` CREATIVE COMPUTING VOL. 9, NO. 2 / FEBRUARY 1983 / PAGE 154`

 Fin-Apple ratios; analyzing financial ratios with the Apple. William J. Purpura; Paula K. Purpura. The program described here was writtento provide a convenient tool for financial ratio analysis. Financial ratio analysis can be made easier when a computer performs the repetitive calculations. This program is designed to take standard and commonly available information, (such as balane sheets, income statements, and stock price data) and automatically generate sets of the most frequently used financial ratios. These ratios are useful in determining the financial health and prospects of a firm, in performing trend analysis, and for comparing one firm with another. It should be noted that it is for just these purposes, that Dun and Bradstreet publishes such ratios for entire industries. The program makes it possible to test the effects of various circumstances quickly by comparing before and after ratios. The program is menu-driven to aid the user in its operation. Readers who already have an understanding of financial ratios may skim the next sections, which provide descriptions of the various ratios calculated by the program. To help those new to financial ratios, a single example will be used throughout the article. Following the tutorial section is a section discussing a few important points about program operation. Peter Piper's Pickle Packing Plant Peter Piper's Pickle Packing Plant will be used as an example of how the various ratios can be used and interpreted. The example can also be used to verify correct operation of the program after you have entered and de-bugged it. Peter Piper is an energetic young businessman who became interested in pickles as a boy when he picked a peck of pickled peppers. He started his own pickle packing plant five years ago, and has developed the Peter Piper brand of pickles into a highly respected name. Peter sells his pickles directly to grocery stores in the area under his own name. Peter Piper's income statement and balance sheet for the current year are shown in Figures 1 and 2. About Financial Ratios Ratios are a means of expressing the relationship between numbers for comparative purposes. Ratios are usually expressed as percentages. For example, Peter Piper may be interested in knowing the proportion of pickles packed which are of acceptable quality. A useful measure to Peter then would be the ratio: Total Number of Good Pickles Packed Total number of Pickles Produced This ratio gives Peter the percentage of good production. If this ratio should change periodically, it can be a clue to production problems or other changes. Similarly, financial ratios can be used to present actual operating figures in a more easily understood format. Such ratios can be used to spot financial trends and operating problems. They can be useful in comparing different business units (i.e., divisions or companies), as the relative sizes of the organizations involved are factored out. Many firms use financial ratios to state their budgetary goals or to evaluate managerial performance. Ratios are a widely used and versatile tool for financial analysis. The ratios represented in this program fall into six categories: liquidity, leverage, activity, profitability, coverage, and stock ratios. Each set of ratios is displayed separately by the program, and will be discussed individually below. Those ratios which are published by Dun and Bradstreet as KEY ratios, will be noted in this article by the symbol DB. The program output automatically flags these KEY ratios. Liquidity Ratios Liquidity ratios compare a firm's current assets (such as cash, accounts receivable, inventory, etc.) to current liabilities (such as short-term debts, accounts payable, etc.). These ratios give the analyst indications of the firm's ability to meet its short-term obligations, and point out inappropriate balances between current assets and liabilities. In addition to the ratios listed below, the liquidity ratio section also calculates Net Working Capital (i.e., current assets less current liabilities). Note that the information presented below follows a format which will be used throughout this article. First, the ratio will be defined, followed by a description of what that particular ratio indicates. Second, the ratio for Peter Piper's Pickle Packing Plant, as calculated by the program, will be presented together with an explanation of its significance. DB 1. Current Ratio = Current Assets/Current Liabilities This ratio measures the firm's ability to meet is short-term obligations. For most firms, the value of the ratio should be between 1.5 and 4. Values beyond these limits may indicate that the firm will have difficulty meeting its short-term bills, or that short-term assets are not being well used. Peter Piper's current ratio is 3:83. Since this ratio is high, we suspect that Peter will not have trouble meeting his upcoming bills (accounts payable and notes payable). We should note that the ratio is so high, that Peter could probably use