Friday, 31 January 2014

2014 Year to Date Top 20 Gainers and Losers in Colombo Stock Exchange

Top 20 Gainers:

Top 20 Losers:

31-Jan-2014 CSE Trade Summary

Following Stocks Reached New High / Low on 31/01/2014

Crossings - 31/01/2014 & Top 10 Contributors to Change ASPI

Top 10 Gainer / Loser / Turnover / Volume for the day

Foreign Activity for the week ending 31/01/2014

Company Fact Sheet: Vallibel Power Erathna PLC - VPEL:N0000

About the company:

Established: 2001-11-07                 Quoted Date: 2006-05-16             Sector: Power & Energy

Vallibel Power Erathna PLC is a Sri Lanka-based company engaged in the generation of electricity using hydro resources and transmitting such electricity to the national grid of the Ceylon Electricity Board. The Company's Erathna Mini-Hydro Power Project, which is located in the Kuruwita Divisional Secretariat in the District of Ratnapura, has an installed capacity of 10 Megawatts (MW). Through its subsidiary, the Company owns two other power generating plants situated at Durekkanda in Rathnapura District and Norton Bridge in Nuwara Eliya District: Kiriwaneliya Mini-Hydro Power Project and Denawaka Gana Mini-Hydro Power Project, which begun commercial operations in December 2011 and February 2012 with installed capacity of 4.65 MW and 7.2 MW respectively. As of March 31, 2012, the Company's parent entity was Vallibel Power Limited. As of the same date, the Company held 84.53% stake in its subsidiary, Country Energy (Pvt) Ltd.

Chairman: Mr. K D D Perera

Board of Directors:
Mr. S.H. Amarasekera
Mr. P.K. Sumanasekera
Mr. D.S. Clark
Mr. S.E. De Silva
Mr. H. Somashantha
Mr. L.D. Dickman
Mr. S. Shanmuganathan
Mr. P.B. Perera
Mr. C.V. Cabraal

Alternate Directors:

Mr. W.D.N.H. Perera (for Mr. P.B. Perera)
Ms. D.S.N. Weerasooriya (for Mr. K.D.D. Perera)

52 Weeks Low: 7.00                                                         52 Weeks High: 5.20

Average Trading Volume: 323,600

Company Financial at a glance:
Click Table to Enlarge

1. 16-05-2006 Total Share were Indexed 249,036,577 after 50,000,000 shares were fully subscribed by public @ Rs. 8.00 in the IPO.
2. 05-07-2006 Bonus Shares Allotted 498,073,154 (Ratio 2:1)

Total shares in Issue: 747,109,731

Top 20 Shareholders as at 31/12/2013

The percentage of Shares held by the Public as at 31 December 2013 was 19.10%.

Thursday, 30 January 2014

30-Jan-2014 CSE Trade Summary

Following Stocks Reached New High / Low on 30/01/2014

Crossings - 30/01/2014 & Top 10 Contributors to Change ASPI

Top 5 Gainer / Loser / Turnover / Volume for the day

Foreign Activity for the day

Company Fact Sheet: The Autodrome PLC - AUTO:N0000

About the company:

Established: 1953                    Quoted Date: 1975-01-01             Sector: Motors

The Autodrome PLC is a Sri Lankan based trading company. The Company is engaged in the importing and distribution of Bridgestone-branded tires, tubes and flaps from Japan, Indonesia and Thailand; Yokohama-branded batteries from Malaysia; Futek-branded alloy wheels from Taiwan and China, and China Soong-branded wheels and tire accessories from China. The Company is the local distributor of beauty care and cosmetics for Revlon Lanka (Pvt) Ltd, a Joint venture of the Modi Group of India and Revlon USA. Other activities include the provision of services related to the above; real estate rental and leasing (as Landlord); design and hosting and maintenance of Websites. Its subsidiary Tourama (Pvt) Ltd is a travel agent and destination management company.

Chairperson: Ms. B.J. Aloysius 

Board of Directors:
Mr. J.D. Aloysius (Joint Managing Director )
Mr. R.A.J. Aloysius (Joint Managing Director)
Prof. John A. Aloysius
Mr. S.C. Weerasooria
Mr. M.S. Dominic
Mr. M.R. Ratnasabapathy
Mr. C.L. Sirimanne
Ms. J.J.B. Aloysius (Executive Director )
Ms. Julie A. Aloysius (Executive Director)

52 Weeks Low: 600.30                                                         52 Weeks High: 1050.00

Average Trading Volume: 51

Company Financial at a glance:
Click Table to Enlarge

Total shares in Issue: 1,200,000

Top 20 Shareholders as at 31/12/2013

The percentage of Shares held by the Public as at 31 December 2013 was 22.95%. 

