Investopedia.com https://www.investopedia.com/ (use it as much as possible - but reference it!!!!)

Net income (NI), also called net earnings, is calculated as revenues (sales?) minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses. It is a useful number for investors to assess how much revenue exceeds the expenses of an organization. This number appears on a company’s income statement and is also an indicator of a company’s profitability.

\[ NI = TR - BE - OC - T \] - TR = Total Revenues

• BE = Business Expenses

• OC = operating costs

• T = Taxes

Net equity value is the fair market value of a business’s assets minus its liabilities. This measured value is used to determine a business’s net worth – or the funds that would be left over and available to shareholders if all liabilities and debts were paid off.

Net Equity Value = (enterprise value + cash and cash equivalents + short and long term investments) – (short term debt + long term debt + minority interests).

Enterprice value = Market capitalization + Preferred stock + Outstanding debt + Minority interest – Cash and cash equivalents

Outstanding debt = total principal + interest amount of a debt that has yet to be paid

Market cap = Stock price x number of outstanding shares. (outstanding shares are traded in the secondary market)

Debt ratio measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets. It can be interpreted as the proportion of a company’s assets that are financed by debt.

In general, many investors look for a company to have a debt ratio between 0.3 and 0.6. From a pure risk perspective, debt ratios of 0.4 or lower are considered better, while a debt ratio of 0.6 or higher makes it more difficult to borrow money.

\[Debt ratio = \frac{Total Debts}{Total Assets}\]

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables. If it is in line with the industry average or slightly higher is generally considered acceptable. A current ratio that is lower than the industry average may indicate a higher risk of distress or default.

The current ratio is called current because, unlike some other liquidity ratios, it incorporates all current assets and current liabilities. The current ratio is sometimes called the working capital ratio.

\[ Current\_Ratio = \frac{Current\_Asset}{Current\_Liabilities} \]

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity.

Because shareholders’ equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets.

ROE is considered a gauge of a corporation’s profitability and how efficient it is in generating profits. The higher the ROE, the more efficient a company’s management is at generating income and growth from its equity financing.

\[ROE = \frac{Net Income}{Shareholder Equity}\]

The net profit margin, or simply net margin, measures how much net income or profit is generated as a percentage of revenue. It is the ratio of net profits to revenues for a company or business segment.

\[Net\_Margin = \frac{NI}{R}\] where - R - Revenue - NI - Net Income

The operating margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company’s operating income by its net sales. Higher ratios are generally better, illustrating the company is efficient in its operations and is good at turning sales into profits.

\[ Operating\_Margin = \frac{Operating\_earnings}{Revenues}\]

Return on assets (ROA) is the net income divided by total assets. It’s an efficiency measure of how well a company is using its assets. ROAs can vary based on the industry, thus, it’s best to compare company ROAs that operate in similar industries, or to use ROA for historical analysis (comparing a company’s current ROA to its previous ROA).

\[ROA = \frac{net Income}{Total Assets}\]

Operating revenue is the revenue that a company generates from its primary business activities.

For example, a retailer produces its operating revenue through merchandise sales; a physician derives their operating revenue from the medical services that they provide. What constitutes operating revenue varies based on the business or the industry. Operating result is the profit originating from the primary business.

The cash ratio is a measurement of a company’s liquidity. It specifically calculates the ratio of a company’s total cash and cash equivalents to its current liabilities. The metric evaluates company’s ability to repay its short-term debt with cash or near-cash resources, such as easily marketable securities. This information is useful to creditors when they decide how much money, if any, they would be willing to loan a company.

Compared to other liquidity ratios, the cash ratio is generally a more conservative look at a company’s ability to cover its debts and obligations, because it sticks strictly to cash or cash-equivalent holdings—leaving other assets, including accounts receivable, out of the equation.

\[Cash\_Ratio = \frac{Cash + Cash\_equivalents}{Current\_liabilities}\]

The acid-test ratio uses a firm’s balance sheet data as an indicator of whether it has sufficient short-term assets to cover its short-term liabilities.

The acid-test, compares a company’s most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities. The acid-test ratio disregards current assets that are difficult to liquidate quickly such as inventory. The acid-test ratio may not give a reliable picture of a firm’s financial condition if the company has accounts receivable that take longer than usual to collect or current liabilities that are due but have no immediate payment needed.

\[Acid\_Test = \frac{Cash+Marketable\_secur.+Accounts\_receivable}{Current\_liab.}\]

Working capital ( = net working capital) represents the difference between a company’s current assets and current liabilities. Working capital is a measure of a company’s liquidity and short-term financial health.

A company has negative working if its ratio of current assets to liabilities is less than one (or if it has more current liabilities than current assets). Positive working capital indicates that a company can fund its current operations and invest in future activities and growth. High working capital isn’t always a good thing. It might indicate that the business has too much inventory, not investing its excess cash, or not capitalizing on low-expense debt opportunities.

Earnings before interest and taxes (EBIT) is an indicator of a company’s profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest. EBIT is also referred to as operating earnings, operating profit, and profit before interest and taxes.

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is an alternate measure of profitability to net income. By stripping out the non-cash depreciation and amortization expense as well as taxes and debt costs dependent on the capital structure, EBITDA attempts to represent cash profit generated by the company’s operations.

EBITDA is not a metric recognized under generally accepted accounting principles (GAAP). Some public companies report EBITDA in their quarterly results along with adjusted EBITDA figures typically excluding additional costs, such as stock-based compensation.

Some claim that EBITDA overstates profitability.

\[EBITDA = NI + T + IE + D\]

• NI = Net Income

• T = Taxes

• IE = Interest Expence

• D = Depreciation & Amortization

What Is the Altman Z-Score? The Altman Z-score is the output of a credit-strength test that gauges a publicly traded manufacturing company’s likelihood of bankruptcy.

The Altman Z-score is a formula for determining whether a company, notably in the manufacturing space, is headed for bankruptcy.

An Altman Z-score close to 0 suggests a company might be headed for bankruptcy, while a score closer to 3 suggests a company is in solid financial positioning.

\[Altman Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E\] - A = working capital / total assets - B = retained earnings / total assets - C = earnings before interest and tax / total assets - D = market value of equity / total liabilities - E = sales / total assets

Days sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment for a sale. DSO is often determined on a monthly, quarterly, or annual basis.

To compute DSO, divide the average accounts receivable during a given period by the total value of credit sales during the same period, and then multiply the result by the number of days in the period being measured.

Days sales outstanding is an element of the cash conversion cycle and may also be referred to as days receivables or average collection period.

\[DSO = \frac{Accounts\_Receivable}{Total\_Credit\_Sales} Number\_of\_Days\]

Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which may include suppliers, vendors, or financiers. The ratio is typically calculated on a quarterly or annual basis, and it indicates how well the company’s cash outflows are being managed.

A company with a higher value of DPO takes longer to pay its bills, which means that it can retain available funds for a longer duration, allowing the company an opportunity to use those funds in a better way to maximize the benefits. A high DPO, however, may also be a red flag indicating an inability to pay its bills on time.

\[ DPO = \frac{Accounts\_payeble x Number\_of\_days}{COGS}\] \[COGS=Beginning\_Inventory+Purchases−Ending\_Inventory\] ## Days of inventory

The days sales of inventory (DSI) is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales.

DSI is also known as the average age of inventory, days inventory outstanding (DIO), days in inventory (DII), days sales in inventory, or days inventory and is interpreted in multiple ways.

\[DSI= \frac{COGS}{Average\_inventory} \times 365\]