his current assets in the business, instead of letting them collect interest in the bank. DB 2. Inventory to Working Capital = Inventory/Current Assets - Current Liabilities The intensity of the firm's involvement with inventory is shown by this ratio. If the ratio is too high, it may indicate that the firm cannot raise money quickly in an emergency. If the ratio is too low, it may indicate that the firm cannot meet the needs of its clients quickly. The range for this ratio depends upon the industry in which the firm operates, as service industries will typically have less inventory than manufacturing or industrial organizations. Consider Peter, our friendly neighborhood pickle packer. Peter's inventory to working capital ratio is 0.61, which is probably neither too high nor too low. Since we already know (from the current ratio) that Peter has a lot on current assets, it becomes obvious that he does not have all of them in the form of inventory. He does apparently have enough stock on hand though to satisfy his customers' needs. Peter seems to have achieved a good balance between inventory and working capital. DB 3. Current Debt to Inventory = Current Debt/inventory The firm's dependence on funds generated by selling inventory is measured by the current debt to inventory ratio. A high ratio indicates that in an emergency, the firm would have little cash available to meet obligations, since inventory is not a liquid asset. It is more favorable to have a lower ratio, which indicates that the firm would not have to try to liquidate its inventory in such an emergency. Again, in Peter's company, we can see that there is not an excess of inventory. Peter's ratio is 0.57, which is probably a little low for a manufacturing firm. This ratio, together with the inventory to working capital ratio, indicates that Peter will probably not have to try to liquidate his inventory in the event of a cash crisis. DB 4. Quick Ratio = Current Assets - Inventory/Current Liabilities The quick ratio estimates the firm's ability to get cash quickly in an emergency. A firm which has a high percentage of its current assets tied up in inventory will be less able to pay its obligations than a firm which has its assets in more liquid form. Peter has a high quick ratio of 2.09 and wound have little trouble meeting his obligations in an emergency. We can see again that having a low inventory level leads to favorable liquidity ratios. 5. Net Working Capital = Current Assets - Current Liabilities Net working capital is not a ratio by definition, but it is a frequently used measure for estimating the liquidity of a firm. This value indicates how much of the firm's assets are required to meet short-term obligations and how much is left over for running the business. Net working capital is automatically calculated by the program, and provided with the miscellaneous information. Leverage Ratios Leverage ratios compare the balance between a firm's debt and its ownership. Up to a point, the tax advantages of debt can reduce the firm's operating costs, and equity (or ownership) increases the firm's financial stability. The balance between debt and equity is very important to lenders and owners of the firm, and also gives an indication of the firm's management style. DB 1. Total Debt to Net Worth = Current and Long - Term debt/Tangible Net Worth This ratio provides a direct comparison between debt an equity. If the ratio is high, it indicates that the firm has many contractual obligations to pay out its money to creditors. Thus, there will be less money available for operating and paying the owners of the firm. There is no single ratio value which will be high for all firms. The nature of the industry, general economic conditions, and the preferences of the firm's management will all affect the suitability of a given value of this ratio. Note that "tangible net worth" is defined as the sum of all outstanding stock (both preferred and common) and retained earnings less the value of any intangible assets. Peter's total debt ratio is 0.79. This is certainly not a low ratio, as it indicates that every dollar invested in Peter's Plant has been encumbered by an additional \$0.79 in debt. Whether or not this ratio is too high is dependent upon many factors. For example, if the current economic conditions Peter faces include a high inflation rate and a reasonable interest rate, it may make sense for him to have a large amount of debt. This ratio also indicates that Peter is not a particularly conservative manager, as such managers tend to avoid high levels of debt. DB 2. Current Debt to Net Worth = Current Debt/Tangible Net Worth The intensity with which the firm uses short-term debt is measured by this ratio. As with the previous ratio, high values depend on environmental factors and opinion. This ratio provides a better indication of the short-term position of the firm than does the total debt ratio. The Current Debt to Net Worth ratio for Peter's Pickle Plant is 0.75. This is somewhat alarming, as it means that Peter not only has a fairly