Wednesday, 29 January 2014

Company Fact Sheet: Richard Pieris Exports PLC - REXP:N0000

About the company:

Established: 1983                            Quoted Date: 1993-10-11                     Sector: Manufacturing

Richard Pieris Exports PLC is a Sri Lanka-based company engaged in the manufacture and export of rubber-based products and supply of fillers for the rubber industry. The Company's rubber products include rubber mats, food jar seals and crutch tip markets. Its rubber mat product line comprises entrance mats, industry mats, food service mats, sports and leisure mats, agriculture mats, electrical safety mats, domestic mats and general purpose mats. The Company, through its subsidiaries, manufactures and exports molded and extruded rubber based products, foam rubber products and resin rubber shoe soling sheets, as well as manufactures minerals for the rubber industry. The Company's subsidiaries include Richard Pieris Natural Foams Ltd., Micro Minerals (Pvt) Ltd., Arpico Natural Latexfoams (Pvt) Ltd. and Arpitalian Compact Soles (Pvt) Ltd.

Chairman: Dr. Sena Yaddehige

Board of Directors:
Mr. Shaminda Yaddehige
Mr. J. H. Paul Ratnayeke
Mr. Sunil S G Liyanage
Mr. W.J.Viville P Perera
Mr. W R Abeysirigunawardena
Mr. Kumar Abeysinghe

Dr. L.M.K. Tillekeratne
Mr. A.M. Patrick
52 Weeks Low: 29.40                                                                52 Weeks High: 59.90

Average Trading Volume: 25,730

Company Financial at a glance:
Click Table to Enlarge

Total shares in Issue: 11,163,745

Top 20 Shareholders as at 30/09/2013

Percentage of Public Holding as at 30th September 2013 was 19.74%

29-Jan-2014 CSE Trade Summary

Following Stocks Reached New High / Low on 29/01/2014

Crossings - 29/01/2014 & Top 10 Contributors to Change ASPI

Top 5 Gainer / Loser / Turnover / Volume for the day

Foreign Activity for the day

Tuesday, 28 January 2014

28-Jan-2014 CSE Trade Summary

Following Stocks Reached New High / Low on 28/01/2014

Crossings - 28/01/2014 & Top 10 Contributors to Change ASPI

Top 5 Gainer / Loser / Turnover / Volume for the day

Foreign Activity for the day

Company Fact Sheet: CIC Holdings PLC - CIC:N0000 & CIC:X0000

About the company:

Established: 1964                    Quoted Date: 1964              Sector: Chemical & Pharmaceuticals

CIC Holdings PLC is engaged in the business of merchandising and manufacturing. The Company operates in six segments: Agriculture & Livestock, consumer & pharmaceutical, construction, industrial raw materials, packaging, and others. Brands under its crop solutions business include Solito and Superdash. Pharmaceutical products, it carries include Betaserc and Duphaston. Link Naturals Products manufactures and retails a range of herbal, health and personal care products, such as Samahan, Link Paspanguwa, Link Kesha and Samahan Balm. CIC Agri Businesses Group's main brands are CIC Pohora, CIC seeds, Golden Corp, Juiceez, Fresheez, CIC Agri fruits, CIC Yoghurt and Tikria. The Feeds group has invested in brands, such as CIC Feeds, CIC Day-old, Chicks and CIC Chicken. The main brands in Chemanex Group's portfolio are stop brake oil, Nexo Bleech, Menara and Panora. Its product categories include speciality chemicals and additives, yarn sizing chemicals, seamless knitted gloves and liners.

Chairman: Mr S H Amarasekera (Acting)

Managing Director / CEO: Mr S.P.S. Ranatunga

Board of Directors:
Mr. E.F.G. Amerasinghe
Mr. R.N. Asirwatham
Mr. R.S. Captain
Mr. S.M. Enderby
Mr. M.P. Jayawardena

Prof. P W M B B Marambe

52 Weeks Low: 46.20                                                                52 Weeks High: 77.70
Average Trading Volume: 6,160

52 Weeks Low: 30.50                                                                52 Weeks High: 54.20
Average Trading Volume: 15,130

Company Financial at a glance:
Click Table to Enlarge

Total Voting shares in Issue: 72,900,000
Total Non - Voting shares in Issue: 21,870,000

Top 20 Shareholders as at 30/09/2013
Percentage of public holding as at 30th September 2013 was 46.37%

Percentage of public holding as at 30th September 2013 was 85.18%

Monday, 27 January 2014

27-Jan-2014 CSE Trade Summary

Crossings - 27/01/2014 & Top 10 Contributors to Change ASPI

Following Stocks Reached New High / Low on 27/01/2014

Top 5 Gainer / Loser / Turnover / Volume for the day

Foreign Activity for the day

Are you ready to face a growing stock market?

The Sri Lankan equity market experienced certain developments during the past few years and is currently poised for growth. The daily average turnover for the current year is Rs.1,132 million, while the net foreign inflow is Rs.826.6 million.

