Earnings Performance, Efficiency Analysis, and Calculating Financial Strength

1. Earnings Performance, Efficiency Analysis, and Calculating Financial Strength Calculations and Definitions

2. Earnings Performance Analysis

3. Calculation: (January 1 total Assets + December 31 Total Assets) / 2 = Average Total Assets Calculation: NetIncome after Federal Income tax / Average total assets = Rate Earned on total Average Assets Rate earned on average total assets

4. Rate earned on average total assets • Definition: This total shows how well a business is using it’s assets to earn net income.

5. Calculation: (January 1 Stockholder’s Equity + Dec 31 Stockholder’s Equity) / 2 =Average Stockholder’s Equity Calculation: Net Income After Federal Income Tax / Average Stockholder’s Equity = Rate Earned on Average Stockholder’s Equity Rate earned on average stockholders equity

6. Rate earned on average stockholders equity • Definition: Investor’s use this for several businesses to determine the best investment.

7. Calculation: Net Income After Federal Income Tax / Net Sales = Rate Earned on Net Sales Definition: It is used when a business that carefully controls costs should earn a consistent rate on net sales form year to year. Rate earned on net sales

8. Calculation: Net Income After Federal Income Tax / Shares of Capital Stock Outstanding = Earnings Per Share Definition: Stockholder’s and management often use this as a measure of success. Earnings per share

9. Calculation: Market Price Per Share / Earnings Per Share = Price Earnings Per Ratio Definition: This relates the profitability to the amount that investor’s currently pay for the stock. Price-earnings ratio

10. Efficiency Analysis

11. Calculation: (Beginning Book Value of Accounts Receivable + Ending Book Value) / 2 = Average Book Value of Accounts Receivable Calculation: Net Sales on Account / Average Book Value = Accts Receivable Turnover Ratio Accounts Receivable Turnover Ratio

12. Accounts Receivable Turnover Ratio • Definition: this ratio monitors a business’ accounts receivable collection efficiency.

13. Calculation: Days In Year / Accounts Receivable Turnover Ratio = Average Number of Days For Payment Definition: The average number of days for the customers to pay their accounts. Average Number of Days for Payment

14. Calculation: (January 1 Mdse Inventory + Dec 31 Mdse Inventory) / 2 = Avg Merchandise Inventory Calculation: Cost of Merchandise Sold / Avg Mdse Inventory = Merchandise Inventory Turnover Ratio Merchandise Inventory Turnover Ratio

15. Merchandise Inventory Turnover Ratio • Definition: This ratio can be used to monitor merchandise inventory efficiency.

16. Financial Strength

17. Calculation: Total Current Assets – Total Current Liabilities = Working Capital. Use for both Current year and prior year. Definition: this is the amount (stated in dollars) is the amt of current assets available to the business after the current liabilities are paid. Working Capital

18. Calculation: Total Current Assets / Total Current Liabilities = Current Ratio Definition: a ration that shows the numeric relationship of current assets to current liabilities. Current Ratio

19. Calculation: Total Quick Assets(Cash +Accounts Receivable) / Total current Liabilities = Acid-Test Ratio Definition: those current assets that are cash or can quickly be turned into cash. Acid-Test Ratio

20. Calculation: Total Liabilities / Total Assets = Debt Ratio Definition: this ratio shows the percentage of assets that are financed with borrowed capital(liabilities). Debt Ratio

21. Calculation: Total Stockholder’s Equity / Total Assets = Equity Ratio Definition: This ratio shows the percentage of assets that are provided by Stockholder’s equity. Equity Ratio

22. Calculation: Total Stockholder’s Equity / Shares of Capital Stock Outstanding = Equity per share Definition: this tells stockholder’s how much ownership of the company each share represents. Equity Per Share

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