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.
How is Change in Working Capital calculated on the Cash Flow Statement?
Old Working Capital - New Working Capital
When a company’s Working Capital INCREASES, the company uses cash to do that; when Working Capital DECREASES, it FREES UP cash.
Unlevered Free Cash Flow
NOPAT + Non-Cash Adjustments and Changes in Working Capital from CFS - CapEx
Levered Free Cash Flow
Net Income + Non-Cash Adjustments and Changes in Working Capital from CFS - CapEx - (Mandatory?) Debt Repayments
Unlevered Beta
Levered Beta / (1+ Debt / Equity Ratio * (1- Tax Rate) + Preferred / Equity Ratio)
Levered Beta
Unlevered Beta * (1 + Debt / Equity Ratio * (1 - Tax Rate) + Preferred / Equity Ratio)
Present Value
Cash Flow / ((1 + Discount Rate) ^ Year #)
Terminal Value (Using UFCF)
Unlevered FCF in Year 1 of Terminal Period / (WACC - Terminal Unlevered FCF Growth Rate)
Terminal Value (Using Final Forecast Year)
Final Forecast Year FCF * (1 + Terminal FCF Growth Rate) / (Discount Rate - Terminal FCF Growth Rate)
Gordon Growth Method
Terminal Value (Multiples Method)
Terminal EBITDA or EBIT or NOPAT or FCF Multiple * Relevant Metric
Implied Terminal FCF Growth Rate
(Terminal Value * Discount Rate - Final Year FCF) / (Terminal Value + Final Year FCF)
Combined Equity Value
Acquirer’s Equity Value + Value of Stock Issued in Deal
Combined Enterprise Value
Acquirer’s Enterprise Value + Purchase Enterprise Value of Target
Cost of Cash
Foregone Interest Rate on Cash * (1 - Buyer’s Tax Rate)
Cost of Debt
Interest Rate on New Debt * (1 - Buyer’s Tax Rate)
Cost of Stock
Reciprocal of the Buyer’s P / E multiple, i.e. Net Income / Equity Value.
Seller’s Yield
Reciprocal of the Seller’s P / E multiple, calculated using the Purchase Equity Value
Weighted Cost of Acquisition
% Cash Used * Cost of Cash + % Debt Used * Cost of Debt + % Stock Used * Cost of Stock
Double Your Money in 1 Year
100% IRR
Double Your Money in 2 Years
~40% IRR
Double Your Money in 3 Years
~25% IRR
Double Your Money in 4 Years
~20% IRR
Double Your Money in 5 Years
~15% IRR
Triple Your Money in 3 Years
~45% IRR
