %hich the Cost o( 8oods "old is calc\$lated. The higher an inventory t\$rnover rate, the
!ore closely a co!pany con(or!s to >\$st0in0ti!e proced\$res.
The (ig\$res (or cost o( goods sold and average inventory are taken directly (ro! the Inco!e "tate!ent=s
cost o( sales and the #alance "heet=s inventory levels. In a sit\$ation %here yo\$ kno% only the &eginning
and ending inventory0(or exa!ple, at the &eginning and the ending o( a period0yo\$ %o\$ld \$se the
average o( the t%o levels* hence the ter! average inventory.
An accepta&le inventory t\$rnover rate can &e deter!ined only &y kno%ledge o( a co!pany=s &\$siness
sector. I( yo\$ are in the &\$siness o( %holesaling (resh prod\$ce, (or exa!ple, yo\$ %o\$ld pro&a&ly re7\$ire
an ann\$al t\$rnover rate in the ?5s* a !\$ch lo%er rate %o\$ld !ean that yo\$ %ere losing too !\$ch
inventory to spoilage. #\$t i( yo\$ sell co!p\$ting e7\$ip!ent, yo\$ co\$ld pro&a&ly a((ord an ann\$al t\$rnover
rate o( aro\$nd 6 or E, &eca\$se hard%are does not spoil, nor does it &eco!e technologically o&solete
!ore (re7\$ently than every (e% !onths.
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*e#erage Ratios
De)t ratio -uarter , -uarter . -uarter / -uarter 0
Total 'ia&ilities J/A92K J/A92K J/A92K J/A92K
Total Assets J/A92K J/A92K J/A92K J/A92K
;e&t ratio J/A92K J/A92K J/A92K J/A92K
De)t Ratio
The de&t ratio is de(ined &y this (or!\$la*
De)t ratio @ Total de)t B Total assets
It is a healthy sign %hen a co!pany=s de&t ratio is (alls, altho\$gh &oth stockholders and potential
creditors %o\$ld pre(er to see the rate o( decline in the de&t ratio !ore closely !atch the decline in ret\$rn
on assets. As the ret\$rn on assets (alls, the net inco!e availa&le to !ake pay!ents on de&t also (alls.
This co!pany sho\$ld pro&a&ly take action to retire so!e o( its short0ter! de&t, and the c\$rrent portion o(
its long0ter! de&t, as soon as possi&le.
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*e#erage Ratios
!+uit" ratio -uarter , -uarter . -uarter / -uarter 0
Total 27\$ity J/A92K J/A92K J/A92K J/A92K
Total Assets J/A92K J/A92K J/A92K J/A92K
27\$ity ratio J/A92K J/A92K J/A92K J/A92K
!+uit" Ratio
The e7\$ity ratio is the opposite o( the de&t ratio. It is that portion o( the co!pany=s assets (inanced &y
stockholders*
!+uit" Ratio @ Total !+uit" B Total assets
It is \$s\$ally easier to ac7\$ire assets thro\$gh de&t than to ac7\$ire the! thro\$gh e7\$ity. There are certain
o&vio\$s considerations* (or exa!ple, yo\$ !ight need to ac7\$ire invest!ent capital (ro! !any investorsL
%hereas yo\$ !ight &e a&le to &orro% the re7\$ired (\$nds (ro! >\$st one creditor. 'ess o&vio\$s is the iss\$e
o( priority.
#y la%, i( a (ir! ceases operations, its creditors have the (irst clai! on its assets to help repay the
&orro%ed (\$nds. There(ore, an investor=s risk is so!e%hat higher than that o( a creditor, and the e((ect is
that stockholders tend to de!and a greater ret\$rn on their invest!ent than a creditor does on its loan.
The stockholder=s de!and (or a ret\$rn can take the (or! o( dividend re7\$ire!ents or ret\$rn on assets,
each o( %hich tend to increase the !arket val\$e o( their stock.
#\$t there is no al%ays in (inancial planning. #eca\$se investors \$s\$ally re7\$ire a higher ret\$rn on their
invest!ent than do creditors, it !ight see! that de&t is the pre(erred !ethod o( raising (\$nds to ac7\$ire
assets. 3otential creditors, tho\$gh, look at ratios s\$ch as the ret\$rn on assets and the de&t ratio. A high
de&t ratio @or, conversely, a lo% e7\$ity ratioA !eans that existing creditors have s\$pplied a large portion
o( the co!pany=s assets, and that there is relatively little stockholder=s e7\$ity to help a&sor& the risk.
