- Net Sales
- Gross Margin
- Selling, General Administrative Expenses
- Operating Margin
- EBITDA
- Pre-tax Income
- Net Income
- Tax Expense
- Depreciation Expense
- Capital Expenditures
- Interest Coverage Ratio
- Free Cash Flow
- Effective Tax Rate
- Current Assets
- Current Liabilities
- Working Capital
- Cash
- Cash Ratio
- Quick Assets
- Quick Ratio
- Current Ratio
- Accounts Receivable
- Accounts Receivable Turnover (Annualized)
- Days Sales Outstanding
- Inventory
- Percent of Inventory Financed by Vendors
- Inventory Turnover (Annualized)
- Number of Days Sales in Inventory
- Inventory to Working Capital
- Accounts Payable
- Accounts Payable Turnover (Annualized)
- Total Debt
- Stockholders' Equity
- Total Debt to Equity Ratio
- Tangible Net Worth
- Total Liabilities to Tangible Net Worth Ratio
- Total Debt to Net Tangible Equity Ratio
- Total Assets
- Total Debt to Assets Ratio
- Net Tangible Assets
- Short-Term Debt
- Short-Term Debt as a Percent of Total Debt
- Total Liabilities
- Total Liabilities to Equity Ratio
- Unqualified
- Unqualified with Explanation
- Qualified
- Disclaimer of Opinion (no opinion)
- Adverse Opinion
- Unaudited
- Restated Income Statement
- Reclassified Income Statement
- Restated Balance Sheet
- Reclassified Balance Sheet
- Restated Cash Flows
- Reclassified Cash Flows
Performance Ratios
Net Sales - The dollar volume of transactions involving company products and services net of returns, allowances and sales discounts.
Gross Margin - Also known as gross profit. The value is computed by deducting cost of goods sold from net sales. Where cost of goods sold represents the cost of materials, labor and factory overhead needed to bring to a marketable state the goods that have been sold.
Selling, General and Administrative Expenses - Represent costs that are not specifically identifiable with or assigned to production. These include marketing, selling, research and development, and administrative expenses.
Operating Margin - The amount of revenue remaining after all operating expenses subtracted from net sales.
EBITDA - Earnings before interest, taxes, depreciation and amortization expense.
Pre-tax Income - Operating results before income taxes have been deducted.
Net Income - Also called net earnings and net profit. Represents the net operating results of the company for the period.
Tax Expense - The tax requirement estimated by management for the period.
Depreciation Expense - An allowance for wear or age made to the value of a fixed asset, allocating its cost over its estimated useful life.
Capital Expenditures - Represents the purchase of assets whose life expectancy is greater than one year. Examples are plant, property and equipment.
Interest Coverage Ratio - Also known as Times Interest Earned. Measures the number of times profits cover interest charges. Determines the ability of a company to meet current interest charges without impairing normal operations. The value is computed by dividing earnings before interest, taxes and depreciation by interest expense.
Free Cash Flow - This measure is very useful in assessing a company's financial health because it strips away all the accounting assumptions built into earnings. A company's earnings may be high and growing, but until you look at free cash flow, you don't know if the company has actually generated money in a given year or not. Free cash flows represent real cash, while earnings do not. It is cash from operations (also called operating cash flow) minus capital expenditures, which are investments in property, plant, and equipment. The formula for calculating free cash flow is Operating Cash Flow (OCF) - Capital Expenditures.
Effective Tax Rate - The net rate a taxpayer pays on pre-tax income. It is calculated by dividing the total tax paid by taxable income.
Liquidity Ratios
Current Assets - Are the resources of a company that are constantly changing form or being turned over in the normal course of business. These normally are cash, short-term marketable securities, accounts receivable, and merchandise inventory.
Current Liabilities - Are obligations maturing within one year from the date of the balance sheet. Also included are demand notes which, although carrying no maturity date, any be presented for payment any time at the option of the holder.
Working Capital - Measures a company's ability to pay off current obligations with current assets. The value is computed by subtracting total current liabilities from total current assets. Negative working capital could indicate a liquidity problem.
Cash - Money on deposit or on hand comprises cash. This includes currency, personal and bank checks, drafts and money orders.
Cash Ratio - Also known as the Liquidity Ratio. Measures a company's ability to pay its current bills. The value is computed by dividing cash and short-term marketable securities by total current liabilities.