Further on, the All Share Price Index (ASPI) has grown by 5.8 percent since the beginning of the year. The incentives given by the 2013 and 2014 budgets, prevailing monetary indicators (lowering interest rates) and the initiatives taken by the regulator and other stakeholders will continue to have a positive impact on the market.

If we are to maintain growth, it is vital that market stakeholders act with precision and caution. It is only then that we could maximize the returns of a growing market.

At this juncture, it is timely to highlight the initiatives taken by the Securities and Exchange Commission of Sri Lanka (SEC) and the Colombo Stock Exchange (CSE) in the recent past to create a fair and transparent market in which interests of the investors are protected. It is undoubted that a suitable environment is created for new investors to enter the market, while existing investors can be more active.

Yet, it is equally important to note that it does not allow investors to blindly enter the market. It is the duty of the investors to assist the regulator in maintaining fair markets by acting with responsibility.

On that note, today’s article will unfold a few areas that investors should look sharp on when investing in a growing market. It is important to bear in mind that your decisions will not only determine your return to investment but also the performance of the market in general.

Invest based on financial goals.  
Almost all the stocks seem lucrative in a growing market. Don’t get carried away as all of those stocks might not be the ideal pick for you. Make sure that your transactions go in line with your investment goals.

Diversify your investment portfolio.
It is vital to maintain a balance portfolio if you are to maximize returns. Invest in all types of asset classes ranging from risk-free investments as Treasury bills to real estate, bonds and equity while keeping in line with your investment goals. When the market reaps high returns, rational investors will divert the money in other assets/financial tools to the market. Diversion is acceptable as long as it is kept within manageable limits.

Research before you invest.
It is important for investors to do their own research before they enter the market. When you are given recommendations always ask for a justification on the same. More over take time to do your own independent research on the matter.

Never base your decisions simply on unsolicited emails, message board postings and company news releases. Verify the details. Understand a company’s business and its products or services before investing. Look for the company’s financial statements on the CSE website ( Interpret them in the light of current economic, political, legal and economic framework.

Know your investment advisor.
Spend some time checking out the person touting the investment before you invest – even if you already know the person socially. Always find out whether the advisor who contacted you is licenced to act in the capacity of an investment advisor. You can check out the relevant details from the SEC.

Take time off from your busy schedule to talk to your advisor and see if he understands your investment goals. He should have a wide knowledge on financial markets and update himself on current happenings. Above all, bear in mind that knowledge can be gained but integrity cannot.

Be informed about documents and agreements you sign.
There are several documents and agreements you will have to sign when investing in the market. The Client Agreement and the Agreements on Discretionary Accounts are two important agreements investors should pay attention to. Read and understand the terms and conditions prior to signing them. Further on, certain individuals hand over the discretionary power to their advisors. Think twice before you do so.

If it sounds too good to be true, think twice before you invest.
Any investment opportunity that claims you’ll receive “incredible gains” or “a pre-determined rate of return” should be dealt with caution. It is true that investors have earned more by investing in the market compared to risk-free instruments as Treasury bills. Yet, any stock cannot generate abnormal returns within a short time period and the return for a stock cannot be guaranteed in advance. Never enter the market with such a mind frame.

Be especially careful if you receive an unsolicited pitch to invest in a company or see it praised online but can’t find current financial information about it from independent sources.

Protect yourself online.
In present days investors prefer to trade online by themselves. When they are in front of the computer and see prices shooting up, they are tempted to do transactions. This method is recommended for seasoned investors. History taught us bitter lessons of how new investors randomly traded on stocks without sufficient knowledge on the market or the stock.

Credit increases liquidity in the market.  
Investing on credit is important to increase liquidity in the market and can be rather profitable in a growing and liquid market. Yet, it is important that investors refrain from overly trading on credit. However, lucrative the market may be, don’t get carried away.

Don’t blindly follow others.
At times some people might blindly purchase shares simply because others are buying it. Think about whether you are interested in the product and infer why the demand is building up.

Be patient.
However lucrative an opportunity may be and fear that the opportunity will not last, don’t make rash decisions. Resist the pressure to invest quickly and take the time you need to investigate before investing.

As an investor you should keep the following points in your mind

Stocks aren’t just pieces of paper.
When you buy a share of stock, you are taking a share of ownership in a company. 

Collectively, the company is owned by all the shareholders and each share represents a claim on assets and earnings.

There are many different kinds of stocks.
The most common ways to divide the market are by company size (measured by market capitalization), sector and types of growth patterns. Investors may talk about large-cap vs. small-cap stocks or growth vs. value stocks, for example.

Stock prices track earnings.
Over the short term, the behaviour of the market is based on enthusiasm, fear, rumours and news. Over the long term though, it is mainly company earnings that determine whether a stock’s price will go up, down or sideways.

Stocks are your best shot for getting a return over and above the pace of inflation.
Since the end of war, through many ups and downs, the average yearly return of the stock market is 44 percent -- well ahead of inflation and the return of bonds, real estate and other savings vehicles. As a result, stocks are the best way to save money for long-term goals like retirement.

