The Battle for Steel Corp. To lend money to business and make money on the interest, right?

But when a bank uses debts as leverage not to retire a loan but to take over a company, you have to wonder if the lender isnt after its pound of flesh but is really going for the whole hog. This is the gist of the complaint of the owners of the Steel Corp. of the Philippines (Steel Corp.), which is accusing one of its creditors, Banco de Oro-Equitable, of not being interested in getting repaidat least in cash on the barrelhead. Instead of repayment, the bank, Steel Corp. says, is pushing a rehabilitation plan that would allow it to take over control of the pioneering and profitable company, and possibly allow it to sell off the firms assets for an even bigger windfall. A short history of Steel Corp. is necessary. Businessman Abeto Uy put up Steel Corp. in 1994, in response to the call of then President Fidel Ramos for local investors to industrialize. The company was the only one that met the requirements of a certified enterprise under Republic Act 7103, also known as the Iron and Steel Industry Act of 1991. The company was initially capitalized at P4.5 billion. Steel Corp. put up the countrys biggest and most modern integrated flat steel factory, producing cold-rolled coils and other steel products for construction, appliances, automotive and furniture components, cans, roofing and various other consumer items. As the leading Philippine manufacturer of coated steel, the company established a solid clientele locally and is even now exporting to 12 other countries. In 1996, Steel Corp. put up a plant in Balayan, Batangas, and secured loans worth P3.1 billion from a syndicate of local and foreign banks and financial institutions. But the 1997 Asian currency crisis hit Steel Corp. hard, just as it did many other local enterprises. The currency crunch increased the Balayan projects cost by approximately P3.3 billion and Steel Corp. failed to enjoy in full the grace periods on its loans as the amortizations started on the same year the project became operational. The parent company of Steel Corp., Philsteel Holdings Corp., infused an additional P1 billion into the project a year later. But the devaluation of the peso against the US dollar resulted in foreign exchange losses to Steel Corp. of around P1.3 billion. Despite payments of $13.8 million on its loans from 1999 to 2000, Steel Corp. saw the peso equivalent of its dollar-denominated loans continue to rise. Still, during the first 10 months of operations ending in Dec. 31, 1999, Steel Corp. generated revenues of P2.4 billion and reported a net income of P329.5 million. But then, the government, which originally gave Steel Corp. a tariff protection rate of 7 percent on its finished products, unilaterally reduced this to 3 percent in July 2000. *** By 2001, realizing that the company would not be able to meet its scheduled loan amortizations without further depleting its working capital and adversely affecting operations, Steel Corp. and its creditors agreed to reschedule payments. The 2002 agreement stated that the creditors would put up a Revolving Trade Financing Line worth P500 million in exchange for Steel Corp.s shareholders or new investors infusing P550 million in additional equity into company to be used exclusively to settle the RTFL three years after. BDO-Equitable was the lead bank and agent in the deal.

But according to Steel Corp., the creditors only lent P100 million. Three creditors withdrew P275 million of existing capital lines, effectively withdrawing P675 million according to the approved financial plan. Still, by June 2006, Steel Corp. had paid a total of P5.1 billion in principal and interest payments, out of an original loan amount of P4.2 billion, according to the terms and schedules of the original agreement. But after the company asked for a review of its debt-service plan to allow it to repay its debt in full, BDOEquitable unilaterally petitioned a court to place the company under receivership. In its petition, the bank sought, among others, the conversion of P3.122 billion in debt to equity, which the company said would translate into practically 100 percent ownership of Steel Corp. by BDO-Equitable. When a Batangas court hearing the receivership case granted the banks petition and upheld the plan last Dec. 7, Steel Corp. went to the Court of Appeals, where the case is now being heard. In its pleading to the higher court, Steel Corp. alleged that a straightforward rehabilitation is not what BDOEquitable had in mind. In a conspiracy with its handpicked rehabilitation receiver and his appointed financial adviser, BDO-Equitable [has] embarked on a quest for a takeover and management control of Steel Corp. Furthermore, the company said that its total debt, as the lower court itself reported, stood at P7.205 billion while its total assets were estimated to be worth P13 billionimplying that this could be the reason why a bank would want to own a steel-manufacturing company. In this case, the company said, its creditor was also obviously smitten by the fact that Steel Corp.despite its financial woeshad consistently registered profits averaging over P600 million a year. The fight for control over Steel Corp. between Uy and his creditor bank continues. It would be interesting to see how the higher courts will rule on the matter.

STEELFRAME PHILIPPINES, INC.

