Topics
Income Statement
Balance Sheet
Profitability Ratios
Financial Health Ratios
Discounted Cash Flow
Dividend Discount Model
Cash Flow Statement
Technical
Margins
Valuation Ratios
Analyst Estimates
Ownership
Profitability Ratios
The return on assets ratio measures a company’s ability to generate profits from its assets. It is calculated by dividing net income by total assets. A higher ROA indicates that a company is utilizing its assets efficiently to generate profits.
For example, if a company generates net income of $1 million and has total assets worth $10 million, the ROA would be 10% ($1 million ÷ $10 million). This means that for every dollar of assets, the company generates 10 cents of profit.
The return on equity ratio assesses a company’s profitability in relation to shareholders’ equity. It is calculated by dividing net income by total equity. ROE represents the return that shareholders earn on their investment. A higher ROE indicates better profitability and efficient use of shareholders’ equity.
For example, a company has a net income of €500 000 and total equity of €2 million. In this case, the ROE would be 25% (€500 000 ÷ €2 million). It indicates that for every 1€ of equity invested by shareholders, the company generates 25 cents of profit.
The return on invested capital ratio evaluates the efficiency and profitability of a company’s capital investments. It is calculated by dividing operating income (adjusted for taxes) by invested capital. ROIC indicates how well a company generates returns from its invested capital.
For example, a company has operating income of €2 million and invested capital of €20 million. The ROIC would be 10% (€2 million ÷ €20 million). This implies that for every 1€ of capital invested in the company, it generates a 10-cent return.
The return on capital employed ratio measures the profitability of a company’s capital investments and its overall operational efficiency. It is calculated by dividing operating income by the capital employed (total assets minus current liabilities). ROCE helps assess the effectiveness of a company’s capital utilization.
For example, a company has operating income of €1.5 million, total assets of €10 million, and current liabilities of €2 million. The capital employed would be €8 million (€10 million – €2 million). With an operating income of €1.5 million, the ROCE would be 18.75% (€1.5 million ÷ €8 million). This indicates that for every 1€ of capital employed in the company, it generates a 18.75-cent return.
The cash return on capital employed ratio indicates the return generated by a company’s capital investments after deducting capital expenditures. It is calculated by dividing cash flow from operations by capital employed (total assets – current liabilities). CROCE reflects the cash generated from operations relative to the capital employed.
For example, a company which has a cash flow from operations of €3 million, total assets of €15 million, and current liabilities of €2 million. The capital employed would be €13 million (€15 million – €2 million). With a cash flow from operations of €3 million, the FCF ROCE would be 23.08% (€3 million ÷ €13 million). This implies that for every 1€ of capital employed, the company generates a free cash flow return of 23.08 cents.
Discounted Cash Flow
The discounted cash flow (DCF) model is a financial valuation method used to estimate the fair value of a stock by discounting its future cash flows to present value. This enables investors to assess whether an investment opportunity is undervalued or overvalued relative to its current market price.
- The most recent free cash flow per share is projected into the future based on growth assumptions.
Tip: Make sure to look at historical growth rates and analyst estimates for your assumptions.
2. After the projected period, the stock is sold at the selected price-to-free cash flow (P/FCF) multiple.
Tip: Make sure to look at the historical price-to-free cash flow (P/FCF) ratios for your assumptions.
3. Projected cash flows are then discounted back to today at the required rate of return.
Tip: In the discounted cash flow model, the company’s weighted average cost of capital (WACC) is often used as the discount rate (Required Return).
The required rate of return is the return an investor will accept for owning a company’s stock, to compensate them for taking a given level of risk. In discounted cash flow models, often the WACC (Weighted Average Cost of Capital) is used as the required rate of return.
Weighted average cost of capital (WACC) is the rate at which a company’s future cash flows can be discounted to arrive at a present value for the stock. It serves as the discount rate in the discounted cash flow model.
The WACC consists of 4 parts:
- Cost of Equity
- Cost of Debt
- Weight of Equity
- Weight of Debt
WACC = Cost of Equity×Weight of Equity + Cost of Debt×Weight of Debt
Cost of equity represents the return that investors expect to receive for putting their money into a company by buying its stock. This return compensates investors for the risk they take by investing in a stock instead of putting their money in a risk-free investment, like government bonds.
Cost of Debt is similar to the interest rate the company pays on its loans, but adjusted to reflect tax benefits because interest payments are tax-deductible.
Weight of Equity and Weight of Debt refers to the proportion of equity and debt in the company’s capital structure. If a company has $60 million in equity and $40 million in debt, the weights of equity and debt would be 60% and 40% respectively.
Margin of safety is a measure to add a buffer to the fair value calculation, to take into account possible changes in market conditions and minimize risk.
For example, if the calculated fair value of a stock is €100 per share and a margin of safety of 10% is applied, the final fair value would be €90 (€100 – (€100 × 10%)).
Sensitivity analysis involves changing one variable at a time in a discounted cash flow or dividend discount model to see how those changes affect the fair value calculation. This helps in understanding how sensitive the fair value is to changes in assumptions.
For example, an investor might perform a sensitivity analysis on a company’s required return, estimated growth rate or valuation multiple, to see how changes in the variable affect the stock’s valuation.
Balance Sheet
Assets
Cash and cash equivalents refer to the line item on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately. Cash equivalents include bank deposits, money market funds, and short-term government securities.