Individual stocks are not the market.
A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

A great track record does not guarantee strong performance in the future.
Stock prices are based on projections of future earnings. A strong track record bodes well but even the best companies can slip.

You can’t tell how expensive a stock is by looking only at its price.
Because a stock’s value depends on earnings, a Rs.100 stock can be cheap if the company’s earnings prospects are high enough, while a Rs.20 stock can be expensive if earnings potential is dim.

Investors compare stock prices to other factors to assess value.
To get a sense of whether a stock is over- or undervalued, investors compare its price to revenue, earnings, cash flow and other fundamental criteria. Comparing a company’s performance expectations to those of its industry is also common -- firms operating in slow-growth industries are judged differently than those whose sectors are more robust.

A smart portfolio positioned for long-term growth includes strong stocks from different industries.
As a general rule, it’s best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on.

It’s smarter to buy and hold good stocks than to engage in rapid-fire trading.
Active trading requires paying close attention to stock-price fluctuations. That’s not so easy to do if you’ve got a full-time job elsewhere. And it’s especially difficult if you are a risk-averse person, in which case the shock of quickly losing a substantial amount of your own money may prove extremely nerve-wracking.

“To know values is to know the meaning of the market” -Charles Dow
(Charles Dow invented the Dow Jones Industrial Average as a journalist in 1896, so his thoughts on stocks should be listened to rather closely)

Company Fact Sheet: Tokyo Cement Company (Lanka) PLC - TKYO:N0000 & TKYO:X0000

About the company:

Established: 1982                    Quoted Date: 1984-01-01              Sector: Manufacturing

Tokyo Cement Company (Lanka) PLC is a Sri Lanka-based company engaged in the manufacturing and selling of cement and ready mixed concrete to the local market. The Company's product lines include Nippon Ordinary Portland Cement (OPC), Tokyo Super Ordinary Portland Cement, Tokyo Super Portland Pozzolana Cement and Tokyo Super Masonry Cement. As of March 31, 2012, The Company had four subsidiaries, namely Tokyo Super Cement Company Lanka (Pvt) Limited, Fuji Cement Company (Lanka) Limited, which were both engaged in manufacturing and selling cement; Tokyo Cement Power (Lanka) Limited, which was still in gestation stage; and Tokyo Cement Colombo Terminal (Pvt) Limited, which was active in the import and distribution of cement.

Chairman: Mr Edgar Gunatunga

Managing Director: Mr S. R. Gnanam

Board of Directors:
Mr A.S.G. Gnanam  (Non Executive Director)
Mr E. J. Gnanam  (Non Executive Director)
Mr R Seevaratnam  (Non Executive Independent Director)
Dr Harsha Cabral  (Non Executive Independent Director)
Dr Indrajit Coomaraswamy  (Non Executive Independent Director)
Mr S.V. Wanigasekera  (Non Executive Director & Nominee Director of Nippon Coke & Eng)
Mr Tatsuro NARUSE  (Non Executive Director & Nominee Director of Nippon Coke & Eng) 
Mr Shiro Takihara  (Non Executive Director & Nominee Director of Nippon Coke & Eng)

52 Weeks Low: 21.50                                                                52 Weeks High: 38.00
Average Trading Volume: 367,410

52 Weeks Low: 22.70                                                                52 Weeks High: 30.30
Average Trading Volume: 274,140

Company Financial at a glance:
Click Table to Enlarge

1. On 04/08/2005 75,000,000 Non - Voting Shares were listed by way of Introduction.
2. O
n 27/12/2007 3,000,000 Ordinary Voting Shares and 15,000,000 Non - Voting Shares of the company were listed , pursuant to a capitalization of reserves in the proportion of 1:5.
3. On 01/02/2010 Sub Divided Voting Shares in the proportion of 1:10 were started to trading.
4. On 29/06/2010 22,500,000 Ordinary Voting Shares and 11,250,000 Non - Voting Shares of the company were listed , pursuant to a capitalization of reserves in the proportion of 1:8.
5.On 21/08/2013 20,250,000 Ordinary Voting Shares and 10,125,000 Non - Voting Shares of the company were listed , pursuant to a capitalization of reserves in the proportion of 1:10.

Total Voting shares in Issue: 222,750,000
Total Non - Voting shares in Issue: 111,375,000

Top 20 Shareholders as at 30/09/2013

Percentage of public holding as at 30th September 2013 was 25.5%

Non Voting:

Percentage of public holding as at 30th September 2013 was 100.00%

Sunday, 26 January 2014

Realistic Investing Expectations

Over the long term stocks have provided us with great average return results. But this average return masks a great deal of volatility, because returns have fluctuated within a very wide band.

This extreme volatility is the chief risk of investing in stocks, but it is a risk that tends to recede from investors memories after a lengthy period of generally rising stock prices.

