These ratios are a guide to assist in the selection from the approximately 180 income trusts. Criteria other than financial ratios (see full list of investment criteria) are also important, however the financial ratios receive significant attention.

These descriptions of financial ratios as they relate to income trusts are introductory only.

Debt to Equity Ratio
Identifies if the debt levels of the income trust are reasonable.

Compares the total of long-term debt to the equity. For REITs this ratio is modified to the total of long-term debt as a ratio of equity plus long-term debt. This is done to be consistent with industry practice.

For any business there is limit to the amount of borrowing it can undertake and remain able to repay the debt plus interest. For a business with no debt this ratio will be zero. One with more debt than equity will have a ratio greater than 1. Typically a ratio from “nil” to about 30% is desirable. Real estate and pipeline trusts are generally able to have higher ratios ranging up to 100% due to the long lived nature of their assets.

Market Capitalization to Book Value
Compares the value the “market” places on the income trust to the values recorded on the books.

The comparison of these market value to book value indicates if the market value of the trust is greater or lesser than the amount the trust paid for their assets less the amounts borrowed to buy the assets.

A market value to book value ratio greater than 1 indicates investors are paying a premium for the trust. Normal ratios are typically between 1-2. A ratio less than one may indicate a bargain or a trust at risk of liquidation.

Market values move based on investor expectations about the individual trust’s earnings, the sector in which the trust operates, and the overall economy.

Market value is calculated as total trust units outstanding times the trading price per unit, the result is the total market value of the income trust. The book value is total value paid for assets minus total liabilities. Put another way, book value is the amount invested by the unit holders plus or minus the accumulated earnings/losses of the income trust. This amount is also referred to a net book value, net asset value, net equity, equity or just book value.

Cash Flow Ratios
Income trusts pay out a high percentage of their cash flow to unit holders making these are important ratios. The income fund must be able to continuously provide the regular payments to unit holders.

Distributions as a percent of Net Income - Quarterly & Year-to-date Cash Flow
This is rigorous measure of the ability to maintain distribution payments to unit holders. Calculated as the percentage of distributions to net income calculated according to Generally Accepted Accounting Principles. (GAAP). Net income will be adjusted for unrealized gains or losses and future income tax expense.

Operating Cash as a percent of Operating Income - Quarterly & Year-to-date Cash Flow
The "accountants" calculation of net income includes revenues that are not actually received in cash and expenses that are not actually paid out in the current reporting period. "Depreciation expense", or in the case of oil and gas trusts "depletion" of reserves are sources of cash that can be used to fund distributions. Also amortization expense that relates to intangible assets such are copyrights, trademarks, customer lists and non-compete agreements.

The "operating" cash flow measure broadens out the types of "cash flows" that are included in the cash flow measure. The intention is to include cash flows that represent the core operating activities. Amounts that would not be included are the proceeds from the issuing of trust units, long term debt, changes to working capital and one time extra-ordinary uses or receipts of cash. The CICA description of distributable cash now requires that changes to working capital be included.

The relationship between Net Income Ratio and the Operating Cash Flow Ratio
Ideally these two ratios should be less than 100% . This indicates the trust is earning more than it pays out and that capital is not being distributed. Operating Cash Flow Ratios greater than 100% indicate that ?trust capital? is possibly being distributed which could ultimately negatively impact on the value of the trust units

Why Both Quarterly and Year to Date?
The reason for both quarterly and year-to-date is to be able to quickly spot changes in cash flow trends. A strong year-to-date cash flow followed by a weak quarter inidicates a shift. A weak year-to-date cash flow ratio may followed by a strong quarterly ratio also indicates a change. These may be seasonal or a more permanent change in financial health. Spotting these changes and the reasons for them is essential.

ROC (Return of Capital)
When income trusts are distributing more than they earn they usually relying on cash from depreciation or depletion and in essence distributing some of their capital. At some future point this cash is likely going to be needed to replace the core assets. This capital element that trusts distribute is not tax deductible to the trust nor is it immediately taxable to the unit holder. This amount is listed as “Return of Capital” on unitholder tax reporting slips and must be deducted from the price paid for the units if and when the units are sold. When the units are sold the amount is taxable as a capital gain or possibly deductible as a capital loss.

Convertible Debentures
This column shows the amount of convertible debenture debt that a trust carries on their balance sheet. Convertible debentures have a dual personality in that they are not strictly debt or equity. It is important to know if a trust has convertible debentures in their capital structure and how much they carry.

Commencing on October 1/04 trusts will be required to classify convertible debentures as liabilities.

Yield
The column shows the annualized yield based on the “last updated” unit price. Unit prices can and do fluctuate so IncomeTrustResearch.com makes every effort to update unit prices but does not guarantee the accuracy of this information. Users are advised to check current unit prices.

Opinion
IncomeTrustResearch.com uses 5 different ratings. Ratings can and do change as information is available. Notification of ratings changes are made available to subscribers using emailed updates and are upated to the appropriate location on IncomeTrustResearch.com website. IncomeTrustResearch.com does not guarantee the accuracy of ratings and users are advised this is an opinion only subject to the “Terms of Use” of IncomeTrustResearch.com

Descriptions of Opinions

Green Dot (Green Up arrow) – this trust is considered to be of good quality with reasonable security of capital and stability of distribution. Both upside appreciation and downside movement in unit prices are limited. There is a reasonable possibility of moderate increase in distributions, and reductions in distributions are unlikely. Suitable for investors who are willing to accept moderate investment risk.

Yellow Arrow - UP – Indicates that the unit price of this trust is predicted to increase and/or there is potential for increase to distribution payments. This rating is considering to be of increased risk when compared to the “green” rated trusts. Trusts with the rating would be suitable for more aggressive investors.

Yellow Dot - Indicates this trust is currently experiencing increasing uncertainty with regards to the unit price or distribution. The direction of the unit price movement or stability of distribution cannot be determined at this time. Trusts with the rating would be unsuitable for conservative investors.

Yellow Arrow – Down – Indicates that the unit price of this trust is predicted to decline and/or there is potential for a decrease to distribution payments. This rating is considering to be of significantly increasing risk. Trusts with the rating would be unsuitable for conservative investors.

Red Dot(Red Down Arrow) – Trusts with this rating should not be owned by the type of investor who requires security of capital or stability of distributions. Risk level is considered to be high.