Short-term investments represent financial assets that a company intends to hold for a relatively short period, typically less than one year. These investments can include marketable securities (stocks, bonds), certificates of deposit, and other interest-bearing instruments.
Accounts receivable on the balance sheet represent the amounts owed to a company by customers for goods or services that have been delivered but not yet paid for. It is a short-term asset that reflects the company’s expectation of receiving cash in the near future.
For example, if a company has delivered products worth €5 million to customers but has not yet received payment, the accounts receivable would be €5 million.
Inventory refers to the raw materials used in production as well as the goods produced that are available for sale. There are three types of inventory: raw materials, work-in-progress, and finished goods. Managing inventory can help companies determine how successful they are and where they can improve to increase their profits.
Other current assets on the balance sheet include various short-term assets that do not fit into the standard categories like cash and equivalents, short-term investments, accounts receivable, or inventory. These can include prepaid expenses, deferred charges, or any other assets expected to be converted to cash or used up within one year.
Current assets on the balance sheet include all assets that are expected to be converted to cash or used up within one year. This category typically includes cash, cash equivalents, short-term investments, accounts receivable, inventory, and other current assets.
Gross property, plant & equipment (PPE) on the balance sheet represents the total cost of a company’s tangible assets used in its operations. This includes land, buildings, machinery, equipment, and vehicles before accounting for accumulated depreciation.
For example, if a manufacturing company has spent €8 million on buildings, €5 million on machinery, and €2 million on vehicles, the gross PPE would be €15 million (€8M + €5M + €2M).
Accumulated depreciation and amortization on the balance sheet represents the total amount of depreciation and amortization expenses that have been charged against the gross property, plant & equipment (PPE) over time. It reflects the accumulated reduction in the value of assets.
Net property, plant & equipment on the balance sheet represents the value of tangible assets (property, plant, and equipment) after deducting accumulated depreciation. It reflects the net book value of these assets.
For example, if a company’s gross property, plant & equipment is €15 million and accumulated depreciation and amortization is €6 million, the net PPE would be €9 million (€15M – €6M).
Goodwill on the balance sheet represents the excess of the purchase price of an acquired business over the fair value of its identifiable net assets. It arises when a company acquires another entity and pays more than the fair value of its tangible and identifiable intangible assets.
For example, if a company acquires another business for €20 million, and the fair value of its net assets are €15 million, the goodwill recorded on the balance sheet would be €5 million (€20M – €15M).
Intangible assets on the balance sheet represent non-physical assets that have no intrinsic value, but still contribute to a company’s long-term value. Examples of intangible assets include patents, trademarks, and copyrights.
Long-term investments on the balance sheet represent financial assets that a company intends to hold for more than one year. These can include equity investments in other companies, bonds, and other securities not intended for short-term liquidation.
Deferred tax assets on the balance sheet represent an overpayment or advance payment of taxes. These assets help reduce the company’s future tax liability.
For example, if a company has overpaid taxes by €500 000 due to temporary differences, the deferred tax assets would be €500 000, indicating the expected future tax benefit.
Long-term assets on the balance sheet include all assets with a useful life exceeding one year. This category comprises tangible assets like net property, plant, and equipment (PPE), intangible assets, long-term investments, deferred tax assets, and other non-current assets.
Total assets on the balance sheet represent the sum of a company’s current assets and long-term assets. It is the overall value of everything the company owns, indicating the resources available for operations and future growth.
Liabilities
Accounts payable on the balance sheet represents the short-term obligations a company owes to its suppliers or creditors for goods or services which have been received but not yet paid for.
For example, if a company has received goods worth €2 million from suppliers but has not yet made the payment, the accounts payable would be €2 million.
Current deferred revenue represents payment received in advance from customers for goods or services that the company expects to deliver within one year. It is a short-term liability reflecting obligations to fulfill transactions in the near future.
For example, if a company receives €1 million for an annual software subscription and expects to provide the services within the next year, the €1 million is classified as current deferred revenue.
Taxes payable on the balance sheet represent all the current amount of taxes that a company owes to tax authorities but has not yet paid.
Short-term debt on the balance sheet represents the portion of a company’s debt that is due for repayment within one year. It includes obligations such as short-term loans, lines of credit, or the current portion of long-term debt.
For example, if a company has a short-term loan of €2 million that needs to be repaid within the next 12 months, the short-term debt would be €2 million.
Other current liabilities on the balance sheet encompass various short-term obligations that do not fit into standard categories. These may include short-term accrued expenses, customer deposits, or any other liabilities expected to be settled within one year.
Current liabilities on the balance sheet represent all short-term financial obligations a company is expected to settle within one year. This category includes accounts payable, short-term debt, current deferred revenue, taxes payable, and other current liabilities.
Long-term deferred revenue represents amounts received in advance for goods or services that the company expects to deliver beyond one year. It is a long-term liability reflecting obligations to fulfill transactions over an extended period.
For example, if a company receives €2 million in advance payments for a long-term service contract for three years, and the services will be provided over that period, the €2 million is classified as long-term deferred revenue.
Long-term debt on the balance sheet represents the portion of a company’s debt that is due for repayment beyond one year. It includes obligations such as bonds, mortgages, and other forms of long-term financing.
For example, if a company takes out a €1 million loan with a repayment period of five years, and one year has passed since the loan was taken, the long-term debt would be €800 000 (assuming €200 000 has been repaid within the first year).