Those investors new to investing in stocks may underestimate the volatility of stocks because volatility has been muted in recent years.

Time greatly reduces, but certainly does not eliminate the volatility in returns from stocks. On the other hand, there is no guarantee that you will earn above average returns even if you hold stocks for two decades or more.

Investors who are relatively new to investing in stocks may benefit from some perspective about bear markets.

During the bear markets, Indexes declined an average of 25-35%. Although the average bear market lasted a little longer than 12 months, it took an average of almost 20 months for the Indexes to return to the levels achieved before the market downturns.

Although no one can reliably predict the timing of bear markets (or bull markets, for that matter), a prudent investor should understand the extent to which stock prices can decline and should be prepared to "ride out" these periods when they occur.

The big danger from bear markets is that investors will sell at or near the bottom of the downturn. Those who got out of stocks missed an extraordinary rebound in stock market performance.

Since risk is inescapable when investing in stocks, perhaps the greatest risk is that you will never invest in stocks because you can never be sure when is "the right time" to invest.

Uncertainty is a permanent feature of the investing landscape, and trying to discern the ideal time to invest is almost always a futile exercise.

Don't be swayed by market fluctuations or the opinions and predictions from market analysts and forecasters!

Your investment strategy and expectations should all be based on your personal objectives, time horizon, risk tolerance and financial situation.

It should not be determined by the direction of the financial markets or the opinions of "The Experts!"

Saturday, 25 January 2014

Financial Ratios and Bankruptcy Predictions

Financial Ratios
There are many financial ratios that can be calculated. Some are more useful than others. You should determine which ratios are the most important in your industry. 

Listed here are thirteen ratios that are most often used by financial analysts. 
Solvency Ratios: Quick Ratio, Current Ratio, Current Liabilities to Net Worth, Total Liabilities to Net Worth; Fixed Assets to Net Worth; Efficiency Ratios: Collection Period, Inventory Turnover, Assets to Sales, Sales to Net Working Capital, Accounts Payable to Sales; Profitability Ratios: Return on Sales, Return on Assets, Return on Equity.

The following is a more complete list of Ratios and synopsis of the information they provide. Commonly applied ratios used in financial analysis are defined below in seven groups for convenience. These groupings should not restrict their usage.

A. Solvency Ratios: Solvency, or liquidity, ratios are used to measure the financial soundness of a business and how well it can satisfy its obligations. They are designed to help measure the degree of financial risk that a business faces. "Financial risk," in this context, means the extent to which the business has debt obligations that must be met, regardless of the cash flow. These ratios are of particular interest to short term creditors.

1. Absolute Liquidity Ratio
This ratio shows how much of a firm’s current liabilities can be covered by its most liquid assets, cash and marketable securities. The liquidity ratio measures the extent to which a company or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors. Also called cash asset ratio or cash ratio. Current liabilities are payable within one year.

Absolute Liquidity Ratio = (Cash + Marketable Securities) / Current Liabilities

2. Acid Test Ratio
The Acid Test, or Quick, Ratio differs from the Absolute Liquidity Ratio to the extent that net Accounts Receivable is considered. It is another way to determine whether a company can make their day-to-day payments.

Acid Test Ratio = Quick Ratio = (Cash + Marketable Securities + Accounts Receivable (net)) / Current Liabilities

3. Current Ratio
This is also called the working capital ratio. Current or trading assets include items that can be converted to cash within one year of normal operations. They include cash, marketable securities, accounts receivable, as considered in the acid test ratio, while adding the value of inventory. Although short term creditors may feel more comfortable when the debtor firm has a high current ratio in comparison to its competitors, too high of a current ratio may signify inefficiency, since too much may be tied up in non productive assets. Generally, any value of less than 1 to 1 suggests an over-reliance on inventory or other current assets to pay off short-term debt. Higher ratios indicate a better buffer between current obligations and a firm's ability to pay them. The quality of current assets is a critical factor in interpreting this analysis.

Current Ratio = Current Assets / Current Liabilities

4. Accounts Payable to Sales Ratio
This ratio measures how a firm pays its creditors in relation to its sales volume - the speed with which a company pays vendors relative to sales. A low percentage is usually considered healthy. Numbers higher than typical industry ratios suggest that the company is using suppliers to float operations.

Accounts Payable to Sales Ratio = Accounts Payable / Net Sales

5. Accounts Receivable Turnover Ratio
This ratio measures a firm's efficiency in freeing up working capital by providing the rate at which working capital tied up in receivables is converted to cash. The higher the turnover, or number of times in a given period that receivables are turned into cash, the more liquid are the firm's receivables. For industry wide comparison, Net Sales is often used. Some prefer to use Total Credit Sales. Net Sales is the total of the invoices billed during a given period, less any discounts and returns. Average Accounts Receivable is the average of the beginning and ending balances for a given period.