Quick Assets - Also known as Liquid Assets. Consists of cash, short-term marketable securities and accounts receivable.
Quick Ratio - Also known as the Acid Test Ratio. Measures the number of dollars of liquid assets available to cover each dollar of current liabilities. The value is computed by dividing liquid assets by total current liabilities, where liquid assets is comprised of cash, short-term marketable securities and accounts receivable.
Current Ratio - Measures a company's ability to meet its current obligations (i.e., the degree of protection afforded short-term creditors by current assets). The value is computed by dividing current assets by total current liabilities.
Efficiency Ratios
Accounts Receivable - Amounts customers owe a company from sales of goods or services that the company expects to collect within one year.
Accounts Receivable Turnover (Annualized) - Measures the number of times accounts receivable are collected during the year. This ratio measures the efficiency of credit and collection policies and the quality of outstanding average accounts receivable. The value is computed by dividing sales for the period by average accounts receivable for the period, multiplied by the applicable factor to annualize sales.
Days Sales Outstanding - Represents the average number of days to convert receivables into cash. The value is computed by dividing average accounts receivable for the period by annualized sales for the period, multiplied by 365.
Inventory - All goods and materials available for sale (in the case of wholesalers, retailers, and distributors) or raw materials and supplies, work in process, and finished goods (in the case of manufacturers).
Percent of Inventory Financed by Vendors - Measures the total amount of credit that vendors have extended to finance current inventory level. Computed as accounts payable balance at the end of the period divided by inventory balance at the end of the period, and multiplying the result by 100
Inventory Turnover (Annualized) - Measures how quickly inventory is sold. The value is computed by dividing the cost of goods sold for the period by the average inventory for the period, multiplied by the applicable factor to annualize cost of goods sold.
Number of Days Sales in Inventory - Measures the number of days required to sell the inventory balance at the end of the period. The value is computed by dividing 365 by inventory turnover.
Inventory to Working Capital Ratio - Is an indicator of whether a company can adequately finance its inventory. Ideally, the number should be less than 1. The value is computed by dividing the ending inventory balance by working capital at the end of the period.
Accounts Payable - Money owed to suppliers for purchases on credit.
Accounts Payable Turnover (Annualized) - Measures the number of times accounts payable are paid during the year. The value is computed by dividing cost of sales for the period by average accounts payable for the period, multiplied by the applicable factor to annualize sales.
Leverage & Debt Coverage
Total Debt - Measures the total liabilities of an entity that are evidenced by a written promise to pay. It excludes operating debt because it is a function of the firm's operations and its essential business and contractual relationship to its suppliers rather than external lenders. (NOTE: Many lenders define debt as equal to total liabilities.)
Stockholders' Equity - Measures the ownership equity in a business. The value is computed by subtracting total liabilities from total assets.
Total Debt to Equity Ratio - Measures a company's leverage or the safety of principal on long-term debt. The larger the ratio, the riskier the enterprise. The value is computed by dividing total debt by total equity.
Tangible Net Worth - Computed by subtracting intangible assets (i.e., anything nonphysical, such as goodwill, trademarks, and patents, that have value for a company) from stockholders' equity.
Total Debt to Tangible Net Worth Ratio - Measures a company's leverage or the safety of principal on long-term debt. The larger the ratio, the riskier the enterprise. The value is computed by dividing total debt by total equity minus intangible assets.
Total Assets - The total of all assets owned by a company. These things might be liquid assets such as cash and short-term investments, physical assets such as buildings, trucks, inventories of products and equipment or intangible assets such as goodwill, trademarks and patents
Total Debt to Assets Ratio - Also known as Debt Ratio. Measures the degree of protection from loss afforded the company's creditors by the total assets of the company. The value is computed by dividing total debt by total assets.
Net Tangible Assets - Computed by subtracting intangible assets from total assets.
Short-Term Debt - Obligations owing to banks or others and payable with the next 12 months.
Short-Term Debt as a Percent of Total Debt - Measures a company's short-term cash obligations by showing the proportion of overall debt coming due in the current year. The value is computed by dividing short-term debt by total debt, and multiplying the result by 100.
Short-Term Debt as a Percent of Working Capital - Measures a company's short-term cash obligations by showing the proportion of overall debt coming due in the current year versus its net current assets. The value is computed by dividing short-term debt by working capital, and multiplying the result by 100.