(A Wholly owned Subsidiary of the Philsteel Holdings Corporation)

COMPARATIVE STATEMENT OF FINANCIAL POSITION

DECEMBER 31, 2010, 2009, 2008 and 2007

ASSETS Current Assets Cash and Cash Equivalents Receivables Inventories Other Current Assets Total Current Assets Noncurrent Assets
Property, Plant and Equipment

2010

2009

2008

2007

2,929,768 32,195,909 38,682,735 2,237,584 76,045,996

2,648,471 31,376,170 25,000,282 33,829,898 70,802,366 59,943,651 723,391 5,535,311 99,174,510 130,685,030

1,474,592 12,235,582 59,570,084 355,572 73,635,830

Deferred Tax Assets Refundable Deposits Total Noncurrent Assets TOTAL ASSETS LIABILITIES AND EQUITY Current Liabilities Loans Payable Accounts and Other Payables Total Current Liabilities Noncurrent Liabilities Pension & Other Liabilities Payable to Related Parties Total Noncurrent Liabilities TOTAL LIABILITIES EQUITY Share Capital (250,000 Shares) Deficit TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY

39,503,595 1,343,753 119,776 40,967,124 117,013,120

41,137,398 41,616,642 1,039,778 1,164,977 119,776 119,776 42,422,151 42,776,196 141,596,661 173,461,226

40,744,219 805,342 119,776 41,669,337 115,305,167

547,431 48,065,818 48,613,249 4,479,178 45,471,560 49,950,738 98,563,987

25,000,000 57,635,634 82,635,634

74,352,583 74,352,583

25,193,942 25,193,942 28,934,473 43,963,075 72,897,548 98,091,490

3,888,257 28,465,926 37,055,541 53,248,390 40,938,798 81,714,316 123,574,432 156,066,899

25,000,000 (6,550,867) 18,449,133 117,013,120

25,000,000 25,000,000 25,000,000 (6,977,771) (7,605,673) (7,786,324) 18,022,229 17,394,327 17,213,676 141,596,661 173,461,226 115,305,167

STEELFRAME PHILIPPINES, INC.

(A Wholly owned Subsidiary of the Philsteel Holdings Corporation)

COMPARATIVE STATEMENT OF INCOME AND DEFICIT

DECEMBER 31, 2010, 2009, 2008 and 2007

REVENUE Sales Interest and Others Total Revenue COST AND EXPENSES Cost of Sales and Services Admin. and General Expenses Selling Expenses Interest and Other Expenses Total Cost and Expenses
INCOME BEFORE INCOME TAX

2010 49,993,109 19,997 50,013,106

2009 68,600,461 158,753 68,757,214

2008 2007 92,712,430 71,378,718 1,953,698 24,065 94,666,128 71,402,783

PROVISION FOR INCOME TAX NET INCOME

43,845,080 2,856,080 2,200,501 504,793 49,407,313 605,793 (178,889) 426,904

60,655,480 3,048,237 2,050,079 2,148,089 69,901,885 857,329 (229,427) 627,902

87,015,427 2,968,150 2,021,434 2,405,208 94,410,219 255,909 (75,258) 180,651

64,869,605 2,858,160 1,855,992 1,178,891 70,762,648 640,135 (483,756) 156,379

DEFICIT AT BEGINNING OF YEAR

DEFICIT AT END OF THE YEAR

(6,977,771) (6,550,867)

(7,605,673) (6,977,771)

(7,786,324) (7,605,673)

(7,942,703) (7,786,324)

 Overall Financial Condition

Year 2010 2009 2008 2007 a. Current Ratio 1.56 1.2 1.76 2.92 b. Quick Ratio 0.72 0.33 0.88 0.54 c. Inventory Turnover 1.13 Times 0.85 Times 1.45 Times 1.09 Times d. Net Working Capital 27,432,747 16,538,876 56,332,447 48,441,888 e. Working Capital Turnover 1.82 Times 4.14 Times 1.65 Times 1.34 Times f. Total Asset Turnover 0.42 Times 0.48 Times 0.50 Times 0.56 Times g. Equity to Total Assets 15.77% 12.72% 10.03% 14.93% h. Debt to Total Assets 84.23% 87.27% 89.97% 85.07% i. Debt to Equity 534% 686% 897% 570% j. Equity Multiplier 6.24x 7.86x 9.97x 6.69x k. Times Interest Earned 2.21x 1.40x 1.57x 1.55x l. Return on Sales 0.85% 0.92% 0.19% 0.22% m. Gross Profit Margin Ratio 12.30% 11.58% 6.14% 9.12% n. Operating Profit Margin Ratio 2.21% 4.38% 0.76% 0.90% o. Return on Total Assets 0.95% 2.12% 0.41% 1.56% p. Return on Owners Equity 2.31% 3.48% 1.04% 0.91% q. Earnings Per Share P 1.71/Sh P 2.51/Sh P. 0.72/Sh P 0.63/Sh r. Book Value Per Share P 73.80/Sh P 72.09/Sh P 69.58/Sh P 68.85/Sh a. QUICK RATIO The Company has maintained reasonable amount of current assets to pay currently maturing obligations throughout the year 2007-2010. b. QUICK RATIO The Company has not maintained sufficient liquid assets in financing short term obligations in years 2007-2010 c. INVENTORY TURNOVER Inventories are purchased through the parent company at forecasted basis covering a year and is substantially sold fully during the year. d. NET WORKING CAPITAL The Company invested at an average of 35 million in its operation. The ratio from 2007-2010 shows a declining amount of working capital which is caused primarily by accruing large amounts of short term payables e. WORKING CAPITAL TURNOVER Working capital of the firm is adequately used in operations except in the year 2009 which shows a large fluctuation because of a loans payable classified as current liabilities f. TOTAL ASSET TURNOVER Assets of the Company are utilized firmly but at below average due to remaining deficit in its books g. EQUITY TO TOTAL ASSETS - The Assets of the Company are mostly financed by creditors and related parties rather that by stockholders. The Authorized, Issued and Outstanding 250,000 Share remain constant through years 2007 through 2010 h. DEBT TO TOTAL ASSETS Related Parties such as those under the parent company and other minor creditors holds majority of interest in the firms assets i. DEBT TO EQUITY Resources from Creditors and Related Parties are Substantially Larger that the inactive contributions from stockholders j. EQUITY MULTIPLIER Total equity for the years 2007-2010 can be multiplied at average of 510 times which also expresses its reliance to debt over equity contributions