Other long-term liabilities on the balance sheet represent long-term obligations that are not classified under standard categories such as long-term debt or deferred taxes. These may include items like long-term warranties, pension obligations, or lease liabilities beyond one year.
Long-term liabilities on the balance sheet represent the sum of all long-term financial obligations that are due for repayment beyond one year. It includes long-term debt, deferred taxes, other long-term liabilities, and any other long-term obligations.
Total liabilities on the balance sheet represent the sum of a company’s current and long-term liabilities. It reflects the total financial obligations and claims against the company’s assets.
Equity
Treasury stock on the balance sheet represents shares of a company’s own stock that it has repurchased from the open market. It is recorded as a negative equity entry and reduces the total shareholders’ equity.
For example, if a company repurchases 10 000 shares of its own stock at €50 per share, the treasury stock would be €500,000 (10 000 shares × €50).
Common stock on the balance sheet represents the par value of shares issued to the company’s shareholders. It reflects the ownership interest of common shareholders in the company.
For example, if a company issues 100 000 shares of common stock with a par value of €1 per share, the common stock would be €100 000 (100 000 shares × €1).
Retained earnings on the balance sheet represent the cumulative amount of net income earned by a company that has not been distributed to shareholders in the form of dividends. It reflects the portion of profits retained for reinvestment or other purposes.
For example, if a company has earned a total of €5 million in net income over the years and distributed €2 million in dividends, the retained earnings would be €3 million (€5M – €2M).
Minority interest on the balance sheet represents the portion of a subsidiary’s equity that is not owned by the parent company. It reflects the ownership interest held by minority shareholders in the subsidiary.
For example, if a parent company owns 80% of a subsidiary, the remaining 20% owned by external investors would be classified as minority interest on the consolidated balance sheet.
Total shareholders’ equity on the balance sheet represents the total value of a company’s net assets owned by its shareholders. It is calculated as the sum of common stock, retained earnings, treasury stock, and minority interest.
Additionally, total shareholders’ equity represents the residual interest in the assets of the company after deducting its liabilities (Equity = Assets – Liabilities).
Financial Health Ratios
The quick ratio assesses a company’s ability to cover its short-term liabilities with its most liquid assets, excluding inventory. It is calculated by dividing (current assets – inventory) by current liabilities.
For example, a company has current assets of €1 million, inventory worth €200 000, and current liabilities of €500 000. The quick ratio would be 1.6 ((€1 000 000 – €200 000) ÷ €500 000). This indicates that for every 1€ of current liabilities, the company has €1.60 of highly liquid assets available to cover them.
Tip: A quick ratio of 1 or higher is generally considered favorable, as it suggests that a company can meet its short-term obligations without relying heavily on the sale of inventory. However, it is important to know, that healthy quick ratios differ between industries, for example, retail companies might often have lower quick ratios due to the need to have increased inventory on hand.
The current ratio measures a company’s ability to meet its short-term obligations with its current assets. It is calculated by dividing current assets by current liabilities.
For example, a company has current assets of €2 million and current liabilities of €1 million. The current ratio would be 2 (€2 million ÷ €1 million). This indicates that for every euro of current liabilities, the company has €2 of current assets to meet those obligations.
Tip: A current ratio of 1.5 or higher is generally considered healthy, as it indicates that a company has sufficient current assets to cover its short-term liabilities.
Interest coverage evaluates a company’s ability to make interest payments on its debt. It is calculated by dividing operating income by interest expenses.
For example, a company has operating income of €1 million and interest expenses of €200 000. The interest coverage ratio would be 5 (€1 million ÷ €200 000). This means that the company’s operating income is five times the amount needed to cover its interest expenses.
Tip: An interest coverage ratio of 5 or higher signifies that a company has enough income to cover their interest payments.
The debt-to-equity ratio measures a company’s financial leverage and risk by comparing its total debt to total equity. It is calculated by dividing total debt by total equity.
For example, a company has total debt of €10 million and total equity of €20 million. The debt-to-equity ratio would be 0.5 (€10 million ÷ €20 million). This indicates that the company has 50 cents of debt for every 1€ of equity.
Tip: A lower debt-to-equity ratio generally implies lower financial risk, as it suggests that a company relies less on debt financing and has a stronger equity position.
The debt-to-assets ratio measures the proportion of a company’s assets financed by debt. It is calculated by dividing total debt by total assets.
For example, a company has total debt of €5 million and total assets of €25 million. The debt-to-assets ratio would be 0.2 (€5 million ÷ €25 million). This means that 20% of the company’s assets are financed by debt.
Tip: A lower debt-to-assets ratio indicates a lower level of debt burden and a stronger financial position for the company.
Debt-to-operating income is a ratio that measures the amount of income generated and available to pay down debt. It is calculated by dividing total debt by operating income. A high ratio result could indicate a company has a debt load that might be too high
For example, a company has total debt of €5 million and operating income of €2 million. The debt-to-operating income ratio would be 2.5 (€5 million ÷ €2 million). This means that for every €1 of operating income, the company has €2.5 in total debt.
Tip: A lower debt-to-operating income ratio indicates a lower level of debt burden and a stronger financial position for the company.
Debt-to-free cash flow is a ratio that measures the amount of free cash flow generated and available to pay down debt. It is calculated by dividing total debt by free cash flow. A high ratio result could indicate a company has a debt load that might be too high.