Total Liabilities - A company's debts to its lender, suppliers of goods and services, taxing authorities and others.
Total Liabilities to Equity Ratio - Measures the degree of protection that exists for creditors. The lower the ratio the better. The value is computed by dividing total liabilities by total equity.
Total Liabilities to Tangible Net Worth Ratio - (sometimes shortened to "Liabilities to Net Worth Ratio") - Measures the degree of protection that exists for creditors. The lower the ratio the better. The value is computed by dividing total liabilities by total equity minus intangible assets.
Obligations
Long-term obligations - Payment obligations under long-term borrowing arrangements, usually owed to banks or bond holders.
Capital lease obligations - Payment obligations under leases classified as being capital leases pursuant to FASB Statement of Financial Accounting Standards #13, for accounting purposes the transaction is viewed as an installment purchase as title typically vests with the lessee at the expiration of the lease.
Operating lease obligations - Off-balance sheet obligations where title does not pass at expiration of lease term, usually for such items as real estate or equipment.
Rate of Return
Return on Equity - A profitability ratio. Measures the after tax return on equity capital. This is an indication of management's performance. The value is computed by dividing net income available to common stockholders by total equity at beginning of year.
Return on Net Tangible Equity - A profitability ratio. Calculated by dividing a company's net earnings available to common stockholders by total equity less intangible assets (both of these amounts are as of the beginning of the period).
Return on Total Assets - A useful indicator of how profitable a company is relative to its total assets. It also gives an idea as to how well the company is able to use its assets to generate earnings. Calculated by dividing a company's earnings by its average total assets. Sometimes this ratio is referred to as "return on investment".
Return on Net Tangible Assets - A profitability ratio. Calculated by dividing a company's earnings available to common stockholders by its average net tangible assets (i.e., total assets less intangible assets).
Scores
FRISK2 Score - A proprietary score indicating the probability of default for a company over a 12 month horizon. The CreditRiskMonitor FRISK2 scores are a mathematically-derived opinion, calculated daily with inputs including the most recently available information in the CRMZ database, based on a model created by Dr. Camilo Gomez. Inputs used to calculate the score include the most recently available financial statements each day, Altman Z'', Agency ratings, and daily stock price volatility over the preceding 6-month period. The model is a structural statistical model and has been extensively back-tested on the histories of 10,000 companies. It is intended as a first step in credit analysis. Subscribers who log on can learn more about the model, which is also a part of our Credit Limit Service, by reading the CreditRiskMonitor Credit Limit Service White Paper and viewing the Flash Introduction in the About Us section of this web site. Those without a password are invited to contact us at info@crmz.com for more information. The model is updated and the CRMZ implementation of it is improved from time to time, and may be modified without notice. Historical FRISK2 scores shown in the FRISK2 graph page and in the Portfolio FRISK2 History page may have been updated, based on new information or improvements to the model, more recently than the dates shown.
The FRISK2 score is reported on a 1 to 10 scale:
| FRISK2 | Probability of default within 12 months | ||
|---|---|---|---|
| From | To | ||
| Best | 10 | 0% | 0.3% |
| 9 | 0.3% | 0.4% | |
| 8 | 0.4% | 0.9% | |
| 7 | 0.9% | 1.9% | |
| 6 | 1.9% | 3.7% | |
| 5 | 3.7% | 7.4% | |
| 4 | 7.4% | 10.1% | |
| 3 | 10.1% | 14.1% | |
| 2 | 14.1% | 21.0% | |
| Worst | 1 | 21.0% | 50.0% |
| Altman's Z"-Score The Z"-Score was developed by Dr. Edward I. Altman of New
York University in the early-1990's. This model is applicable to firms in the manufacturing, merchandising and service sectors.
The Z"-Score calculates and combines 4 financial ratios, assigning each a different weighting.