high level of total debt (as seen in the previous ratio), but most of that debt has to be paid off during this year. This is probably the reason that Peter has so much cash available; he will need it to pay off his current liabilities. DB 3. Fixed Assets to Net Worth = Fixed Assets/Tangible Net Worth The fixed asset to net worth ratio guages the firm's use of its fixed assets. The ratio is very dependent upon the nature of the organization for useful interpretation. Capital intensive industries, such as heavy manufacturing will have much higher ratios than service industries, which generally have little need for capital involvement. A low ratio many indicate that the firm will have to acquire more fixed assets to operate effectively. A high ratio can be a problem also, indicating that the firm may not be using the assets it already has. Peter's fixed asset ratio is 0.81, which is probably reasonable for his industry. The ratio does not indicate that Peter has heavy capital involvement. It also does not suggest that he lacks sufficient fixed assets to properly pack pickles. DB 4. Times Interest Earned = Profit Before Tax + Interest Charges/Interest Charges The firm's ability to meet its interest payments is indicated by the times interest earned ratio. Interest is usually the major portion of the firm's contractually obligated payments. When the firm has difficulty meeting these payments, it is usually an indication of serious financial problems. The times interest earned ratio for Peter's firm is 8.14, meaning that he could make his interest payments roughly eight times from his profit. This is very surprising for a firm as heavily encumbered with short-term debt as Peter's. The mathematical reason for this is that the interest payments made by the firm this year are extremely small. The practical reason is probably that much of Peter's short-term debt is in the form of accounts payable and accrued taxes (i.e., money Peter owes the government but has not yet paid). Since neither form of debt requires interest payments, Peter has very low interest charges compared to his obligations. Activity Ratios Activity ratios measure the efficiency of the firm's operations by the intensity with which its assets are used to generate sales. The ratios should generally fall within some typical industry average range. Ratios which are consistently out of these ranges indicate that the firm is making inappropriate use of its assets and resources. DB 1. Inventory Turnover = Net Sales/Inventory As its name implies, the inventory turnover ratio gives the number of times during the year that the firm sells its complete inventory. A high ratio here is generally considered to be good; the firm is not spending money tof finanace slow-moving inventory, and the firm's customers are buying. The ratio should not, however, be too high, as this would indicate that the firm inconveniences its customers with frequent delays and stock-outs. Similarly, the ratio should not be very low, as as this would indicate that the inventory is obsolete or not bing sold. Net sales, as used above, refers to the total dollar amount of sales for the perid, less deductions for returns, allowances, and discounts. Peter's Pickle Plant turns its inventory over 5.42 times per year. This is a healthy ratio for a firm which deals in a perishable product. If Peter turned over his inventory less frequently, it would probably mean that the had to sell slate pickles to his customers (in other words, his inventory would be sitting on the shelf longer). If Peter had a higher ratio, he would probably have times during the year that he could not meet the demand for pickles, and thus might lose customers. DB 2. Collection Period = Accounts Receivable X 365/Net Sales The collection period is the number of days the firm takes (on average) to collect the money it makes on sales. The appropriate range for this ratio depends upon many factors, including the industry, general economic conditions, and management attitudes. Long collection periods indicate that the firm is too lenient and many suffer larger losses from defaults and an increase in the cost of carrying credit. Short collection periods may show that the firm is losing customers due to expessively restrictive credit policies. This ratio can be particularly useful in evaluating the managerial policies of the firm. Peter Piper's collection period is 61.5 days. Let's assume that Peter sells to his customers on terms of "Net 30" (which means that Peter wants to be paid in full within 30 days). A 61.5 day collection period may indicate that he is not very careful in following up his credit accounts. If times are difficult for pickle packers, Peter may have decided not to rush his customers in the hope that they will continue to buy from him rather than from a competitor. If this is not the case, Peter should take a careful look at his credit policy to get his collection period closer to 30 days. DB 3. Fixed Asset Turnover = Net Sales/Fixed Assets This ratio measures the intensity with which the firm uses its