For example, a company has total debt of €5 million and free cash flow of €2 million. The debt-to-free cash flow ratio would be 2.5 (€5 million ÷ €2 million). This means that for every €1 of free cash flow, the company has €2.5 in total debt.
Tip: A lower debt-to-free cash flow ratio indicates a lower level of debt burden and a stronger financial position for the company.
Dividend Discount Model
The dividend discount model (DDM) is a financial valuation method used to estimate the fair value of a stock by discounting its expected future dividends to present value. This enables investors to assess whether an investment opportunity is undervalued or overvalued relative to its market price.
- The most recent dividend per share is projected into the future based on growth assumptions.
Tip: Make sure to look at historical growth rates and analyst estimates for your assumptions.
2. After the projected period, the stock is sold at the current share price.
Tip: This indicates no changes in the share price for the projected period.
3. Projected dividends are then discounted back to today at the required rate of return.
Tip: In the dividend discount model, the company’s cost of capital is often used as the discount rate (Required Return).
The required rate of return is the return an investor will accept for owning a company’s stock, to compensate them for taking a given level of risk. In dividend discount models, often the cost of capital is used as the required rate of return.
The cost of capital or capital asset pricing model (CAPM) is a financial model that calculates the expected rate of return for a stock. It uses the:
- Risk-free rate (for example 10-yr treasury bond)
- Beta – the stock’s correlation or sensitivity to the market
- Expected market return
Beta is a measure of a stock’s volatility (systematic risk) relative to the market.
A beta of 1 means that the stock moves in line with the market, while a beta of 2 means that the stock moves twice as much as the market
A beta of 0.5 means that the stock moves half as much as (or 50% less than) the market
A beta of 0 means that the stock is not correlated with the market
The risk-free rate is the return on an investment with no risk of financial loss. Typically, this is represented by the yield on government bonds, such as government bonds or AAA-rated corporate bonds.
For example, if a 10-year U.S. Treasury bond yields 4%, that return would be considered the risk-free rate for investments in the U.S.
This is the return that investors expect to earn from their investment in the market over a given period. This can vary widely depending on the market conditions and historical performance.
For example, if the historical average return of the S&P 500 is around 8% annually, investors might use this figure as the expected market return for U.S. stocks.
Cash Flow Statement
Cash from Operations
Net income, also known as net profit or net earnings, is the final measure of a company’s profitability after all expenses, including taxes, have been deducted from its total revenue. It reflects the bottom line of the income statement.
Depreciation and amortization expenses represent the systematic allocation of the cost of tangible and intangible assets over their useful lives. They represent how much of the asset’s value has been used up in any given time period.
For example, if a manufacturing company owns machinery worth €2 million and estimates its useful life as 10 years, the annual depreciation expense would be €200 000 (€2M ÷ 10 years).
Deferred tax assets on the balance sheet represent an overpayment or advance payment of taxes. These assets help reduce the company’s future tax liability.
For example, if a company has overpaid taxes by €500 000 due to temporary differences, the deferred tax assets would be €500 000, indicating the expected future tax benefit.
Stock-based compensation on the cash flow statement represents the value of equity-based incentives granted to employees and other stakeholders. It includes stock options, restricted stock units (RSUs), and other forms of equity compensation.
For example, if a company grants stock options with a fair value of €500 000 to employees during the year, the stock-based compensation on the cash flow statement would be €500 000.
Change in working capital on the cash flow statement reflects the net change in a company’s current assets and liabilities. It includes variations in accounts such as accounts receivable, accounts payable, and inventory, providing insight into the company’s short-term liquidity.
For example, if a company’s accounts receivable increase by €50 000, assets increase by 50 000€. If accounts payable decrease by €30 000, liabilities would decrease by 30 000€. Therefore, the change in working capital would be €80 000 (€50 000 + €30 000).
Change in receivables on the cash flow statement indicates the net increase or decrease in accounts receivable during a specific period. It reflects the change in the amount of money owed to the company by its customers.
For example, if a company’s accounts receivable decreases by €200 000 during the year, the change in receivables would be -€200 000.
Change in other working capital on the cash flow statement represents the net change in various working capital items that are not specifically covered by other categories, such as changes in prepaid expenses, deferred charges, and other short-term assets and liabilities.
For example, if a company experiences a €50 000 decrease in prepaid expenses and a €30 000 increase in deferred charges during the year, the change in other working capital would be €20 000 (€50 000 – €30 000).
Cash from operations on the cash flow statement represents the amount of money (cash) generated or used by a company’s core operating activities. It includes cash receipts from customers and cash payments to suppliers, employees, and other operational expenses.
Cash from Investing Activities
Capital expenditures (CapEx) on the cash flow statement represent the amount of cash a company spends on acquiring, improving, or maintaining long-term assets such as property, plant, equipment, and intangible assets.
For example, if a company spends €1.5 million to purchase new machinery and €500 000 on building improvements during the year, the capital expenditures would be €2 million (€1.5M + €0.5M).
Net acquisitions on the cash flow statement represent the net cash used or generated from acquiring or selling other businesses during a specific period. It includes the cash outflow for acquiring new businesses and the cash inflow from selling or divesting existing businesses.
For example, if a company acquires a new business for €4 million and sells an existing subsidiary for €2 million, the net acquisitions would be -€2 million (€2M – €4M).