Although the numbers that go into calculating the Z"-Score (and a company's financial soundness) are sometimes influenced by external factors, it provides a good tool for analyzing the ups and downs of a company's financial stability over time. The score is computed as follows:
Total Working Retained
EBIT Equity Capital Earnings
Z" = -------- * 6.72 + ------------- * 1.05 + --------- * 6.56 + ---------- * 3.26
Total Total Total Total
Assets Liabilities Assets Assets
Note that the Z"-Score is different than the original Z-score, developed by Altman in the 1960's. The original Z-Score has as one of its variables the asset turnover ratio. As this variable is industry sensitive, the Z"-model, which omitted this variable, was developed. CreditRiskMonitor computes the Z"-score on a quarterly basis, provided the variables required by the scoring model are reported. Previously, we used the company's quarterly EBIT in this calculation. Now we use the company's EBIT for the twelve trailing months, as this provides a result that is less seasonal and less volatile. One of the 4 variables used to compute Altman's Z"-Score is the ratio of working capital to total assets. As many of the companies in the energy sector are highly leveraged, they generally have low working capital. Thus, we have found that their Z"-Scores are adversely impacted and an abnormally high percentage of companies in this sector are in the neutral and fiscal danger ranges. |
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Auditor Opinions
Unqualified - The Auditor's opinion on the financial statements is given without any reservations. Such an opinion generally consists of 3 paragraphs. The opening paragraph differentiates between the responsibilities of management and the auditor for the financial statements. The next or scope paragraph specifies that their audit was conducted in accordance with generally accepted auditing standards (GAAS). It contains an explanation of an audit and acknowledges that an audit provides only reasonable assurance about whether the financial statements are free of material misstatement. In the last or opinion paragraph, the auditor states that the company's financial statements were prepared in accordance with generally accepted accounting principles (GAAP) and present fairly, in all material respects, the results of operations and financial condition of the company for the period audited.
Unqualified with Explanation - Is an Unqualified opinion but includes comments by the auditors on matters they feel are important to the understanding of the financial statements or their audit. May cover one of the following explanatory issues:
- Uncertainty as to Going Concern - where the auditor concludes that substantial doubt exists about the entity's ability to continue for a reasonable period of time
- Part of audit was performed by another auditor - where the principal auditor does not accept full responsibility for the opinion on the consolidated financial statements, the opening paragraph is modified to explain the division of responsibility, and the scope and opinion paragraphs contain references to the other auditor
- Inconsistent application of GAAP - a change to an acceptable accounting principle that has a material effect on comparability
- Uncertainties exist - such uncertainties or contingencies (e.g., litigation valuation or realization of assets) may require an explanatory paragraph depending on the probability of loss and the ability to make a reasonable estimate
Qualified - A departure from GAAP or the performance of an incomplete audit due to scope restrictions imposed by the client or by circumstances precludes the Auditor from issuing a non-qualified opinion. In this instance, the Auditor's opinion paragraph will include the appropriate qualifying language.
Disclaimer of Opinion (no opinion) - When a material uncertainty exists and the auditor believes that it so pervasive as to not be adequately communicable by the use of an explanatory emphasis paragraph, the auditor will issue a Disclaimer, stating that they are unable to form an opinion on the financial statements. They will also issue a disclaimer if there is a significant restriction on their audit scope, whether or not client-imposed.
Adverse Opinion - This type of opinion is used when there is an unjustified departure from GAAP, and the effect is major. It is also used for failure to comply with disclosure standards (not affecting the amounts reported in the financial statements).
Unaudited - Financial Statements which have not undergone a detailed Audit examination by an independent Certified Public Accountant (CPA).
Restatements and Reclassifications
Restated Income Statement - An income statement reporting period is "restated" if net income before extraordinary items, accounting changes and/or discontinued operations changes. Note that most restatements are routine and not the result of error.
Reclassified Income Statement - An income statement reporting period is "reclassified" if net income before extraordinary items, accounting changes and/or discontinued operations remains the same, but the values of other line items within the period change.
Restated Balance Sheet - A balance sheet is "restated" if total assets and total liabilities + stockholders' equity changes. Note that most restatements are routine and not the result of error.
Reclassified Balance Sheet - A balance sheet is "reclassified" if total assets and total liabilities + stockholders' equity remains the same but the values of other line items in these sections change.
Restated Cash Flow - A cash flow reporting period is "restated" if the net change in cash changes or if net income changes. Note that most restatements are routine and not the result of error.
Reclassified Cash Flow - A cash flow reporting period is "reclassified" if the net change in cash remains the same but other line items - excluding net income - in the cash flow statement change.
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Copyright © 2008 by CreditRiskMonitor.com Friday, July 25, 2008 |