Receivables Turnover = Total Credit Sales / Average Receivables Owing

6. Assets to Sales Ratio
This ratio measures the percentage of investment in assets that is required to generate the current annual sales level. A high percentage may indicate that the firm is not being aggressive enough in its marketing effort, or it is not fully employing its assets. A low percentage may indicate that the firm is selling more than can be safely covered by its as sets.

Assets to Sales Ratio = Total Assets/ Net Sales

7. Average Collection Period
This ratio provides the average period required to collect receivables. It provides an indication of the quality of a firm’s receivables and serves as a measure of the efficiency of its credit department in granting credit and collecting payment. The ratio may be compared to both the firm's credit terms and the industry average to measure effectiveness. If credit transactions vary, such as a retailer selling both on open credit and instalment, this ratio should be calculated for each category. Discounted notes, which create contingent liabilities, must be added back into receivables.

Average Collection Period = 365 (Accounts + Notes Receivable) / Annual Net Credit Sales

8. Collection Index
The collection index provides insight similar to that of the average collection period.

Collection Index = Collections Made During Period / Accounts Receivable Owing at Start of Period

9. Past Due Index
This index can be useful in trend analysis to indicate whether there is improvement or deterioration in collection policies and procedures.

Past Due Index = Total Amount Past Due / Total Sum Uncollected

10. Bad Debt Loss Index
This index may be calculated on either credit sales or total net sales. An increase in this index is not necessarily bad, if a more relaxed credit policy results in more sales and profit than losses.

Bad Debt Loss Index (BDLI) = Bad Debt Losses / Total Credit Sales

11. Basic Defence Interval
This provides the period of time a firm can cover its cash expenses without additional financing should all revenues cease.

Basic Defence Interval (SDI) = 365 (Cash + Receivables + Marketable Securities) / (Operating Expenses + Interest + Income Taxes)

12. Inventory Turnover Ratio
This ratio provides an indication of the liquidity of inventories. A low ratio may indicate that too much cash has been invested in inventory.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

13. Net Sales to Inventory Ratio
An annual increase in this ratio is often considered healthy, while a decline may indicate problems. A low ratio may indicate obsolete inventory, over commitment of investment in inventory, poor purchasing policies, or contingency stockpiling.

Sales to Inventory Ratio = Net Sales / Inventory

B. Working Capital Ratios:
Gross working capital describes current assets, while net working capital is current assets minus current liabilities. Inadequate working capital can be corrected by lowering sales or increasing assets by retaining earnings or selling stock.

1. Cash Available to Finance Operations Ratio
This ratio roughly indicates whether there is sufficient cash to finance current operations. It is similar to the basic defence ratio, except the depreciation is omitted from the denominator, since it is not a cash drain.

Cash Available to Finance Operations Ratio = 365 (Cash + Receivables + Marketable Securities) / (Operating Expenses - Depreciation +Interest +Income Taxes)

2. Current Asset Turnover Ratio
This ratio is useful in identifying trends in the turnover and profitability of current assets. The ratio is slightly less accurate, if depreciation is included.

Current Asset Turnover Ratio = (Cost of Good~ Sold + Expenses + Interest + Taxes - Depreciation) / Average Current Assets

3. Current Liabilities to Net Worth Ratio
This ratio measures the proportion of funds current creditors contribute to operations, or the amounts due creditors within a year as a percentage of the shareholders’ investment. An increasing ratio indicates decreasing security for creditors.

Current Liabilities to Net Worth Ratio = Current Liabilities / Tangible Net Worth

4. Current Liabilities to Inventory Ratio
This measures the extent to which a firm relies on sales to generate funds to pay current liabilities.

Current Debt-to-Inventory = Current Liabilities / Inventory

5. Working Capital Ratio 
This is another name for the current ratio, a liquidity ratio. If the ratio is less than one then there is negative working capital. A high working capital ratio is not always a good thing, it could indicate that there is too much inventory or there is not enough investment of excess cash.

Working Capital Ratio= Current Assets / Current Liabilities 

6. Long Term Liabilities to Working Capital Ratio
Normally this ratio should not exceed 100%

Long Term Liabilities to working Capital Ratio = Long Term Debt / Net Working Capital

7. Inventory to Net Working Capital Ratio
Overstocking can lead to bankruptcy. Normally this ratio should not exceed 80%, but should be compared with the industry average. This ratio is often used in conjunction with the inventory turnover ratio.

Inventory to Net Working Capital = Inventory / Net Working Capital

8. Working Capital Turnover Ratio
This ratio indicates whether a firm is over invested in fixed, or slow, assets. It should be compared with the industry average. It complements the sales to net working capital ratio.

Working Capital Turnover = Net Sales / Net Working Capital

9. Sales to Net Working Capital Ratio
This measures the number of times working capital is turned over annually in relation to net sales. A high turnover rate may indicate excessive sales volume in relation to the investment in the business, or extensive reliance on credit. This ratio should be used in conjunction with the working capital turnover ratio.