Net purchases of investments on the cash flow statement represent the net cash used or generated from buying or selling financial investments, such as stocks, bonds, or other securities.
For example, if a company sells stocks and receives €1 million in cash while also purchasing bonds for €500 000, the net purchases of investments would be €500 000 (€1M – €0.5M).
Net sales/maturities of investments on the cash flow statement represent the net cash generated from selling or maturing financial investments, such as stocks, bonds, or other securities.
For example, if a company sells bonds and receives €800 000 in cash while some existing investments mature, resulting in €200 000 in cash, the net sales/maturities of investments would be €1 million (€0.8M + €0.2M).
Net purchases of intangibles on the cash flow statement represent the net cash used or generated from acquiring or selling intangible assets, such as patents, trademarks, or copyrights.
For example, if a company acquires a patent for €300 000 and sells a trademark for €100 000, the net purchases of intangibles would be -€200 000 (€100 000 – €300 000).
Cash from investing activities on the cash flow statement that represents in total how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets.
Cash from Financing Activities
Debt issued on the cash flow statement represents the net cash generated from issuing debt instruments, such as bonds or loans. It reflects the inflow of cash resulting from the borrowing activities of the company.
For example, if a company issues bonds and receives €5 million in cash, the debt issued would be €5 million, indicating a net cash inflow from debt issuance.
Debt repaid on the cash flow statement represents the net cash used to repay existing debt obligations. It reflects the outflow of cash resulting from the repayment of loans, bonds, or other debt instruments.
For example, if a company repays €2 million in outstanding loans and €1 million in bonds during the year, the debt repaid would be -€3 million.
Common stock issued on the cash flow statement represents the net cash generated from issuing new shares of common stock. It reflects the inflow of cash resulting from equity financing activities.
For example, if a company issues 100 000 new shares of common stock at €10 per share, the common stock issued would be €1 million (100 000 shares × €10).
Common stock repurchased on the cash flow statement represents the net cash used to buy back shares of the company’s own common stock. It reflects the outflow of cash resulting from the repurchase of outstanding shares.
For example, if a company spends €2 million to repurchase its own shares in the open market, the Common Stock Repurchased would be -€2 million.
Dividends paid on the cash flow statement represent the net cash used for distributing profits to shareholders in the form of dividends. It reflects the outflow of cash resulting from dividend payments.
For example, if a company pays €1 million in dividends to its shareholders during the year, the dividends paid would be -€1 million.
Cash from financing activities on the cash flow statement represents the net cash generated or used by a company’s financing activities, including issuing or repurchasing stock, issuing or repaying debt, and paying dividends.
Cash Position
Beginning cash on the cash flow statement represents the amount of cash and cash equivalents the company had at the beginning of the accounting period.
Ending cash on the cash flow statement represents the amount of cash and cash equivalents the company had at the end of the accounting period.
Changes in cash on the cash flow statement represent the increase or decrease in a company’s cash and cash equivalents during a specific accounting period. It is calculated as the difference between the beginning cash and ending cash.
Free Cash Flow
Free cash flow (FCF) on the cash flow statement represents the cash generated by a company’s core operations after deducting capital expenditures necessary to maintain or expand its asset base (free cash flow = cash from operations – capital expenditures). It provides insight into the company’s ability to generate cash for debt repayment, dividends, or further investments.
For example, if a company generates €3 million from operations and spends €1 million on capital expenditures during the year, the FCF would be €2 million (€3M – €1M).
Free cash flow per share is a financial metric that represents the amount of free cash flow generated by a company per outstanding share of its common stock. It provides insight into the company’s ability to generate cash relative to its share count.
For example, if a company has free cash flow of €2 million and 1 million shares outstanding, the free cash flow per share would be €2 (€2M ÷ 1M shares).
Margins
Gross margin is a measure of profitability that measures a company’s gross profit compared to its revenues as a percentage. The gross margin allows for a comparison of one company’s performance to its competitors.
For example, if a company’s gross profit is €2 million and its total revenue is €8 million, the gross margin would be 25% (€2 million ÷ €8 million). This implies that for every 1€ of revenue, the company retains 25 cents as gross profit after accounting for the cost of goods sold.
Tip: Higher margins are generally better, illustrating the company is efficient in its operations and is good at turning sales into profits.
The EBITDA margin is calculated by dividing EBITDA by revenue. The acronym EBITDA stands for earnings before interest, taxes, depreciation, and amortization. The EBITDA margin is a performance metric that measures a company’s profitability from operations.
For example, if a company’s EBITDA is €3 million and its total revenue is €15 million, the EBITDA margin would be 20% (€3 million ÷ €15 million). This suggests that for every 1€ of revenue, the company generates 20 cents in EBITDA (earnings before interest, taxes, depreciation, and amortization).
Tip: Higher margins are generally better, illustrating the company is efficient in its operations and is good at turning sales into profits.
The operating margin represents how efficiently a company is able to generate profit through its core operations. It is calculated by dividing a company’s operating income by its revenue.
For example, if a company’s operating income is €4 million and its total revenue is €20 million, the operating margin would be 20% (€4 million ÷ €20 million). This implies that for every 1€ of revenue, the company retains 20 cents as operating income after covering all operating expenses.
Tip: Higher margins are generally better, illustrating the company is efficient in its operations and is good at turning sales into profits.