k. TIMES INTEREST EARNED The firms ability to pay interest in long term debts need to be improved. Increasing number of times interest earned indicated that the company is under leveraged due to debt financing. l. RETURN ON SALE The ratio shows fluctuating increase and decrease in its return on sale. The companys return on sales remained at below 1%. m. GROSS PROFIT MARGIN RATIO The Companys Gross margin ratio shows an increasing trend at an average of 10%. Compared to the return on sales the average difference of 9% came from the Expenses. n. OPERATING PROFIT MARGIN RATIO Operating income of the company from 2007-2010 shows fluctuating rates at highest of 4% in 2009 o. RETURN ON TOTAL ASSETS Overall asset management and profitability provided by management creates different return in total assets of the company in years 2007-2010. p. RETURN ON OWNERs EQUITY By having a deficit in the books, the Company cannot issue stocks because they will not be able to declare dividends to stockholders due to the deficit. By that reason, Total assets contributed by Stockholders at controlled at a stable level, thus making Income from its operations the primary factor in the companys return on Assets and Equity. And It shows a big fluctuation due to a good return in the year 2009. q. EARNINGS PER SHARE Stockholders of the company holding a P 100 Par per Share earned at average of P 1 (2.5 at highest in 2009) r. BOOK VALUE PER SHARE BPS Proved to be increasing slowly due to deductions in deficit in the books and the stable 250,000 shares issued and outstanding at an average of P 70 per share in the years 2007-2010

How to Analyze Your Business Using Financial Ratios An Edward Lowe In-Depth Business Builder Using a sample income statement and balance sheet, this guide shows you how to convert the raw data on financial statements into information that will help you manage your business_

WHAT TO EXPECT Many small and mid-sized companies are run by entrepreneurs who are highly skilled in some key aspect of their businessperhaps technology, marketing or salesbut are less savvy in financial matters. The goal of this document is to help you become familiar with some of the most powerful and widely-used tools for analyzing the financial health of your company. Some of the names"common size ratios" and "liquidity ratios," for examplemay be unfamiliar. But nothing in the following pages is actually very difficult to calculate or very complicated to use. And the payoff to you can be enormous. The goal of this document is to provide you with some handy ways to look at how your company is doing compared to earlier periods of time, and how its performance compares to other companies in your industry. Once you get comfortable with these tools you will be able to turn the raw numbers in your company's financial statements into information that will help you to better manage your business. WHAT YOU SHOULD KNOW BEFORE GETTING STARTED [top] For most of us, accounting is not the easiest thing in the world to understand, and often the terminology used by accountants is part of the problem. "Financial ratio analysis" sounds pretty complicated. In fact, it is not. Think of it as "batting averages for business." If you want to compare the ability of two Major League home-run sluggers, you are likely to look at their batting averages. If one is hitting .357 and the other's average is .244, you immediately know which is doing better, even if you don't know precisely how a batting average is calculated. In fact, this classic sports statistic is a ratio: it's the number of hits made by the batter, divided by the number of times the player was at bat. (For baseball purists, those are "official at-bats," which is total appearances at the plate minus walks, sacrifice plays and any times the player was hit by a pitch.) You can think of the batting average as a measure of a baseball player's productivity; it is the ratio of hits made to the total opportunities to make a hit. Financial ratios measure your company's productivity. There are many ratios you can use, but they all measure how good a job your company is doing in using its assets, generating profits from each dollar of sales, turning over inventory, or whatever aspect of your company's operation that you are evaluating. Financial Ratio Analysis The use of financial ratios is a time-tested method of analyzing a business. Wall Street investment firms, bank loan officers and knowledgeable business owners all use financial ratio analysis to learn more about a company's current financial health as well as its potential. Although it may be somewhat unfamiliar to you, financial ratio analysis is neither sophisticated nor complicated. It is nothing more than simple comparisons between specific pieces of information pulled from your company's balance sheet and income statement.