Sales to Net Working Capital Ratio = Sales / Net Working Capital

C. Leverage Ratios:
These ratios indicate proportionate risk to a firm's owners and creditors. Leverage can increase both earning and losses.

1. Debt and Preferred Ratio
This ratio measures the extent of financing contributed by creditors and preferred owners.

Debt and Preferred Ratio= (Long Term Debt + Preferred Funds) / Total Capital Employed

2. Debt Ratio
This ratio measures the percentage of total funds supplied by creditors. Creditors normally prefer a lower ratio, but management may use leverage to produce a higher ratio.

Debt Ratio = (Current + Long Term Debt) / Total Assets

3. Debt to Equity Ratio
This ratio provides the relative positions of creditors and owners.

Debt to Equity Ratio = (Long Term Debt + Preferred) / Common Stockholders' Equity

4. Equity Ratio
This ratio shows the share of the firm's capital provided by equity holders.

Equity Ratio = Common Shareholders' Equity / Total Capital Employed

D. Coverage Ratios: 
These ratios measure the protection offered creditors and a firms ability to attract new shareholders and arrange its debt advantageously.

1. Cash Flow to Liabilities Ratio 
This ratio is used to compare statements with a firm, rather than industry, because of varying depreciation practices. Ideally, liquidity would increase as due dates for debt maturity approach.

Cash Flow to Liabilities Ratio = (Net Income + Depreciation) / Total Liabilities

2. Current Assets to Total Liabilities Ratio
This ratio measures protection for both short and long term liabilities. A ratio in excess of 1OO% indicates that long term creditors may be paid out of working capital if the firm is liquidated.

Current Assets to Total Liabilities Ratio = Current Assets / (Current + Long Term Debt)

3. Dividend Payout Ratio
This ratio is the percentage of earnings received by shareholders during each period.

Payout Ratio = Dividends per Share / Earnings per Share

4. Fixed Assets to Net Worth Ratio
Disproportionate investment in illiquid fixed assets decreases the amount of funds available for daily operations and can leave a firm vulnerable to unexpected hazards and adverse changes in the business climate.

Fixed Assets to Net Worth Ratio = (Fixed Assets (net) - Intangibles) / Tangible Net Worth

5. Shareholder's Equity Ratio
A low ratio of equity to assets may precede difficulty in meeting interest charges and debt obligations.

Equity Ratio = Shareholders' Equity / Total Assets

6. Tangible Net Worth to Total Debt Ratio
This ratio measures the proportion between the shareholders' capital and that contributed by creditors. It is the inverse of the debt ratio.

Tangible Net Worth to Total Debt Ratio = Tangible Net Worth / Total Debt

7. Times Interest Earned Ratio
The margin between income and interest payments is considered a good indication of a firm's ability to meet interest payments.

Times Interest Earned Ratio = Earnings Before Interest and Taxes / Interest Expense

8. Total Liabilities to Net Worth
This ratio relates debt to equity. The higher this ratio, the less protection for creditors. Intangible assets, such as good will or capitalized research and development, should be excluded from net worth.

Total Liabilities to Net Worth Ratio = (Current + Deferred Debt) / Tangible Net Worth

E. Profitability Ratios:
These ratios provide the answer to management's overall effectiveness ranked by returns generated on sales and investments.

Gross profit is the difference between net sales and the cost of goods sold, which is the sum of the expenses required to manufacture, purchase, or service customers.

Net profit after taxes is the basic measure of a firm's operating success. It is gross profit less all expenses directly applicable to the firm’s operations, including income taxes. Any surplus (profit) can be added to retained earnings or distributed to shareholders as dividends. When expenses exceed net sales and a loss occurs, this loss is charged against net worth as a reduction to the equity account.

1. Capital Turn Over Ratio
This ratio indicates whether investment is adequately proportionate to sales and whether a potential credit problem or management problem exists. A high ratio may indicate over trading or under capitalization, while a low ratio may indicate over-capitalization.

Gross Tangible Fixed Assets – Land Ratio = Net Sales / Tangible Net Worth

2. Earnings per Share
It should be noted that all significant aspects of a firm's performance cannot be reduced to a single figure as represented by this highly publicized financial ratio.

Earnings Per Share (EPS) = (Earnings After Taxes - Preferred Dividends) / Average Number of Common Shares Outstanding

3. Earning Power
Earning power is increased by heavier trading on assets, by decreasing cost to lower the break even point, or by increasing sales faster than the accompanying rise in costs. Usually, sales is the key.

Earning Power = Net Sales / Tangible Assets x Earnings After Taxes / Net Sales

4. Gross Profit on Net Sales Ratio
This ratio provides the average mark up, or margin, on goods sold. It can help identify trends in a firm's credit policy, mark-ups, purchasing, and general merchandising. It may vary widely among firms in the same industry, according to sales, location, size, and competition.