Profit margin measures how much profit is generated as a percentage of revenue. Net profit margin is one of the most important indicators of a company’s overall financial health.
For example, if a company’s net income is €2.5 million and its total revenue is €25 million, the profit margin would be 10% (€2.5 million ÷ €25 million). This implies that for every 1€ of revenue, the company retains 10 cents as net profit after accounting for all expenses and taxes.
Tip: Higher margins are generally better, illustrating the company is efficient in its operations and is good at turning sales into profits.
Operating cash flow margin is a cash flow ratio that measures cash from operating activities as a percentage of total sales revenue in a given period. Operating cash flow margin is a trusted metric of a company’s profitability and efficiency and its earnings quality.
For example, if a company’s operating cash flow is €3.5 million and its total revenue is €30 million, the operating cash flow margin would be 11.67% (€3.5 million ÷ €30 million). This indicates that for every 1€ of revenue, the company generates approximately 11.67 cents in operating cash flow from its core operations.
Tip: Higher margins are generally better, illustrating the company is efficient in its operations and is good at turning sales into cash.
The free cash flow (FCF) margin is a profitability ratio that compares a company’s free cash flow to its revenue to understand the proportion of revenue that becomes free cash flow. Companies with an abundance of free cash flow available tend to operate more efficiently with higher profit margins, while possessing more cash to reinvest in their operations.
For example, if a company’s free cash flow is €2 million and its total revenue is €20 million, the free cash flow margin would be 10% (€2 million ÷ €20 million). This implies that for every 1€ of revenue, the company generates 10 cents in free cash flow.
Tip: Higher margins are generally better, illustrating the company is efficient in its operations and is good at turning sales into profits.
The cash conversion ratio is calculated by dividing operating cash flow by net income. It provides insights into the company’s ability to generate cash flow relative to its profitability.
For example, if a company’s operating cash flow is €4 million and its net income is €3 million, the cash conversion ratio would be 1.33 (€4 million ÷ €3 million). This suggests that for every 1€ of net income, the company generates €1.33 in operating cash flow.
A ratio greater than 1 indicates that the company generates more free cash flow than its net income, suggesting that it has a healthy cash flow position. Conversely, a ratio less than 1 implies that the company’s net income exceeds its operating cash flow, which may indicate potential cash flow constraints or inefficiencies in managing working capital and capital expenditures.
A tax rate is a percentage at which a company is taxed. The effective tax rate is calculated by taking the income tax expense and dividing it by the company’s net income.
The dividend payout ratio shows how much of a company’s profits it gives to shareholders as dividends. Low ratios often mean the company is focusing on growth, while high ones might suggest it’s more about rewarding shareholders than rapid growth.
For example, if a company pays dividends of €2 per share and has earnings per share of €4, the dividend payout ratio would be 50% (€2 ÷ €4). This means that the company distributes 50 cents in dividends for every 1€ of earnings per share.
Analyst Estimates
“Expected” refers to the amount (earnings per share, revenue, cash flow) anticipated by analysts for the next quarter or year of a company.
“Reported” is the actual amount (EPS, revenue, cash flow) a company has announced in its financial statements.
Surprise represents the percentage difference between the expected and reported values.
A “beat” occurs when the reported value is higher than the expected amount, indicating that the company’s performance has exceeded analyst estimates.
A “miss” occurs when the reported value is lower than the expected amount, indicating that the company’s performance has failed to meet analyst estimates.
High represents the highest expected amount (earnings per share, revenue, cash flow) by analysts for the next quarter or year of a company.
Low represents the lowestYear-over-year growth refers to the percentage change expected amount (earnings per share, revenue, cash flow) by analysts for the next quarter or year of a company.
Year-over-year growth refers to the percentage change when comparing the current period to the same period in the previous year.
Technical
Market cap, short for market capitalization, shows the market value of the whole company. It’s calculated by multiplying the current stock price by the total number of shares that the company has issued.
Enterprise value shows the market value of the whole company. It is similar to the market cap, however it adjusts for total debt and cash & equivalents. It represents the theoretical price an investor would pay for the entire business, including both equity and debt.
Volume shows the total number of shares that are traded during a day of trading. Higher volume usually suggests more active trading and indicates more interest in the company’s stock.
Float is the number of outstanding shares for trading by the general public. Float impacts the liquidity and volatility (beta) of a stock.
52-week high refers to the highest price at which the stock has traded over the past year.
52-week low refers to the lowest price at which the stock has traded over the past year.
Beta is a measure of a stock’s volatility (systematic risk) relative to the market.
A beta of 1 means that the stock moves in line with the market, while a beta of 2 means that the stock moves twice as much as the market.
A beta of 0.5 means that the stock moves half as much as (or 50% less than) the market.
A beta of 0 means that the stock is not correlated with the market.
Shares outstanding is the total number of shares of a company’s stock that have been issued and are held by investors.
Valuation Ratios
The price-to-earnings (P/E) ratio is a financial metric that compares a company’s current share price to its earnings per share (EPS). It is a metric that shows the relative valuation of a stock by measuring how much investors are willing to pay for each dollar of a company’s earnings.
A higher P/E ratio typically indicates that investors are willing to pay a premium for the company’s earnings growth potential, while a lower P/E ratio may suggest that the stock is undervalued or that the company’s growth prospects are not as promising.