A ratio, you will remember from grammar school, is the relationship between two numbers. As your math teacher might have put it, it is "the relative size of two quantities, expressed as the quotient of one divided by the other." If you are thinking about buying shares of a publicly-traded company, you might look at its priceearnings ratio. If the stock is selling for $60 per share, and the company's earnings are $2 per share, the ratio of price ($60) to earnings ($2) is 30 to 1. In common usage, we would say the "P/E ratio is 30." Financial ratio analysis can be used in two different but equally useful ways. You can use them to examine the current performance of your company in comparison to past periods of time, from the prior quarter to years ago. Frequently this can help you identify problems that need fixing. Even better, it can direct your attention to potential problems that can be avoided. In addition, you can use these ratios to compare the performance of your company against that of your competitors or other members of your industry. Remember that the ratios you will be calculating are intended simply to show broad trends and thus to help you with your decision-making. They need only be accurate enough to be useful to you. Don't get bogged down calculating ratios to more than one or two decimal places. Any change that is measured in hundredths of a percent will almost certainly have no meaning. Make sure your math is correct, but don't agonize over it. A ratio can be expressed in several ways. A ratio of two-to-one can be shown as: 2:1 2-to-1 2/1

In these pages, when we present a ratio in the text it will be written out, using the word "to." If the ratio is in a formula, the slash sign (/) will be used to indicate division. Types of Ratios As you use this guide you will become familiar with the following types of ratios:

Common size ratios Liquidity ratios Efficiency ratios Solvency ratios

COMMON SIZE RATIOS [top] One of the most useful ways for the owner of a small business to look at the company's financial statements is by using "common size" ratios. Common size ratios can be developed from both balance sheet and income statement items. The phrase "common size ratio" may be unfamiliar to you, but it is simple in concept and just as simple to create. You just calculate each line item on the statement as a percentage of the total. For example, each of the items on the income statement would be calculated as a percentage of total sales. (Divide each line item by total sales, then multiply each one by 100 to turn it into a percentage.) Similarly, items on the balance sheet would be calculated as percentages of total assets (or total liabilities plus owner's equity.) This simple process converts numbers on your financial statements into information that you can use to make period-to-period and company-to-company comparisons. If you want to evaluate your cash position compared to the cash position of one of your key competitors, you need more information than what you have, say, $12,000 and he or she has $22,000. That's a lot less informative than knowing that your company's cash is equal

to 7% of total assets, while your competitor's cash is 9% of their assets. Common size ratios make comparisons more meaningful; they provide a context for your data. Common Size Ratios from the Balance Sheet To calculate common size ratios from your balance sheet, simply compute every asset category as a percentage of total assets, and every liability account as a percentage of total liabilities plus owners' equity. Here is what a common size balance sheet looks like for the mythical Doobie Company: ABC Company Common Size Balance Sheet For the year ending December 31, 200x Assets Current Assets Cash Marketable Securities Inventory Prepaid Expense Total Current Assets Fixed Assets Building and Equipment Less Depreciation Net Buildings and Equipment Land Total Fixed Assets Total Assets Liabilities Current Liabilities Wages Payable Accounts Payable Taxes Payable Total Current Liabilities Long-Term Liabilities Mortgage Payable Note Payable Deferred Taxes Total Long-Term Liabilities Total Liabilities 70,000 38.8% 15,000 15,000 8.3% 8.3% 3,000 12,000 1.6% 6.6% 25,000 13.8% 40,000 22.2% 105,000 58.3% 30,000 16.6% 75,000 41.6% 40,000 22.2% 115,000 63.8% 180,000 100.0% 12,000 10,000 6.6% 5.5% 9.4% 2.2% $$ %

Accounts Receivable (net of uncollectible accounts) 17,000 4,000

22,000 12.2% 65,000 35.9%

100,000 55.5% 140,000 77.7%

Owner's Equity Total Liabilities and Owner's Equity

40,000 22.2% 180,000 100.0%

In the example for Doobie Company, cash is shown as being 6.6% of total assets. This percentage is the result of the following calculation: 12,000/180,000 x 100 (Multiplying by 100 converts the ratio into a percentage.) Common size ratios translate data from the balance sheet, such as the fact that there is $12,000 in cash, into the information that 6.6% of Doobie Company's total assets are in cash. Additional information can be developed by adding relevant percentages together, such as the realization that 11.7% (6.6% + 5.1%) of Doobie's total assets are in cash and marketable securities. Common size ratios are a simple but powerful way to learn more about your business. This type of information should be computed and analyzed regularly. As a small business owner, you should pay particular attention to trends in accounts receivables and current liabilities. Receivables should not be tying up an undue amount of company assets. If you see accounts receivables increasing dramatically over several periods, and it is not a planned increase, you need to take action. This might mean stepping up your collection practices, or putting tighter limits on the credit you extend to your customers. As this example illustrates, the point of doing financial ratio analysis is not to collect statistics about your company, but to use those numbers to spot the trends that are affecting your company. Ask yourself why key ratios are up or down compared to prior periods or to your competitors. The answers to those questions can make an important contribution to your decision-making about the future of your company. Current ratio analysis is also a very helpful way for you to evaluate how your company uses its cash. Obviously it is vital to have enough cash to pay current liabilities, as your landlord and the electric company will tell you. The balance sheet for the Doobie Company shows that the company can meet current liabilities. The line items of "total current liabilities," $40,000, is substantially lower than "total current assets," $65,000. But you may wonder, "How do I know if my current ratio is out of line for my type of business?" You can answer this question (and similar questions about any other ratio) by comparing your company with others. You may be able to convince competitors to share information with you, or perhaps a trade association for your industry publishes statistical information you can use. If not, you can use any of the various published compilations of financial ratios. (See the Resources section at the end of this document.) Because financial ratio comparisons are so important for bank loan officers who make loans to businesses, RMA (formerly a bankers' trade association, Robert Morris Associates) has for many years published a volume called "Annual Statement Studies." These contain ratios for more than 300 industries, broken down by asset size and sales size. RMA's "Annual Statement Studies" are available in most public and academic libraries, or you may ask your banker to obtain the information you need. Another source of information is "Industry Norms and Key Business Ratios," published by Dun and Bradstreet. It is compiled from D&B's vast databases of information on businesses. It lists financial ratios for hundreds of industries, and is available in academic and public libraries that serve business communities.

