Business Terms and Equations

Simple Growth Rate

(Ending Value - Starting Value) / Starting Value

Year-over-year growth

(This Year-Last Year) / Last Year * 100

Compound Annual Growth Rate (CAGR)

the annual rate of return that shows how an investment grows from its beginning value to its ending value over time, assuming reinvested profits.

(Ending Value / Beginning Value)^(1/n) - 1

Years to Double

72 / Annual Growth Rate (%)

Weighted Average

$$\text{Weighted Average} = \frac{\text{Sum of (Value} \times \text{Weight)}}{\text{Sum of Weights}}$$

Blended Margin

A measure of the overall profitability of a business that combines different margins from various products or services to reflect the average margin across the entire portfolio.

$\text{Blended Margin }=\text{Sum of (Segment Margin}\times\text{ Segment Share)}$

Change in Profit

Sum of (Volume Change * Contribution Margin)

Gross Revenue

Total dollar sales for a reporting period

Net Revenue

Gross revenue minus returns, allowances, and discounts

price

average price per unit sold

Volume

Total number of units sold

Top-Line Growth

Growth in gross revenue (top line of the P&L)

Mix Change

Shift in Volumes across segments with different prices/margins

Fixed Costs

Costs that do not vary with output: rent, salaries, overhead

Variable Costs

Costs that scale directly with units produced or sold

COGS (Cost of Goods Sold)

direct variable cost per unit

Contribution Margin

Revenue - Variable Cost per unit; covers fixed costs

Total Cost Allocation

Proxy for all resources (fixed + variable) to produce/serve

Sunk Cost

Already incurred and unrecoverable - ignore in forward decisions

Opportunity cost

value of next-best alternative foregone

Marginal Cost

Incremental cost to produce one additional unit

Gross Profit

Revenue - COGS

EBITDA (Earnings Before Taxes, Depreciatiion, & Amortization)

• financial metric used to evaluate a company's operating performance.

• focuses on the core profitability and operational efficiency of a company, providing a clearer view of its performance compared to net income.

• important because it helps investors and analysts compare profitability across companies and industries by removing variables that may obscure a company's true operating results.

Operating Profit/EBIT

Profit after all operating expenses; before interest & taxes

Net profit

final profit after all deductions (interest, taxes, one-time items)

Profit Margin

Profit / Revenue (%)

Bottom Line Growth

Net profit growth over a period

Revenue

Price * Volume

Profit Margin

Profit / Revenue * 100

Gross Profit

Revenue - COGS

Contribution Margin

(Revenue - Variable Costs) / Revenue * 100

EBITDA

Net Income + Interest + Taxes + D&A

Breakeven Analysis

(Fixed Costs + Investment costs) / (Price - VC per unit)

Payback Period

Years to fully recoup the capital invested

Investment Cost / Annual Net Cash Flow

Net Inflow = Revenue -VC - FC

Cost-Plus Pricing

Selling Price = Breakeven price * (1+ Target Margin)

Price Elasticity of Demand

PED = % change in quantity / % change in price

<1 means inelastic (price insensitive, raise price), >1 means elastic (price sensitive, lower price), =1 unit elastic

Total Addressable Market (TAM)

Full Revenue Opportunity if a company captured 100% of market

Serviceable Addressable Market (SAM)

Portion of TAM the company can realistically target

Market Share

comapny’s revenue as a % of total market revenue

market penetration

% of target customers currently using the product/service

market saturation

point at which demand has been maximally met in a market

price elasticity

responsiveness of quantity demanded to a change in price

Conversion Rate

% of prospects who take a desired action (e.g. purchase)

Market Size

number of target customers * average purchase per period (usually year)

market share

company revenue / total market revenue * 100

market penetration

units sold / total target market size * 100

Market Growth Rate

(New Market Size - Old) / Old * 100

Conversion Rate

Conversions / Total Prospects * 100

Price Elasticity of Demand

% Change in Quantity / % Change in Price

ROI

Return on Investment - profit as % of cost investment

(Ending Value - Investment Cost) / Investment Cost * 100

Net Present Value (NPV)

today’s value of all future cash flows minus initial investment

Σ [Cash Flow_t / (1 + r)^t] − Initial Investment

r = discount rate, t = time period, Positive number = value creating

Discount Rate

rate used to convert future cash to present value (reflects risk + time cost)

Internal Rate of Return (IRR)

discount rate at which NPV = 0

want this to be greater than hurdle rate to follow through with an investment

Hurdle Rate

Minimum acceptable return for an investment (often weight avergage of of capital)

Simple Payback Period

Initial Investment / Annual Cash Flow

Weighted Average of Cost of Capital

blended cost of debt and equity financing

(E/V × Re) + (D/V × Rd × (1 − Tax Rate))

E = equity, D = debt, V = E + D, Re = cost of equity, Rd = cost of debt

Terminal Value

value of a business beyond the explicit forecast period

Time Value of Money

a dollar today is worth more than a dollar tomorrow

Synergies

Additional Value created when two companies combine (cost savings + revenue upside)

NPV(combined entity) - NPV(acquirer) -NPV(target)

goodwill

excess of purchase price over fair value of net identifiable assets acquired

Adjusted Present Value (APV)

NPV + PV of financing side effects (e.g. tax shield)

NPV + PV of financing effects

Enterprise Value

Total company value: equity + debt - cash; the effective acquisition price

Market Cap + Total Debt - Cash & Equivalents

EV / EBITDA Multiple

Enterprise value / EBITDA

Equity Value

Market capitalization = Enterprise value - net debt

Cannibalization

% of new product sales that replace (rather than add to) existing sales

Cannibalization Rate

Lost Sales (Old) / Sales (New Product) * 100

Conversion Ratio (Bonds)

Par Value of convertible bond/ conversion price of equity

Depreciation

allocation of tangible asset’s cost over its useful life (non-cash). Depreciation is an accounting method that spreads the cost of a tangible asset over its expected useful life. It reflects the gradual decrease in an asset's value due to wear, tear, and obsolescence, allowing businesses to deduct these costs incrementally instead of all at once.

(Asset Cost - Residential Value) / Useful Life

Amortization

allocation of an intangible asset’s cost over its useful life (non-cash). things like patents, trademarks, copyrights, franchises, and software licenses.

Principal * [(period value*(1+period value)ⁿ / ((1+period value)ⁿ-1)]

n = number of periods

CapEx

Capital Expenditure, finds to acquire or upgrade long-term assets

OpEx

operating Expenditure, day-to-day costs expensed immediately on the P&L

Working Capital

Current Assets - Current Liabilities; measures short term liquidity

current assets - current liabilities

positive means healthy liquidity

Capacity Utilization

% of total potential output currently being used

actual output / maximum capacity * 100

Throughput

Rate at which a system generates output or revenue per time period

Return on Assets (ROA)

Net Income / Total Assets * 100