fixed assets. If the ratio is high, the firm's assets are productive. If the ratio is low, the assets are under-utilized. The ratio does not imply that the assets are profitable, merely whether or not they are used. It could be more profitable, for example, to replace the firm's asset base with more effective assets than to continue using the existing assets. Peter's fixed asset turnover ratio is 8.77, which means that every dollar he has invested in his fixed assets has produced \$8.77 in sales. For a manufacturing firm which uses a lot of fixed assets this excellent. This ratio is so high that Peter might consider the possibility of acquiring more assets and expanding his production capability. DB 4. Working Capital Turnover = Net Sales/Current Assets - Current Liabilities The firm's use of its working capital (i.e., the difference between current assets and current liabilities) is measured by this ratio. Generally, a high value indicates efficient use of working capital. If the value is too high, however, it may indicate that the firms needs additional resources to operates effectively. Peter turns over his working capital 3.33 times per year. This indicates effective of current resources and shows that Peter does not, at this time, need further financing to operate well. 5. Total Assets Turnover = Net Sales/total of all Assets Total asset turnover is similar to fixed turnover. The only difference is that for this ratio, assets are considered rather than just the fixed assets. The total asset turnover for Peter's Plant is 1.91, which is, as expected, lower than his fixed asset turnover. This level of turnover indicates that for every dollar that Peter has invested in the pickle business, he generates \$1.91 in sales. Peter should be very happy that his investments produce such a high level of sales. 6. Number of Days of Payables = Accounts Payable X 365/Net Sales The average amount of time the firm takes to pay its bills, is estimated by this ratio, which is also called the payables period. Healthy companies, under normal economic conditions, will generally try to pay their bills within 30 to 45 days. If the time before payment increases significantly, it may indicate that the firm has a critical shortage of cash. Many firms will manipulate the timing of their bill payments, however, to extend the amount of time their cash can collect interest. Peter's payable period is 60.6 days, which means that if his suppliers sell on terms of Net 30, Peter does not pay promptly. Most firms expect that their clients will take a few days to pay their accounts and will tolerate late payments. Peter is in danger of harming his credit reputation, however, if he allows this excessively long payment period to continue. Profitability Ratios Profitability ratios are often the most important to any given firm. These ratios compare the amount of profit the firm generates to the factors which contribute to sales. Changes in these ratios may come from many sources but should be closely monitored by firms which are profit oriented. The ratios may give useful clues to the problems of the organization. DB 1. Return on Net Worth = Net Profit After Taxes/Tangible Net Worth This ratio measures the earning on the owners' equity. The owners `of a firm require a particular return on their investment. If the` firm does not meet the expectations of the owners, they will withdraw their support. The firm wants this ratio to be high, indicating that the money provided by the owners of the firm is being used effectively to generate profits. In Peter's case, return on net worth is 14.2%, meaning that for every dollar of net worth, the business returns \$0.142 of profit. Depending upon outside economic conditions, this may or may not be acceptable to investors. In general, a high return indicates a healthy firm. DB 2. Sales Margin = Net Profit After Taxes/Net Sales The sales margin compares the amount of profit the firm makes to the amount of sales. Since this ratio can be interpreted as profit per dollar, the firm will want a high value. This does not mean that a firm with a low value is in trouble. There are many cases where firms make a very small amount of profit on a unit of sales, but the volume of sales is very high. Such firms will be profitable overall despite a low ratio. The sales margin for Peter's plant is 2%, which indicates that for every dollar pickles that Peter sells, \$0.02 of profit is generated. Since Peter sells a high volume of pickles, the two cents per dollar adds up to an acceptable level of profit. DB 3. Productivity of Assets = Gross Income - Taxes/Total Assets The productivity of assets ratio shows how effectively the firm uses it assets generate profits. The ratio will have a wide range, depending upon the industry in which the firm operates. It should, however, remain fairly constant for a given firm over time. Note that gross income is the actual dollar income of the firm before any deductions for interest, taxes, or dividends are made. For Peter's firm, the productivity of assets ratio is 4.5%, indicating that the total assets of the company produce \$0.45 of gross profit less an allowance for taxes. 