These and similar publications will give you an industry standard or "benchmark" you can use to compare your firm to others. The ratios described in this guide, and many others, are included in these publications. While period-to-period comparisons based on your own company's data are helpful, comparing your company's performance with other similar businesses can be even more informative. Compute common size ratios using your company's balance sheet. Common Size Ratios from the Income Statement To prepare common size ratios from your income statement, simply calculate each income account as a percentage of sales. This converts the income statement into a powerful analytical tool. Here is what a common size income statement looks like for the fictional Doobie Company: $$ % $ 200,000 100% 130,000 65% 70,000 35% 22,000 10,000 4,000 36,000 34,000 2,500 500 36,000 1,800 34,200 11% 5% 2% 18% 17% 1% 0% 18% 1% 17%

Sales Cost of goods sold Gross Profit Operating expenses Selling expenses General expenses Administrative expenses Total operating expenses Operating income Other income Interest expense Income before taxes Income taxes Net profit

Common size ratios allow you to make knowledgeable comparisons with past financial statements for your own company and to assess trendsboth positive and negativein your financial statements. The gross profit margin and the net profit margin ratios are two common size ratios to which small business owners should pay particular attention. On a common size income statement, these margins appear as the line items "gross profit" and "net profit." For the Doobie Company, the common size ratios show that the gross profit margin is 35% of sales. This is computed by dividing gross profit by sales (and multiplying by 100 to create a percentage.) $70,000/200,000 x 100 = 35% Even small changes of 1% or 2% in the gross profit margin can affect a business severely. After all, if your profit margin drops from 5% of sales to 4%, that means your profits have declined by 20%. Remember, your goal is to use the information provided by the common size ratios to start asking why changes have occurred, and what you should do in response. For example, if profit margins have declined unexpectedly, you probably will want to closely examine all expensesagain, using the common size ratios for expense line items to help you spot significant changes.

Compute common size ratios from your income statement. Look at the gross profit and net profit margins as a percentage of sales. Compare these percentages with the same items from your income statement of a year ago. Are any fluctuations favorable or not? Do you know why they changed? LIQUIDITY RATIOS Liquidity ratios measure your company's ability to cover its expenses. The two most common liquidity ratios are the current ratio and the quick ratio. Both are based on balance sheet items. Current Ratio The current ratio is a reflection of financial strength. It is the number of times a company's current assets exceed its current liabilities, which is an indication of the solvency of that business. Here is the formula to compute the current ratio. Current Ratio = Total current assets/Total current liabilities Using the earlier balance sheet data for the mythical Doobie Company, we can compute the company's current ratio. Doobie Company Current Ratio: 65,000/40,000 = 1.6 This tells the owners of the Doobie Company that current liabilities are covered by current assets 1.6 times. The current ratio answers the question, "Does the business have enough current assets to meet the payment schedule of current liabilities, with a margin of safety?" A common rule of thumb is that a "good" current ratio is 2 to 1. Of course, the adequacy of a current ratio will depend on the nature of the business and the character of the current assets and current liabilities. There is usually very little uncertainty about the amount of debts that are due, but there can be considerable doubt about the quality of accounts receivable or the cash value of inventory. That's why a safety margin is needed. A current ratio can be improved by increasing current assets or by decreasing current liabilities. Steps to accomplish an improvement include:

Paying down debt. Acquiring a long-term loan (payable in more than 1 year's time). Selling a fixed asset. Putting profits back into the business.

