Random Equations/Metrics Flashcards
Free Cash Flow
Cash Flow from Operations (CFO) - Capital Expenditures (CapEx)
Company Value
Cash Flow / (Discount Rate - Cash Flow Growth Rate), where Cash Flow Growth Rate < Discount Rate
EBIT
Earnings Before Interest and Taxes, adjusted for any non-recurring or one-time charges (e.g., Impairments or Write-Downs if they’ve affected Operating Income)
It gives you a company’s core, recurring business profitability before the impact of capital structure and taxes.
EBITDA
EBIT + (Depreciation and Amortization taken directly from the Cash Flow Statement, not the Income Statement).
EBITDA is more of a “proxy” for Cash Flow from Operations.
EBITDA gives you a company’s core, recurring business cash flow from operations before the impact of capital structure and taxes.
Leverage Ratio
Total Debt / EBITDA
It tells you how much Debt a company has, relative to its ability to repay that Debt.
Higher numbers are riskier, lower numbers are less risky.
Interest Coverage Ratio
EBITDA / Interest Expense
It tells you how easily the company could pay for its current interest expense on Debt.
Higher numbers are better because they indicate there’s more of a “buffer” in case the business suffers and profits fall.
ROA
Return on Assets
Net Income (to Common) / Average Total Assets
How efficiently the company is using its assets to generate income.
ROE
Return on Equity
Net Income (to Common) / Average (Common) Shareholders’ Equity
How efficiently the company is using its equity to generate income.
ROIC
Return on Invested Capital
NOPAT / Average Invested Capital
Invested Capital = Equity + Debt + Preferred Stock + Other Long-Term Funding Sources.
NOPAT
Net Operating Profit After Tax
EBIT * (1 - tax rate)
DSO
Day Sales Outstanding
Accounts Receivable / Revenue * Days in Year
Shows how quickly it takes a company to collect receivables.
You can use average AR as well.
DIO
Days Inventory Outstanding
Inventory / COGS * Days in Year
Shows how quickly it takes a company to sell inventory.
You can use average Inventory as well.
Lower is better.
DPO
Days Payable Outstanding
Accounts Payable / COGS * Days in Year
You can use average AP as well.
Lower is better.
CCC
Cash Conversion Cycle
DIO + DSO - DPO
It tells you how long it takes a company to convert its Inventory and other short-term operational Assets, such as Accounts Receivable, into cash flows.
Lower is better.
What does Free Cash Flow represent?
FCF represents a company’s “discretionary cash flow” - how much cash flow it generates from its core business after also paying for the cost of its funding sources, such as interest on Debt.