4. Gross Margin Ratio = Gross Margin/Sales A somewhat crude measure of profit per dollar is given by this ratio. The gross margin ratio compares the level of sales to the amount of profit the firm generates. The profit level involved does not take into account all expenses and taxes, thus the ratio is not wholly accurate. Gross margin (also called gross profit) is defined as net sales less cost-of-goods-sold. The gross margin ratio for Peter's business is 41.5%. Comparing this to the sales margin (of 2%), which takes into account all expenses and taxes, we can see that these items take a big bite out of Peter's sales dollars. The interpretation of this information could be that for every dollar of sales, gross profit is \$0.415, net profit is \$0.02, and expenses and taxes are \$0.385. 5. Operating Margin Ratio = Operating Margin/Sales The operating margin ratio is useful determining the sensitivity of income to small changes in sales. For example, a high ratio implies that a small change in sales, will result in a proportionally larger change in operating income. Operating margin is defined as gross margin less operating expenses. Peter's operating margin ratio 4.5%. This is due to the type of business that Peter is in--one of high volume and low profit per unit sold. A company which sells high priced items, such as a jewelry store or automobile dealer, will have a much higher operating margin due to its low turnover rate and high overhead. Coverage Ratios Coverage ratios indicate the firm's ability to pay its debts. These ratios compare the amount of money available to the firm to the amount of interest, lease payments, and debt reductions for which the firm is obligated. High ratios indicate that the firm can meet its obligations from its income. Low ratios might indicate that the firm will have to seek help from outside sources to meet its obligations. Low ratios combined with unfavorable economic conditions may force the firm into bankruptcy. Thus, these ratios are carefully examined by creditors. 1. Fixed Charge Coverage = Gross Income/Interest + Lease Payments + Sinking Fund Payments/1 - Tax Rate This ratio compares the amount of money the firm brings in, to the contractual obligations the firm must meet. If the ratio is high, the firm will probably be able to meet its obligations without financially embarrassing maneuvers. Note that sinking fund payments are simply deposits into a special account that will be used to pay off the debt when it matures. Many lenders require sinking funds when they make very large loans. The interest term in the equation is the total amount of interest paid out on all debts during this period. Peter's fixed charge coverage ratio is 9.57, which means that for every dollar he is obligated to pay to creditors, he has \$9.57 available in income. In other words, Peter can over his obligations about nine and a half times. This would be considered high for most firms, since they usually have higher debt levels than Peter does. 2. Debt Service Coverage = Profit Before Taxes + interest + Lease Payments/Interest + lease payments + Sinking Fund Payments/1 - Tax Rate The debt service coverage ratio, like the previous ratio, indicates the firm's ability to meet its contractual obligations. Peter's debt service coverage ratio is the same as his fixed charge coverage ratio, 9.57. This is because Peter's debt is structured very simply, and the differences in the equations for fixed charge coverage and debt service coverage do not come into play. Stock Radios Stock ratios are used to evaluate how well the firm's own stock is performing in the market. These ratios are particularly useful when comparing two or more firms. Generally, the firm with the highest ratios is more profitable and/or is perceived by investors to be more promising. 1. Earnings per Share = Total Net Earnings/Number of Common Shares This ratio shows the amount of profit generated by each share of common stock. High ratios indicate profitable firms which are more attractive to investors. This means that the earnings per share ratio has a direct effect on the price of the stock. Peter's firm has an earnings per share (EPS) of \$0.875/share. This means that every share of stock in Peter's plant generates about \$0.88 in earnings. To evaluate how good or bad this number is, the stock price must also be taken into consideration. 