A high current ratio may mean that cash is not being utilized in an optimal way. For example, the excess cash might be better invested in equipment. Quick Ratio

The Quick Ratio is also called the "acid test" ratio. That's because the quick ratio looks only at a company's most liquid assets and compares them to current liabilities. The quick ratio tests whether a business can meet its obligations even if adverse conditions occur. Here is the formula for the quick ratio: Quick Ratio = (Current Assets Inventory)/Current Liabilities Assets considered to be "quick" assets include cash, stocks and bonds, and accounts receivable (in other words, all of the current assets on the balance sheet except inventory.) Using the balance sheet data for the Doobie Company, we can compute the quick ratio for the company. Quick ratio for the Doobie Company: (65,000 22,000)/40,000 = 1.07 In general, quick ratios between 0.5 and 1 are considered satisfactoryas long as the collection of receivables is not expected to slow. So the Doobie Company seems to have an adequate quick ratio. Compute a current ratio and a quick ratio using your company's balance sheet data. OPERATING RATIOS There are many types of ratios that you can use to measure the efficiency of your company's operations. In this section we will look at four that are widely used. There may be others that are common to your industry, or that you will want to create for a specific purpose within your company. The four ratios we will look at are:

Inventory Turnover Ratio Sales to Receivables Ratio Days' Receivables Ratio Return on Assets

Inventory Turnover The inventory turnover ratio measures the number of times inventory "turned over" or was converted into sales during a time period. It is also known as the cost-of-sales to inventory ratio. It is a good indication of purchasing and production efficiency. The data used to calculate this ratio come from both the company's income statement and balance sheet. Here is the formula: Inventory Ratio = Cost of Goods Sold/Inventory Using the financial statements for the Doobie Company, we can compute the following inventory turnover ratio for the company:

$130,000/22,000 = 5.91 In general, the higher a cost of sales to inventory ratio, the better. A high ratio shows that inventory is turning over quickly and that little unused inventory is being stored. Sales-to-Receivables Ratio The sales-to-receivables ratio measures the number of times accounts receivables turned over during the period. The higher the turnover of receivables, the shorter the time between making sales and collecting cash. The ratio is based on NET sales and NET receivables. (A reminder: net sales equals sales less any allowances for returns or discounts. Net receivables equals accounts receivable less any adjustments for bad debts.) This ratio also uses information from both the balance sheet and the income statement. It is calculated as follows: Sales-to-Receivables Ratio = Net Sales/Net Receivables Using the financial statements for the Doobie Company (and assuming that the Sales reported on their income statement is net Sales), we can compute the following sales-to-receivables ratio for the company: Doobie Company Sales-to-Receivables Ratio: 200,000/17,000 = 11.76 This means that receivables turned over nearly 12 times during the year. This is a ratio that you will definitely want to compare to industry standards. Keep in mind that its significance depends on the amount of cash sales a company has. For a company without many cash sales, it may not be important. Also, it is a measure at only one point in time and does not take into account seasonal fluctuations. Days' Receivables Ratio The days' receivables ratio measures how long accounts receivable are outstanding. Business owners will want as low a days' receivables ratio as possible. After all, you want to use your cash to build your company, not to finance your customers. Also, the likelihood of nonpayment typically increases as time passes. It is computed using the sales/receivables ratio. Here is the formula: Days' Receivables Ratio = 365/Sales Receivables Ratio The "365" in the formula is simply the number of days in the year. The sales receivable ratio is taken from the calculation we did just a few paragraphs earlier. Using the financial statements for the Doobie Company, we can compute the following day's receivables ratio for the company. Doobie Company Days' Receivables Ratio 365/11.76 = 31 This means that receivables are outstanding an average of 31 days. Again, the real meaning of the number will only be clear if you compare your ratios to others in the industry.

Return on Assets The return on assets ratio measures the relationship between profits your company generated and assets that were used to generate those profits. Return on assets is one of the most common ratios for business comparisons. It tells business owners whether they are earning a worthwhile return from the wealth tied up in their companies. In addition, a low ratio in comparison to other companies may indicate that your competitors have found ways to operate more efficiently. Publicly held companies commonly report return on assets to shareholders; it tells them how well the company is using its assets to produce income. It is computed as follows: Return on Assets = Net Income Before Taxes/Total Assets X 100 (Multiplying by 100 turns the ratio into a percentage.) Using the balance sheet and income statement for the Doobie Company, we can compute the return on assets ratio for the company: Doobie Company Return on Assets: $36,000/180,000 x 100 = 20% This is a ratio that you will certainly want to compare with other firms in your industry. SOLVENCY RATIOS Solvency ratios measure the stability of a company and its ability to repay debt. These ratios are of particular interest to bank loan officers. They should be of interest to you, too, since solvency ratios give a strong indication of the financial health and viability of your business. We will look at the following solvency ratios:

Debt-to-worth ratio Working capital Net sales to working capital Z-Score

Debt-to-Worth Ratio The debt-to-worth ratio (or leverage ratio) is a measure of how dependent a company is on debt financing as compared to owner's equity. It shows how much of a business is owned and how much is owed. The debt-to-worth ratio is computed as follows: Debt-to-Worth Ratio = Total Liabilities/Net Worth (A reminder: Net Worth = Total Assets Minus Total Liabilities.) Using balance sheet data for the Doobie Company, we can compute the debt-to-worth ratio for the company.