For example, if a company’s stock price is €50 and its earnings per share (EPS) are €5, the P/E ratio would be 10 (€50 ÷ €5). This indicates that investors are willing to pay €10 for every €1 of earnings the company generates.
The price-to-free cash flow (P/FCF) ratio is a financial metric that compares a company’s current share price to its free cash flow per share (FCF). Free cash flow represents the cash generated by a company after accounting for capital expenditures.
Relative to competitors, a lower value for P/FCF indicates that the company’s stock is relatively cheap, and a higher value for P/FCF indicates a company’s stock is relatively expensive.
For example, if a company’s stock price is €40 per share and its free cash flow per share (FCF) is €4, the P/FCF ratio would be 10 (€40 ÷ €4). This suggests that investors are willing to pay €10 for every €1 of free cash flow generated by the company.
The price-to-book (P/B) ratio measures the market cap of a company relative to its book value. Book value equals total assets less total liabilities.
Relative to competitors, a lower value for P/B indicates that the company’s stock is relatively cheap, and a higher value for P/B indicates a company’s stock is relatively expensive.
For example, if a company has total assets worth €100 million and total liabilities worth €40 million, its book value would be €60 million (Total Assets – Total Liabilities). If the company has a market cap of €180 million, the P/B ratio would be 3 (€180 million ÷ €60 milion), indicating that investors are valuing the company at three times its book value.
The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenue. The P/S ratio shows how much investors are willing to pay per dollar of sales for a stock.
A low ratio could imply the stock is cheaper, while a ratio that is higher could indicate that the stock is expensive. The P/S ratio doesn’t take into account whether the company makes any profit or whether it will ever make earnings.
For example, if a company’s revenue is €50 million and a market cap is €100 million, the P/S (Price-to-Sales) ratio would be 2 (€100 million ÷ €50 million), indicating that investors are willing to pay €2 for every €1 of the company’s sales revenue.
Earnings yield is the inverse of the price-to-earnings (P/E) ratio, which is the company’s earnings divided by the share price. The inverse relationship between earnings yield and the P/E ratio indicates that the higher the earnings yield, the cheaper the stock. Conversely, a lower earnings yield means that the company is more expensive.
For example, if a company has net income of €10 million and has a market cap of €100 million, the earnings yield would be 10% (€10 million ÷ €100 million). This means that for every €1 invested in the company’s stock, investors receive a return of 10 cents in earnings.
Free cash flow yield is the inverse of the price-to-free cash flow (P/FCF) ratio, which is the company’s free cash flow divided by the share price. The inverse relationship between free cash flow yield and the P/FCF ratio indicates that the higher the free cash flow yield, the cheaper the stock. Conversely, a lower free cash flow yield means the company is more expensive.
For example, if a company has free cash flow of €8 million and has a market cap of €160 million, the earnings yield would be 5% (€8 million ÷ €160 million). This means that for every €1 invested in the company’s stock, investors receive a return of 5 cents in free cash flow.
The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It indicates the return that investors receive from holding a particular stock in the form of dividends.
The higher the dividend yield, the more dividends the investor receives relative to the stock price. Conversely, a lower the dividend yield indicates a higher stock price relative to dividends.
For example, if a company pays an annual dividend of €2 per share and the stock price is €40, the dividend yield would be 5% (€2 ÷ €40). This means that for every €1 invested in the company’s stock, investors receive a return of 5 cents in dividends annually.
Enterprise multiple, also known as the EV-to-EBITDA multiple, is computed by dividing enterprise value by EBITDA. The enterprise multiple takes into account a company’s debt and cash levels in addition to its stock price and relates that value to the firm’s cash profitability.
Enterprise Value (EV) = Market capitalization + total debt − cash & cash equivalents
EBITDA = Earnings before interest, taxes, depreciation and amortization
Relative to competitors, a lower value for EV/EBITDA ratio indicates that the company’s stock is relatively cheap, and a higher for EV/EBITDA ratio indicates that the company’s stock is relatively expensive.
For example, if a company has an enterprise value (EV) of €200 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) of €40 million, the EV/EBITDA ratio would be 5 (€200 million ÷ €40 million). This implies that for every €1 of EBITDA generated by the company, the market values it at €5.
The enterprise value-to-revenue multiple is a measure of the value of a stock that compares a company’s enterprise value to its revenue. The enterprise multiple takes into account a company’s debt and cash levels in addition to its stock price and relates that value to the firm’s revenue.
EV = Market capitalization + total debt − cash & cash equivalents
Relative to competitors, a lower value for EV/Revenue ratio indicates that the company’s stock is relatively cheap, and a higher for EV/Revenue ratio indicates that the company’s stock is relatively expensive.
For example, if a company has an enterprise value (EV) of €300 million and revenue of €60 million, the EV/Revenue ratio would be 5 (€300 million ÷ €60 million). This suggests that for every €1 of revenue generated by the company, the market values it at €5 of enterprise value.
Income Statement
Revenue is the total amount of income generated by the sale of goods or services related to the company’s primary operations. It is the income a company generates before any expenses are taken out. Total revenue reflects the top line of the income statement.
For example, if a manufacturing company sells €100 million of goods, they will report €100 million as their total revenue.
Cost of goods sold (COGS), also known as „cost of revenue,“ refers to the direct costs of producing the goods or services sold by a company. COGS is subtracted from the revenue to calculate gross profit.