Gross Margin Ratio = Gross Margin / Net Sales

Gross Profit Rate = (Net Sales - Cost of Goods Sold) / Net Sales

5. Management Rate of Return
This rate quantifies the efficient use of assets compared with a target rate of return.

Rate of Return = Operating Income / ( Fixed Assets + Net Working Capital)

6. Maintenance and Repairs to Net Sales Ratio
This is an example of an expense ratio by an expenditure category that might be important in a particular industry.

Sum Spent on Repairs per Dollar of Sales = Maintenance and Repair Costs / Net Sales

7. Net Operating Profit Ratio
When there are significant financial charges, this ratio is preferable to the return on assets ratio. Net profit to net worth is influenced by the method of financing.

Net Operating Profit Ratio = Earnings Before Interest and Taxes / Tangible Net Worth

8. Net Profit to Tangible Net Worth
This ratio measures management's ability to realize an adequate return on the capital invested. It is often compared with an industry average.

Net Profit Rate = Earnings After Taxes / Tangible Net Worth

9. Net Profits to Net Working Capital
Working capital provides the cushion to carry inventories and receivables and finance ordinary business operations.

Net Profits to Net Working Capital = Earnings After Taxes / Net Working Capital

10. Operating Expenses Ratio
This ratio shows management's ability to adjust expense items to changing sales. Trend analysis identifies any problem category. The higher this ratio the more sales are being absorbed by expenses. Total operating expenses include cost of goods sold, selling, administrative, and general expenses.

Operating Expenses Ratio = Total Operating Expenses / Net Sales

11. Operating Ratio
This ratio measures the profitability of normal business operations. It excludes other revenue, or loses, extraordinary items, interest on long term debt, and income taxes. It is usually compared with industry averages.

Operating Ratio = Operating Income / Net Sales

12. Price Earnings Ratio
This ratio is used to compare alternate investment opportunities. It may be interpreted as the value placed on a particular firm's earnings.

Price Earnings Ratio = Market Price Per Share of Common Stock / Earnings Per Share

13. Rate of Return on Common Shareholders' Equity
This ratio is based on book value and is used for comparison with similar firms within the same industry.

Rate of Return = (Earnings After Taxes - Preferred Stock Dividends) / (Tangible Net Worth - Par Value of Preferred Stock)

14. Rate of Return on Total Assets
This measures management's ability to earn a return on the firm's assets without regard to variations in the method of financing.

Rate of Return on Total Assets = (Earnings After Taxes + Interest Expense) / Average Total Assets during the Year

15. Return on Sales
This rate is usually compared with the industry average. The higher the rate, the better the firm is able to survive a downturn. If the rate is low, a high turnover of inventory is required to obtain an adequate return on investment. Normally this rate is fairly constant over time.

Net Profit Rate = Earnings After Taxes / Net Sales

16. Turnover of Total Operating Assets Ratio
This ratio tracks over investment in operating assets. Trend analysis indicates direction of any change.

Turnover of Total Operating Assets = Net Sales / Total Operating Assets


Financial Jeopardy and the Use of the "Z-Score"

The failure prediction model provides a means to assess a firm's financial health in terms of the probability of future bankruptcy. This model employs a multiple discriminant analysis of five significant financial ratios to calculate an overall "Z- Score."

Z-Score =1/2a + 1.4b +3.3c + 0.6d +1.0e,


a = Working Capital to Total Assets = Net Working Capital

This ratio measures net liquid assets relative to total capitalization. Consistent operating losses will cause shrinking current assets relative to total assets.

b = Retained Earnings to Total Assets = Retained Earnings / Total Assets

This ratio measures a firm's success in using its total asset base to generate earnings. However, manipulated retain earnings data can distort the numerical results.

c = EBIT to Total Assets = EBIT / Total Assets

The earnings before interest and taxes (EBIT) to total assets ratio, or the rate of return on assets, measures the productivity of a firm's assets. Maximizing this rate is not the same as maximizing the rate of return on equity, since different degrees of leverage can affect conclusions.

d = Equity to Debt = (Market Value of Common + Preferred Stock) / (Total Current Debt + Long Term Debt)

This ratio shows the amount a firm's assets can decline in value before liabilities exceed assets and the firm becomes insolvent.

e = Sales to Total Assets = Total Sales / Total Assets

This ratio is a measure of the firm's ability to generate sales.

The "Z-Score" is a test to determine whether additional analysis is required, not an end in itself. It is best to plot the "Z-Score" over time and compare it with averages for the industry. A firm may have had a constantly low "Z-Score" for years and still have performed satisfactorily.

Z- Score Interpretation

Professor Altman's data indicates that:

Z Score Prediction

3.00 or more Little chance of bankruptcy

1.81 to 2.99 Some chance of bankruptcy

1.80 or less Large chance of bankruptcy

It is noted that variants to Professor Altman's "Z-Score" formula have been calculated for a number of industries. The analyst should examine the databases used to develop these models before placing too much reliance on them.