Doobie Company debt-to-worth ratio: $140,000/40,000 = 3.5 If the debt-to-worth ratio is greater than 1, the capital provided by lenders exceeds the capital provided by owners. Bank loan officers will generally consider a company with a high debt-to-worth ratio to be a greater risk. Debt-to-worth ratios will vary with the type of business and the risk attitude of management. Working Capital Working capital is a measure of cash flow, and not a real ratio. It represents the amount of capital invested in resources that are subject to relatively rapid turnover (such as cash, accounts receivable and inventories) less the amount provided by short-term creditors. Working capital should always be a positive number. Lenders use it to evaluate a company's ability to weather hard times. Loan agreements often specify that the borrower must maintain a specified level of working capital. Working capital is computed as follows: Working Capital = Total Current Assets Total Current Liabilities Using the balance sheet data for the Doobie Company, we can compute the working capital amount for the company. Doobie Company working capital: $65,000 40,000 = $25,000 Doobie Company has $25,000 in working capital Net Sales to Working Capital The relationship between net sales and working capital is a measurement of the efficiency in the way working capital is being used by the business. It shows how working capital is supporting sales. It is computed as follows: Net Sales to Working Capital Ratio = Net Sales/Net Working Capital Using balance sheet data for the Doobie Company and the working capital amount computed in the previous calculation, we compute the net sales to working capital as follows: Doobie Company Net Sales to Working Capital Ratio $200,000/25,000 = 8 Again, this is a ratio that must be compared to others in your industry to be meaningful. In general, a low ratio may indicate an inefficient use of working capital; that is, you could be doing more with your resources, such as investing in equipment. A high ratio can be dangerous, since a drop in sales which causes a serious cash shortage could leave your company vulnerable to creditors. Z-SCORE

The Z-Score is at the end of our list neither because it is the least important, nor because it's at the end of the alphabet. It's here because it's a bit more complicated to calculate. In return for doing a little more arithmetic, however, you get a numbera Z-Scorewhich most experts regard as a very accurate guide to your company's financial solvency. In blunt terms, a Z-Score of 1.81 or below means you are headed for bankruptcy. One of 2.99 means your company is sound. The Z-Score was developed by Edward I. Altman, a professor at the Leonard N. Stern School of Business at New York University. Dr. Altman researched dozens of companies that had gone bankrupt, and others that were doing well. He eventually focused on five key balance sheet ratios. He assigned a weight to each of the five, multiplying each ratio by a number he derived from his research to indicate its relative importance. The sum of the weighted ratios is the Z-Score. Calculating The Z-Score Ratio Return on Total Assets Sales to Total Assets Equity to Debt Working Capital to Total Assets Retained Earnings to Total Assets Formula Earnings Before Interest and Taxes / Total Assets Net Sales / Total Assets Market Value of Equity / Total Liabilities Working Capital / Total Assets Retained Earnings / Total Assets Weighting Factor Weighted Ratio x 3.3

x 0.999 x 0.6 x 1.2

x 1.4

Total of all Weighted Ratios = Z-Score: Like many other ratios, the Z-Score can be used both to see how your company is doing on its own, and how it compares to others in your industry. For a worksheet on calculating your Z-Score. Click below: http://www.scotlandgroup.com/zscore.htm Calculate the debt to worth ratio, working capital, and net sales to working capital ratio for your company. How do your ratios compare to others in your industry? CHECKLIST [top] This document has presented information on common size ratios for both the income statement and the balance sheet, plus several additional financial ratios you can use to gain a better understanding of the financial health of your business.

The ratios you will use most frequently are common size ratios from the income statement, the current ratio, the quick ratio and return on assets. Your specific type of business may require you to use some or all of the other ratios as well. Financial ratio analysis is one way to turn financial statements, with their long columns of numbers, into powerful business tools. Financial ratio analysis offers a simple solution to numbers overload. Common Size Ratios ___ When computing common size ratios for your company's balance sheet, were percentages for asset categories based on total assets? Were liability percentages based on total liabilities plus owners' equity? ___ Have you examined at least one source of comparative financial ratios? Liquidity Ratios ___ What does the current ratio you computed for your business tell you about your company's ability to meet current liabilities? ___ Is your quick ratio between 0.5 and 1? If not, is there an explanation that is satisfactory to you? Operating Ratios ___ When computing the sales-to-receivables ratio, did you remember to use NET sales and NET receivables? Solvency Ratios ___ Does the net sales-to-working capital ratio that you computed make sense for your business? Are adjustments necessary? Z-Score ___ Where is your company's Z-Score? If it is low, or the trend is down for recent years, do you know what changes you need to make?

Key Financial Ratios of Lloyds Steel Industries

Jun '11

Mar '10

Mar '09

Mar '08

Mar '07

Investment Valuation Ratios Face Value Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Cash Profit Margin(%) Adjusted Cash Margin(%) Net Profit Margin(%) Adjusted Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) Adjusted Return on Net Worth(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Return on Long Term Funds(%) 1.57 -2.19 -2.21 0.31 0.31 -3.38 -3.38 -10.24 26.08 --13.68 -13.68 -11.06 3.56 -0.46 -0.46 2.01 2.01 -2.68 -2.68 0.06 13.80 --25.13 -25.13 0.07 -2.70 -7.09 -7.14 -4.42 -4.42 -6.29 -6.29 -22.57 25.09 --31.03 -31.03 -35.37 1.08 -3.96 -4.06 1.58 1.58 -2.14 -2.14 -4.05 7.51 --33.63 -33.63 -6.46 3.07 -3.34 3.92 2.49 3.01 -3.83 -3.58 -1.35 18.13 --32.08 -32.08 -2.24 10.00 -1.64 104.28 -32.00 0.58 10.00 -4.58 128.77 -50.27 1.02 10.00 --3.32 122.84 -49.68 1.08 10.00 -1.25 114.76 -46.27 1.19 10.00 -2.76 89.82 -44.31 1.20

Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital Profit & Loss Account Ratios Material Cost Composition Imported Composition of Raw Materials Consumed Selling Distribution Cost Composition Expenses as Composition of Total Sales Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit -----88.29 4.11 2.69 0.53 79.51 11.82 2.93 0.15 84.90 19.42 3.03 3.27 74.88 13.76 2.97 0.98 72.41 27.80 5.37 6.98 21.00 20.20 21.00 1.48 9.44 1.48 14.93 6.57 -82.66 22.82 17.76 22.82 1.28 5.73 1.28 16.61 4.08 -66.84 22.87 20.92 22.87 1.15 3.50 1.15 7.80 2.59 -32.68 19.97 17.81 19.97 0.99 2.55 0.99 5.93 5.99 -29.66 5.89 15.02 8.08 1.46 1.72 0.78 10.29 10.88 -28.87 -0.78 -1.13 1.16 0.01 -2.00 1.66 -4.88 --0.82 0.22 -0.99 -1.78 2.49 -0.40 -2.08 1.99 0.58 0.45 --0.57 0.46 --0.52 0.60 --0.39 0.48 --0.40 0.42 ---

Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio AdjustedCash Flow Times

--100.00 55.82

--100.00 13.54

-----

--100.00 35.40

--100.00 25.74

Jun '11

Mar '10

Mar '09

Mar '08

Mar '07

Earnings Per Share Book Value

-3.57 -13.68

-3.47 -25.13

-7.78 -31.03

-2.53 -33.63

-3.55 -31.86

Source : Dion Global Solutions Limited

Key Business Ratios:

Industry Norms and Key Business Ratios: The following key business ratios were obtained from the public domain and may not be accurate. However, they will give you a rough idea. Key Business Ratios can be obtained from companies like D&B (Dun & Bradstreet) or RMA. Their ratios are developed and derived from the financial statements in their extensive database. They are based on activities of numerous industries, includes a combination of financial statements and business ratios to help the credit community to compare a company's financial performance to its peer group by industry size and region. For more information and an extensive list of the key business ratios please contact your local Dun & Bradstreet or RMA office.
Current Ratio Agriculture Mining Construction 1.31 1.19 1.44 Quick Ratio 0.39 0.77 0.98 Debt to Equity 1.33 0.48 1.31 Sales to Inventory 2.52 0.00 4.74 DSO 19.00 52.00 43.00 Profit Margin % 2.58 0.00 1.74

Manufacturing Leather/Textile/App Chem. Petrol. Metal Wood Related 1.50 1.54 1.43 0.62 0.75 0.62 1.48 1.33 1.41 6.05 6.94 6.46 34.00 48.00 33.00 1.64 2.23 2.16

Prod Mach-trans equipment 1.54 0.74 1.34 5.89 51.00 2.38

Trans-Communic

1.03

0.70

1.64

0.00

34.00

1.84

Wholesale Non-Durable Durable 1.53 1.42 0.66 0.69 1.70 1.60 4.63 7.36 39.00 31.00 1.40 1.11

Retail Hardware Gen. Merchandise Automobiles Apparel Furniture Restaurants 1.68 2.14 1.23 1.90 1.61 0.73 0.43 0.15 0.19 0.14 0.38 0.18 1.30 0.59 2.61 0.91 1.33 1.24 4.20 3.81 4.75 2.96 4.03 35.65 22.00 4.00 9.00 2.00 16.00 1.00 1.11 0.16 0.84 1.35 0.92 0.43

Financial Services Business Services Service Industry

1.18 1.36 1.29

0.34 0.84 0.68

0.72 1.11 0.75

0.00 0.00 3.04

1.00 42.00 15.00

1.29 1.75 0.77

N D Metal Industries Key Financial Ratios

Particular Liquidity Ratios Debt/Equity Ratio Current Ratio Turnover Ratios Inventory Turnover Ratio Fixed Assets Turnover Ratio

201003

200903

200803

200703

200603

3.93 1.53

1.93 1.41

1.31 1.41

1.26 1.37

1.11 1.40

2.57 3.22

4.42 6.73

2.73 5.11

3.27 6.29

3.53 5.59

Debtors Turnover Ratio Interest Coverage Ratios Profitability Ratios Operating Profit Margin PAT/Total Income NPM (Net Profit Margin) Return on Capital Employed Return on Networth

1.58 0.74

2.98 -2.45

2.46 2.09

3.17 2.31

3.39 2.37

8.60 -2.79 -3.00 9.56 -19.13

-5.70 -6.43 -6.07 -18.80 -53.11

5.45 1.68 1.88 11.08 10.34

3.29 1.12 1.12 8.36 7.96

3.93 1.11 1.25 9.94 8.08

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