Gross profit is the profit a company makes after deducting the costs associated with producing and selling its products or the costs associated with its services. It is the difference between a company’s total revenue and its cost of goods sold (COGS), and represents the earnings available to cover operating expenses and contribute to net profit.
For example, if a company generates €5 million in revenue and incurs €2 million in COGS, the gross profit is €3M.
Selling, general, and administrative expenses (SG&A) include costs related to selling, marketing, administrative functions, and other overhead costs. These include expenses like management salaries, advertising, travel costs, legal fees, commissions, and all payroll costs. None of these expenses are assigned to a specific product, and therefore are not included in the cost of goods sold (COGS).
Research & development expenses (R&D) represent the costs incurred by a company in its pursuit of innovation and product improvement. These expenses cover activities aimed at creating new products, enhancing existing ones, or discovering new technologies.
For example, if a pharmaceutical company invests €15 million in developing a new drug, the €15 million spent on research, testing, and innovation is reported as R&D expenses.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a measure of a company’s profitability. EBITDA is calculated by adding interest, taxes, depreciation, and amortization expenses to net income.
For example, if a company reports €8 million in revenue, €3 million in cost of goods sold (COGS), and €1 million in selling, general, and administrative expenses (SG&A), its EBITDA would be calculated as €4 million (€8M – €3M – €1M).
Depreciation and amortization expenses represent the systematic allocation of the cost of tangible and intangible assets over their useful lives. They represent how much of the asset’s value has been used up in any given time period.
For example, if a manufacturing company owns machinery worth €2 million and estimates its useful life as 10 years, the annual depreciation expense would be €200 000 (€2M ÷ 10 years).
Other operating expenses encompass costs not directly tied to the core business operations, such as losses from unexpected events, impairments, or one-time charges.
For example, if a company faces an unexpected lawsuit settlement costing €500 000 or incurs a one-time restructuring charge of €1 million, these amounts would be categorized as other operating expenses.
Total operating expenses represent the sum of all costs associated with a company’s regular business operations, including cost of goods sold (COGS), selling, general, and administrative (SG&A), depreciation, amortization, and other operating expenses. It provides a comprehensive view of the overall expenses incurred to run the business.
Operating income represents the profit generated from a company’s core operations before interest and taxes. It is calculated by subtracting total operating expenses from gross profit.
For example, if a company has gross profit of €8 million and total operating expenses of €3 million, the operating income would be €5 million (€8M – €3M).
Non-operating income includes gains or losses that are not directly related to a company’s core business operations. This can include income from investments, interest income, or gains from the sale of assets. Examples of non-operating income would be if a company earns €100 000 from selling an investment or receives €50 000 in interest income from a loan.
Pre-tax income, also known as income before taxes, is the total income a company earns before accounting for income taxes. It includes both operating and non-operating income.
For example, if a company has operating income of €4 million and non-operating income of €500 000, the pre-tax income would be €4.5 million (€4M + €0.5M).
Provision for income taxes represents the estimated amount of income taxes a company expects to pay based on its pre-tax income.
For example, if a company has a pre-tax income of €5 million and is subject to a 20% tax rate, the provision for income taxes would be €1 million (€5M × 20%).
Net income, also known as net profit or net earnings, is the final measure of a company’s profitability after all expenses, including taxes, have been deducted from its total revenue. It reflects the bottom line of the income statement.
Basic earnings per share (EPS) is a financial metric that represents the portion of a company’s profit allocated to each outstanding share of common stock. Basic EPS considers only the actual number of outstanding shares. It is calculated by dividing the net income by the number of basic outstanding shares during a period.
For example, if a company has a net income of €4 million and 1 million basic shares outstanding, the basic EPS would be €4 (€4M ÷ 1M).
Diluted earnings per share (EPS) is a financial metric that represents the portion of a company’s profit allocated to each outstanding share of common stock. Diluted EPS accounts for the potential impact of convertible securities (like stock options or convertible bonds) that could be converted into common shares. It is calculated by dividing the net income by the number of diluted outstanding shares during a period.
For example, if a company has a net income of €4 million and 1 million diluted shares outstanding, the diluted EPS would be €4 (€4M ÷ 1M).
Basic shares outstanding represent the total number of common shares that are currently issued and outstanding. It includes common shares held by investors and excludes any potentially dilutive securities.
Diluted shares outstanding takes into account the potential impact of dilutive securities that could be converted into common shares. It includes additional shares that would arise from the conversion of stock options, convertible bonds, or other securities.
Dividend per share (DPS) is a financial metric that represents the total amount of dividends declared by a company divided by the total number of outstanding shares. It indicates the cash value distributed to shareholders for each share held.
For example, if a company declares €500 000 in dividends and has 1 000 000 shares outstanding, the dividend per share would be €0.50 (€500 000 ÷ 1 000 000), reflecting the amount of cash each shareholder would receive for every share owned.
Ownership
Institutional holdings refers to the portion of a company’s outstanding shares that are owned by institutional investors, such as mutual funds, pension funds, and insurance companies.
Insider holdings refers to the portion of a company’s outstanding shares that are owned by individuals who are closely associated with the company, such as executives, directors, or employees.
Shares held refers to the total number of shares of a company that are owned by a specific individual or entity.
% Shares held indicates the proportion of a company’s total outstanding shares that are owned by a specific individual or entity.