2. Price to Earnings = Market Price per Share/Earnings per Share The price/earnings ratio indicates how the market perceives the value of the stock. A high ratio shows that investors believe the firm's prospects, profits, and management are good. High ratios are also typical of "glamour" industries. Low ratios are not necessarily bad, as they may indicate a conservative firm in a stable industry. If the trend in this ratio is downward over time, however, investors probably see the firm as declining. The price/earnings (P/E) ratio for Peter's firm is 13.7. This value seems reasonable for Peter, and is neither ridiculously high or low. Earnings of \$0.875 per share would be phenomenally low for a stock with a price of \$100 per share, and leads to an unreasonably high P/E ratio. The P/E ratio gives a measure of the appropriateness of a firm's earnings compared to the investments made in the firm. 3. CAPM (a Stock's Required Rate of Return) = Ks = Kf + Beta x (Kf - Km) The capital asset pricing model (CAPM), is a technique used to estimate an investor's required rate of return on a given stock. The equation takes into account current market conditions and the inherent risk in the individual stock. The terms of the equation are defined as follows: Kf is the "risk-free" rate of return in the current market. This is usually the current T-bill rate (i.e., the interest the goverment pays on its own debt). Km is the current average market rate of return. This figure fluctuates with market conditions and buyer demand. This figure can usually be approximated by the current yield on average quality corporate bonds. Beta is a measure of the volatility (in price) of an individual stock. Basically, a high Beta indicates a firm with a high degree of price swing versus the market as a whole. Such a firm will have to pay a high rate of return to its stockholders to compensate them for taking the risk of a large price drop. A low Beta usually indicates a firm which experiences smaller price swings than the market average. A Beta value equal to one indicates a firm which follows market price variations very closely. Several large investment firms calculate and publish the Beta values for publicly traded firms. Ks is the investor's required rate of return on the stock involved. The CAPM for Peter's firm yields a value of 15.5% based on Peter's Beta of 1.25, the expected market return of 15%, and the T-bill rate of 13%. What this means is that Peter's stock price is expected to fluctuate over a wider range than an "average" stock (one that responds in exactly the same way that the market as a whole does). Those people who invest in Peter's firm will expect a higher rate of return on their investment, than they would from a stock which tracks the market exactly. The reason for this, is that if the overall market goes down, the price of Peter's stock is expected to drop by more than the market does. Thus, investors require a higher rate of return from Peter's stock, to compensate them for taking the greater risk. 4. Stock's Projected Market Price = Current Dividend x (1 + Growth Rate)/Market Rate of Return - Growth Rate The stock's projected market price is an equation which estimates the long-term average price for a given firm's stock. Price is partially determined by a firm's own growth and by the dividends it pays to its shareholders. The effect of outside economic factors on the stock price is considered by the "market rate of return" term which consolidates the effects of interest rates, investor preferences, legislation, and other outside forces. The "growth rate" term refers to the compound rate of the firm's growth over a long period of time. For any single stock in the market place, the price may range to points widely different from the result of this equation. Such variations usually balance out to the projected stock price over the long term, however. The calculated stock price for Peter's firm is \$10.70 per share, which is below Peter's current selling price of \$12 per share. Since the price per share is reasonably close to the selling price, an investor may feel confident that the has paid a reasonable price for the stock. If the calculated price varies widely from the market price, it sometimes indicates that the market expects a major change in the growth and profitability of the company. In other cases, the calculated stock price equation should not be applied. For example, a firm experiencing "super-normal" growth will be unable to maintain its growth rate for more than a few years. This high growth rate will push the results of the equation well beyond any reasonable limits. Finally, the actual price may vary from the calculated price due to forces which the equation cannot take into account. Summary Taken together, the six types of financial ratios can provide a snapshot of the firm's position, prospects, and problems. If the complete set of ratios is calculated for several consecutive time periods, trends in the firm can often be seen. As an example, inventory accounts which are not closely controlled may grow faster than the rate of sales. This creates an extra financial burden on the firm. Figure 3 shows the performance of Peter's firm over two consecutive years. Note that Peter's sales and inventory have both increased, but the balance between them has become less favorable. Peter is holding a larger amount of inventory than is optimum for this level of sales. He should note the increased use of inventory and seek its cause. By performing this simple ratio test, problems which are not evident from the raw sales and inventory data can be spotted and corrected. Similar possibilities exist for the use of other financial ratios. The Fin-Apple Ratios Program The ratio program is menu-driven to be as simple as possible for the user. Each entry of the main menu corresponds to one of four principle functions: 1. Initial data entry and data modification (options 1,2,3). 