Financial evaluation of the compnay

1. Profit margin = Net income / Revenue

1. Gross margin % = Gross margin $ / Revenue

1. Operating expense % = Operating expense / Revenue

1. Operating income % = Operating income / Revenue

1. Tax rate = Tax expense / Profit before tax

1. Current ratio = Current assets / Current liabilities

1. Quick ratio = (Current assets – inventory) / Current liabilities

1. Days receivable = Total Receivables / (Revenue / # days in the period)

1. Days inventory = Total inventory / (Cost of sales / # days in the period)

1. Days payables = Total accounts payable / (Cost of sales / # days in the period)

1. Cash conversion cycle = Days receivable + Days inventory – Days payable

1. A day of receivables working capital is worth = Revenue / # days in a period

1. A day of inventory working capital is worth = Cost of sales / # days in a period

1. A day of payables working capital is worth = Cost of sales / # days in a period

1. Debt ratio = Total liabilities / Total assets

1. Debt to equity ratio = Total debt / Total equity

(Debt defined as interest bearing liabilities. Debt normally includes bank debt, commercial paper, notes payable and capital leases)

1. Times interest earned = Earnings before interest and tax / Interest expense

(Earnings before interest and tax is commonly referred to as EBIT)

1. Return on Assets = Net income / Total assets

1. Return on Equity = Net income / Common equity

1. DuPont Formula = (Net income/Revenue) X (Revenue/Assets) X (Assets/Equity)

= Return on equity

1. Free cash flow;

1. Economic Value Added (EVA):

=NOPAT – Capital charge

Where capital charge = (WACC) X Operating capital

1. Price/earnings multiple = Share price / Earnings per share

1. Market capitalization = Share price X # diluted shares outstanding

1. Cost of debt = (interest rate ) X (1 – tax rate)

1. Cost of equity = = Risk free rate + beta (market risk premium)

(for this class we will normally use a market risk premium of 6.5)

1. Weighted Average Cost of Capital (WACC)

WACC = + % Debt X After tax cost of debt

+ % Preferred X Cost of preferred stock

+ % Common equity X Cost of Common Equity

1. Entity value = (# Shares outstanding X Current share price) + Value of debt

1. Dividend growth model:

Price of stock = D1 / (rs – g), where:

D1 = dividend to be paid in the next period

rs = required return of shareholders

g = growth rate

1. Profitability index (capital budgeting) = PV of future cash flows / Initial cost

1. Payback period: use an assessment of future cash flows to determine in how many years/months the capital will be paid back.

+ Sales

- Cost (cash costs only, exclude non cash costs like depre and stock comp

- Taxes

= Profit

- Capital expenditures

- Investment in working capital

= Free cash flow