TBC NME formulas (Fall 2024)

X margin

X / Revenue (e.g. gross margin = gross profit / revenue, net margin = net income / revenue.)

Liquidity ratios

Current Ratio: Current Assets / Current Liabilities

Quick Ratio: (Current Assets - Inventories) / Current Liabilities

Solvency ratios

1) Debt/Equity ratio; 2) Net Debt / EBITDA ratio; 3) Interest coverage ratio (Operating income / Interest expense)

Book Value of Equity

Assets - Liabilities

ROA

Return on Assets = Net Income / Total Book Value of Assets

ROE

Net Income/Book Value of Equity

ROIC

NOPAT / Invested Capital

Invested Capital

Total Debt + Book Value of Equity - Non-Operating Assets (usually just cash/ST securities)

Intrinsic value compounding rate (sustainable growth rate)

ROIIC * Reinvestment Rate

= (Δ Earnings / Δ Invested Capital) * (Δ Invested Capital / Σ All Earnings over that period)

ROIIC

Return on INCREMENTAL invested capital. (Incremental = change in.)

Δ Earnings / Δ Invested Capital.

Reinvestment rate

Δ Invested Capital / Σ All Earnings over that period

(see Week 2 Business analysis slides 17-19)

Economic profit

Revenue - Explicit costs - Opportunity Costs;

(ROIC - WACC) * Invested Capital

NOPAT

operating income * (1-effective tax rate)

Net Debt

Total Debt - Cash

Enterprise Value

Market value of operating assets.

Market Cap + Total Debt - Cash (= Market Cap + Net Debt)

FCFF

Free Cash Flow to Firm = Unlevered Free Cash Flow.

FCFF = NOPAT + D&A - CapEx - ΔNWC

NWC

Net Working Capital = working capital assets – working capital liabilities = current operating assets - current operating liabilities.

basically, do (CA - cash & equivalents) - (CL - short-term debt)

Expected return

Total Return = Dividend Yield + Δ in stock price

= Dividend Yield + (Δ EPS + Δ P/E Ratio)

* Dividend Yield = guaranteed annual payout

* Δ EPS = actual growth

* Δ P/E ratio = change in valuation; could be due to changes in: interest rates, market risk premium, company risk, future growth expectations

WACC

CoD(1-t)(D/(D+E)) + CoE*(E/(D+E))

Cost of Equity (CAPM)

Rf + β*ERP = Rf + β(Rm-Rf)

Equity risk premium

Rm-Rf (Expected Market Return - Risk Free Rate)

Cost of Debt (practical approaches)

1) Weighted average yield of the outstanding debt on their books (weighted by principal amounts), or 2) Risk-free rate + estimated credit spread based on their credit rating

Terminal Value (gordon growth)

Terminal year FCFF * (1+g)/(r-g)

PV of firm

Σ (CFn/(1+r)^n) [for projected years, e.g. 5 years] + Terminal Value

PE ratio

Share Price / EPS (= Market Cap / Net Income)

EPS

Earnings / Share (= Net Income / Shares Outstanding)

PB ratio

Price-to-Book

Share Price/Book Value Per Share = Market Cap / Book Value of Equity

Asset Turnover

Revenue / Asset

Days

365 / Turnover = 365 / (Revenue / Asset) = 365 * Asset/Revenue