2. Storage and retrieval of data to a 5 1/4" floppy disk (option 10). 3. Actual calculation of the ratios, and optionally, their output to a printer (options 4,5,6,7,8). 4. Exiting the program when finished (option 11). The data entry functions bring the user to computer-driven questionnaires which guide the entry of data from balance sheets, income statements, ans stock information. The ratio calculation functions automatically display the ratios of the selected set together with the values of those ratios. The file function allows the user to create and store files of data on those firms which are useful for more than one analysis. The exit function brings the user back to DOS. Each sub-function of the main menu allows the user a choice of options. For data entry functions, the user may change previously entered data, have the data printed out, or return to the main menu. For the ratio calculation functions, the user may either have the ratio set printed out or returned to the main menu. In all cases, the program is designed to return to the main menu if an error is detected. The first time the program is used, it will be necessary to enter all the data to be operated upon. In subsequent runs, the data can be stored to the disk in the files. (Notes that the stock data is necessary only if the user wishes to calculate stock-related ratios). When entering dollar amounts, the program expects the numbers to be in thousands. Therefore, an amount such as \$1,385,000. should be entered as 1358. When non-dollar amounts, such as the number of shares of common stock outstanding are being entered, they should be entered fully. For example, 1,500,000 shares of stock would be entered as 1500000. If an error is made during data entry, a single entry may be changed without re-entering the entire set. This is done by entering a - 1 for each entry whcih is to remain the same, and correcting those entries which were in error. Note: this feature makes - 1 an invalid data value for input into the program. If the value - 1 is needed as a data point, use the value of -.999 to overide this feature. Finally, to assist the user in locating a persistent error, line 80 of the program can be replaced with a REMark. This will eliminate the error trapping feature of the program. Some printers, such as the Centronics 773, will not recognize the TAB feature which is used for spacing the output of the program. Printers like the Epson MX-80, however, will give an output that mirrors the CRT screen. If you find a spacing problem with your printer, consult your manual to see if your printer requires special initialization codes to enable the TAB feature. The following list gives the general procedure for running the program. 1. Load the program into an Apple II computer, running Applesoft, and type RUN. 2. The main menu should be automatically displayed on the screen. 3. If this is the first time the program has been run, enter the appropriate data by calling the data-entry functions form the main menu. Note that any dollar amounts should be entered in thousands. To check out the newly entered program, it is suggested that the figures for Peter's company be loaded. Then compare the resulting ratios to those given in this article. If there is a file in memory which is to be used for operating data, call the appropriate file from the main menu. 4. To calculate the desired ratios, call the appropriate routine by selecting its number from the main menu. The program will automatically calculate and display the ratio set. 5. If there are any problems in running the program, each sub-function of the main meny offers a choice, to print of return, when the specific function has been completed. 6. To exit the program, enter 11 when the main menu is displayed. For Further Information It should be obvious that this article is an attmpt only to acquaint the novice with financial ratio analysis. Those who would like to learn more about the subject may find the following texts of interest: The Guide to Case Analysis and Reporting, Edge and Cole-man, Systems Logistics Honolulu, HI, 1978. This is an excellent beginner's text, that is written and presented in a manner that is very understandable to the novice. Financial Management Theory and Practice, Brigham Dryden Press, Hinsdale, IL, 1979. This is a well respected college text used in intermediate level finance classes. Techniques of Financial Management, Helfert, Irwin Press, Homewood, IL, 1977. This text deals with the various financial analysis tools in use today. It is a more advanced text which presupposes prior knowledge of the field. Dun's Review, A Dun and Bradstreet Publication, 666 Fifth ave., New York, NY. A well known source of compiled financial data for industries and individual companies.