Essential Corporate Finance Formulas and Ratios
Chapter 2: Key Financial Formulas
- Asset Equation:
Assets = Liabilities + Shareholder Equity - Market Capitalization (Market Value of Equity):
Market Price per Share * Number of Shares Outstanding - Net Working Capital (NWC):
Current Assets - Current Liabilities - Net Working Capital to Total Assets Ratio:
NWC / Total Assets - Debt-to-Equity Ratio:
Total Debt / Total Equity - Enterprise Value (EV):
Market Value of Equity + Debt - Cash - Current Ratio:
Current Assets / Current Liabilities - Quick Ratio (Acid-Test Ratio):
(Current Assets - Inventories) / Current Liabilities - Gross Profit:
Sales Revenue - Cost of Goods Sold - Earnings Per Share (EPS):
Net Income / Shares Outstanding - Gross Margin:
Gross Profit / Sales - Operating Margin:
Operating Income / Sales - Net Profit Margin:
Net Income / Total Sales - Asset Turnover:
Total Sales / Total Assets - Fixed Asset Turnover:
Sales / Net Fixed Assets - Accounts Receivable Days (Days Sales Outstanding – DSO):
Accounts Receivable / Average Daily Sales
Interest Coverage Ratios
Note: Higher ratios indicate a company earns significantly more than needed for interest payments.
- Times Interest Earned (TIE) Ratio (Option 1):
Operating Income / Interest Expense - Times Interest Earned (TIE) Ratio (Option 2):
EBIT / Interest Expense - EBITDA Coverage Ratio:
EBITDA / Interest Expense - Cash Coverage Ratio:
(EBIT + Depreciation) / Interest Expense
Profitability & Return Ratios
- Return on Equity (ROE):
Net Income / Book Value of Equity (Total Equity) - Return on Assets (ROA):
Net Income / Total Assets
Du Pont Identity
- ROE Decomposition:
ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets / Book Value of Equity) - Alternatively:
ROE = Net Profit Margin * Asset Turnover * Equity Multiplier
Market Value Ratios
- Price-Earnings (P/E) Ratio (Option 1):
Market Capitalization / Net Income - Price-Earnings (P/E) Ratio (Option 2):
Share Price / Earnings Per Share (EPS) - Market-to-Book (M/B) Ratio:
Market Value per Share / Book Value per Share - EV/EBITDA Ratio:
Enterprise Value / EBITDA
Where Enterprise Value = Market Value of Equity + Market Value of Interest-Bearing Debt + Minority Interest – Cash & Cash Equivalents - Market Value of Equity (Calculation):
Outstanding Shares * Price per Share
Cash Flow Statement Related Formulas
Operating Activities
- Operating Cash Flow (OCF – Indirect Method Start):
Net Income + Depreciation - Change in Non-Cash Working Capital:
(AR + Inventory - AP - Notes Payable)[Ending] - (AR + Inventory - AP - Notes Payable)[Beginning] - Cash Flow from Operations (CFO):
OCF (NI + Dep) - Change in Non-Cash Working Capital(Note: Sign convention for changes matters)
Investing Activities
- Net Capital Spending (NCS):
Net Fixed Assets[Ending] - Net Fixed Assets[Beginning] + Depreciation
Financing Activities
- Change in Retained Earnings:
Net Income - Dividends - Net New Borrowing:
Long-Term Debt[Ending] - Long-Term Debt[Beginning] - Dividends Paid:
Net Income - Change in Retained Earnings
Other Liquidity & Solvency Ratios
- Cash Ratio:
Cash / Current Liabilities - Interval Measure:
Current Assets / Average Daily Operating Costs - Total Debt Ratio:
(Total Assets - Total Equity) / Total Assets - Long-Term Debt Ratio:
Long-Term Debt / (Long-Term Debt + Total Equity)
Activity / Efficiency Ratios
- Inventory Turnover:
Cost of Goods Sold / Inventory - Days Sales in Inventory:
365 Days / Inventory Turnover - Receivables Turnover:
Sales / Accounts Receivable - Days Sales Outstanding (DSO):
365 Days / Receivables Turnover - Net Working Capital (NWC) Turnover:
Sales / NWC
Chapter 3: Time Value of Money Formulas
- Net Present Value (NPV):
NPV = PV(Benefits) - PV(Costs) - Present Value (PV) of a Single Future Amount:
PV = FV / (1 + r)^n - Future Value (FV) of a Single Present Amount:
FV = PV * (1 + r)^n
Return Calculations
- Holding Period Return:
Return = (Gain at End of Year) / Initial Cost - NPV of Buying Security:
PV(All Cash Flows from Security) - Price(Security)(Should be >= 0 for a good investment) - NPV of Selling Security:
Price(Security) - PV(All Cash Flows from Security)
Value Additivity Principle
- Combined Asset Value:
Price(Combined) = Price(Asset A) + Price(Asset B)
Expected Return & Risk
- Expected Return of Risky Investment:
Expected Gain at End of Year / Initial Cost - Required Return (r):
r = Risk-Free Rate (Rf) + Risk Premium - Discount Factor:
1 / (1 + r)
Cash Flow Streams
- Present Value (PV) of a Cash Flow Stream:
PV = Σ [Ct / (1 + r)^t](Sum from t=1 to n) - Present Value (PV) of a Perpetuity:
PV = C / r(Where C is the constant periodic payment starting next period) - Present Value (PV) of an Annuity:
PV = (C / r) * [1 - (1 / (1 + r)^n)] - Future Value (FV) of an Annuity:
FV = (C / r) * [(1 + r)^n - 1] - Present Value (PV) of a Growing Perpetuity:
PV = C1 / (r - g)(Where C1 is cash flow at t=1, g is constant growth rate, r > g) - Present Value (PV) of a Growing Annuity:
PV = (C1 / (r - g)) * [1 - ((1 + g) / (1 + r))^n] - Future Value (FV) of a Growing Annuity:
FV = (C1 / (r - g)) * [(1 + r)^n - (1 + g)^n] - Annuity Payment (C) given PV:
C = (PV * r) / [1 - (1 + r)^-n]
Chapter 4 Formulas
(No formulas listed in the original source for this chapter)