Page 67 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 2. Performance Measurements and Standards 53

long-term (portion to be paid in more than a year from the date of this balance sheet).
In Table 2-7, these are $23,683,100 and $170,237,400, respectively, or a total of
$193,920,500.

• Debt to assets ratio See Debt to capital ratio.
• Debt to capital ratio This is total liabilities divided by total assets. In our example,
this is $193,920,500 (Table 2-7) divided by $330,997,900 (Table 2-6), or 0.586 to 1.
• Debt to equity ratio This is long-term debt divided by shareholder equity. This is
$126,763,900 (Table 2-7) divided by $137,077,400 (Table 2-8) or 0.92 to 1. Generally,
it is believed that the higher the ratio (especially above 1.0), the greater the investor
risk.

• Depreciation This is the systematic and rational allocation of the cost of a fixed
(noncurrent) asset over its useful life. Buildings and equipment listed on the balance
sheet as noncurrent assets ($76,980,500 in Table 2-6) are reduced annually in accor-
dance with GAAP by expensing them on the income statement as a depreciation
expense ($1,387,600 in Table 2-1). Tax regulations differ from GAAP.
• Dilution This is EPS before issuing additional shares of stock minus EPS after issu-
ing the additional shares divided by EPS before stock issuance. In Table 2-1, the basic
EPS for all operations is 63¢ per share (i.e., $9,658,800 net income divided by the
weighted average number of shares outstanding, namely, 15,250,000) vs. 73¢ for con-
tinuing operations (i.e., $11,140,600 divided by 15,250,000 shares). Diluted EPS, in
accord with FAS 128, increases the number of shares outstanding by the dilutive effect
of all in-the-money outstanding stock options and awards. In this example, that num-
ber is a million shares (Table 2-1), resulting in an EPS of 69¢ for continuing opera-
tions and 59¢ for all operations. This four-cent reduction is a dilution of 5.5 percent
for continuing operations (i.e., 4¢ divided by 73¢) and 6.3 percent for all operations
(i.e., 4¢ divided by 63¢).
• Dividend Payment by the company to any owner of a share of company stock. For
common stock, the amount is typically adjusted from time to time. For preferred
stock, the amount is typically preset at time of issuance. It could be expressed as the
dividend for the last or next quarter; it could be the actual dividend paid for the past
12 months; or it could be the current quarterly dividend projected for the next 12
months.
• Dividend payout ratio This is dividend divided by earnings per share. In our exam-
ple, if dividends are $0.46 per share and earnings per share are $0.63 (Table 2-1), the
ratio is 0.73 to 1.
• Earnings This is what remains after income is reduced by expenses. See EBIT,
EBITDA, and Net earnings.
• Earnings before taxes See Pre-tax earnings.

• Earnings charge This is when, in accord with GAAP, a program (such as executive
compensation) must be expensed. Typically, this will appear in the General and
Administrative line in the income statement ($5,398,400 in Table 2-1).