Financial Statement Analysis

Determinants of Intrinsic Value: Using Ratio Analysis Net operating profit after taxes Required investments in operating capital − Free cash flow (FCF) = FCF1 FCF2 FCF∞ ... Value = + + + (1 + WACC)1 (1 + WACC)2 (1 + WACC)∞ Weighted average cost of capital (WACC) For value box in Ch 3 ratios FM13. Market interest rates Firm’s debt/equity mix Cost of debt Cost of equity Market risk aversion Firm’s business risk

Overview Ratios facilitate comparison of: Ratios are used by: One company over time One company versus other companies Ratios are used by: Managers to identify areas of weakness and strength Lenders to determine creditworthiness Stockholders to estimate future cash flows and risk

RATIO ANALYSIS Liquidity Ratios Asset Management Ratios Debt Management Ratios Profitability Ratios Market Value Ratios There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

Liquidity Ratios CA CR = CL CA - Inv. QR = Can the company meet its short-term obligations using the resources it currently has on hand? Current Ratio Quick Ratio CR = QR = CA CL CA - Inv. There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

Asset Management Ratios How efficiently does the firm use its assets? How much does the firm have tied up in assets for each dollar of sales? Inventory Turnover Ratio Days Sales Outstanding (DSO), Average Collection Period (ACP) Fixed Asset Turnover Ratio Total Asset Turnover Ratio There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

Asset Management Ratios Inv. turnover = Sales Inventories DSO = = Receivables Average sales per day Sales/365 Fixed assets turnover      Sales              Net fixed assets = There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk). Total assets turnover      Sales        Total assets =

Debt Management Ratios Does the company have too much debt? Can the company’s earnings meet its debt servicing requirements? Total Liabilities to Total Assets, Long Term Debt to Total Assets, Debt to Equity Ratio Times Interests Earned Ratio EBITDA Coverage Ratio There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

Debt Management Ratios Total liabilities Total assets Debt ratio =             EBIT         Int. expense TIE = EBITDA Coverage Ratio = EBIT + Depr. & Amort. + Lease payments Interest Lease expense pmt. There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk). + + Loan pmt.

Profitability Ratios What is the company’s rate of return on: Sales? Assets? Profit Margin on Sales Basic Earning Power Return on Total Assets Return on Common Equity There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

Profit Margin Net profit margin (PM): NI PM = Sales OM = EBIT Net profit margin (PM): Operating profit margin (OM): Gross profit margin (GPM): There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk). Sales − COGS Sales GPM =

Basic Earning Power Return on Asset, Return on Equity BEP = EBIT Total assets ROA = NI Total assets There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk). ROE = NI Common Equity

Market Values Ratios Price/Earnings Ratio Price/Cash Flow Ratio Market value ratios incorporate the: High current levels of earnings and cash flow increase market value ratios High expected growth in earnings and cash flow increases market value ratios High risk of expected growth in earnings and cash flow decreases market value ratios Price/Earnings Ratio Price/Cash Flow Ratio Market/Book Value Ratio There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

Market Values Ratios P/E = Price per share EPS Price per share Cash flow per share P/CF = Mkt. price per share Book value per share M/B = There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

DU PONT EQUATION There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

ANALYTICAL APPROACHES Trend Analysis Common Size Analysis Percent Change Analysis There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

Limitations Different divisions in different industries Average is not good enough Inflation Seasonal factors Window dressing Different accounting practices What is a good ratio? Financial statements accuracy There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).

Qualitative Factors Dependence on key customer(s) Dependence on key product(s) Dependence on key supplier(s) Competition Future prospects Legal & regulatory environment There are three slightly different versions of the Thales story that I know of (I have no source for the first one). The third listed here seems to agree, in principal, with the first. The second isn’t that different, but it does not describe an option contract. Thales was born in Miletus in Greek Ionia, now part of Turkey. 1) At the time, Thales (pronounced Thay’leez) had been ridiculed as a philosopher whose philosophy was useless. Evidence of this was his extreme poverty. However, because of his extraordinary ability to read the stars, Thales forecast that the autumn olive harvest would be unusually large. He secretly traveled to the olive farmers and purchased the right of first refusal on their olives (a call option). Because this was nine months before the harvest, the farmers were willing to sell this right very inexpensively. Since he was correct, Thales was able to purchase the entire olive crop at the pre-agreed upon price. He now controlled the entire crop, and those who needed olives had to buy them at his price. Apparently, he made a fortune, and quieted his critics. 2) Another version of this story (http://www-groups.dcs.st-andrews.ac.uk/~history/Mathematicians/Thales.html) has it that Thales purchased outright all of the olive presses before the harvest. In either case, he apparently correctly forecasted the olive harvest and made a fortune on it. This same source relates that Thales was very well respected, and considered to be one of the Seven Sages of ancient Greece. He is credited with the discovery of theorems of elementary geometry. Aristotle related this story of the olive harvest, though I haven’t read Aristotle and cannot say which version is correct. 3) This story is quoted from the Internet Encyclopedia of Philosophy (http://www.utm.edu/research/iep/t/thales.htm): “Thales's reputation for wisdom is further enhanced in a story which was related by Aristotle. (Politics, 1259 a 6-23). Somehow, through observation of the heavenly bodies, Thales concluded that there would be a bumper crop of olives. He raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit. In this way, Thales answered those who reproached him for his poverty. As Aristotle points out, the scheme has universal application, being nothing more than a monopoly. There need not have been a bumper harvest for the scheme to have been successful. It is quite likely that Thales was involved in commercial ventures, possibly the export of olive oil, and Plutarch reported that Thales was said to have engaged in trade (Plut. Vit. Sol. II.4).” Joseph de la Vega wrote about options dominating the trading activities on the Amsterdam exchange in 1688. Since Amsterdam was the most important financial center of the time, this must have meant a significant amount of trading. David A. Dubofsky, “Options and Financial Futures: Valuation and Uses,” 1992, pp. 5-6. Bachelier (1900) wrote the first paper about the valuation of options in 1900. He wasn’t entirely successful, but his ideas helped to form the theory of option pricing and the EMH. He was the first to note that security returns appeared to follow a form of geometric Brownian motion (essentially, a random walk).