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*e#erage Ratios
Times Interest !arned Ratio -uarter , -uarter . -uarter / -uarter 0
2#IT J/A92K J/A92K J/A92K J/A92K
Interest charges J/A92K J/A92K J/A92K J/A92K
Ti!es interest earned J/A92K J/A92K J/A92K J/A92K
Times interest !arned Ratio
.ne !eas\$re (re7\$ently \$sed &y creditors to eval\$ate the risk involved in loaning !oney to a (ir! is the
Ti!es Interest 2arned ratio. This is the n\$!&er o( ti!es in a given period that a co!pany earns eno\$gh
inco!e to cover its interest pay!ents. A ratio o( ?, (or exa!ple, %o\$ld !ean that the a!o\$nt o( interest
pay!ents is earned ? ti!es over d\$ring that period.
The \$s\$al (or!\$la is*
Times Interest !arned @ E!BIT B Total Interest &a"ments
N2#IT stands (or 2arnings #e(ore Interest and Taxes.
The Ti!es Interest 2arned ratio, in reality, seldo! exceeds 15. A val\$e o( EE.1 is very high, altho\$gh
certainly not \$nheard o( d\$ring a partic\$larly good 7\$arter. A val\$e o( ?.1 %o\$ld \$s\$ally &e considered
strong &\$t %ithin the nor!al range.
/otice that this is a !eas\$re o( ho% deeply interest charges c\$t into a co!pany=s inco!e. A ratio o( 1, (or
exa!ple, %o\$ld !ean that the co!pany earns eno\$gh inco!e @a(ter covering s\$ch costs as operating
expenses and costs o( salesA to cover only its interest charges. There %o\$ld &e no inco!e re!aining to
pay inco!e taxes @o( co\$rse, in this case it=s likely that there %o\$ld &e no inco!e tax lia&ilityA, to !eet
dividend re7\$ire!ents or to retain earnings (or (\$t\$re invest!ents.
"ince 199C, JaxWorks has o((ered a s\$ite o( 7ree 2xcel %ork&ooks and spreadsheets, and associated 9" Word, 3;) and 4T9'
doc\$!ents, that cover a n\$!&er o( (inancial, acco\$nting and sales (\$nctions. These are inval\$a&le s!all &\$siness tools.
Also incl\$ded 7ree are*
0 &\$siness plan tools, incl\$ding spreadsheets and excellent instr\$ctions
0 2xcel (\$nctions glossary and g\$ideL
0 (ree training co\$rses (or !ost 9icroso(t .((ice applications. These g\$ides are in
3;) (or!at and rival co!!ercial &ooksO
0 co!prehensive list o( acrony!s, ratios and (or!\$las in c\$sto!er (inancial
analysis, and (inancial ter!sL
0 s\$ite o( online calc\$lators, incl\$ding, &reakeven analysis, prod\$ctivity analysis,
&\$siness eval\$ationL
0 Alt!an I0"core @covering p\$&licly and privately held (ir!s, and s!all
&\$sinessesAL
0 and payroll analysis.
I( yo\$ are involved in (inancial analysis at any level, or %ant to learn !ore a&o\$t 9" 2xcel and other applications in the .((ice s\$ite this site
is inval\$a&le.
"ince 199C, JaxWorks has o((ered a s\$ite o( 7ree 2xcel %ork&ooks and spreadsheets, and associated 9" Word, 3;) and 4T9'
doc\$!ents, that cover a n\$!&er o( (inancial, acco\$nting and sales (\$nctions. These are inval\$a&le s!all &\$siness tools.
Also incl\$ded 7ree are*
0 &\$siness plan tools, incl\$ding spreadsheets and excellent instr\$ctions
0 2xcel (\$nctions glossary and g\$ideL
0 (ree training co\$rses (or !ost 9icroso(t .((ice applications. These g\$ides are in
3;) (or!at and rival co!!ercial &ooksO
0 co!prehensive list o( acrony!s, ratios and (or!\$las in c\$sto!er (inancial
analysis, and (inancial ter!sL
0 s\$ite o( online calc\$lators, incl\$ding, &reakeven analysis, prod\$ctivity analysis,
&\$siness eval\$ationL
0 Alt!an I0"core @covering p\$&licly and privately held (ir!s, and s!all
&\$sinessesAL
0 and payroll analysis.
I( yo\$ are involved in (inancial analysis at any level, or %ant to learn !ore a&o\$t 9" 2xcel and other applications in the .((ice s\$ite this site
is inval\$a&le.