How to Calculate NOPAT with an Example
NOPAT is an important measure of profitability. Investors use NOPAT to measure cash flows and ROIC (return on invested capital). Our goal as investors to find profitable, high-quality businesses remains job number one. We want companies with high margins, low debt, capable management, and stable operations. Companies generating high levels of NOPAT have great free […]
Stock Based Compensation Expense and FCF Explained In a Simple Way
Accounting for stock based compensation expense can be tough. The numbers don’t always line up from the income statement to the cash flow statement. Also, stock based compensation (SBC) is either automatically included or excluded, depending on which Free Cash Flow formula you are using (FCFF or FCFE). Over the long term, the real SBC […]
Working Capital vs Current Ratio – Don’t Calculate WC the Wrong Way!
There’s a subtle difference between working capital and current ratio. Though both can be calculated from the same place in the balance sheet, they are not one and the same. Working capital and current ratio paint two separate pictures about a business. To understand those pictures, we need to know the subtleties of each formula. […]
The 3 Main Profitability Ratios Used; with Average Industry Profitability Stats
Profit remains the goal of every business in the world, but how do we track a company’s profitability, and how do we compare the profitability of one company to another? Profitability margins help to answer both questions. Using the three main profitability margins is the fastest, easiest way to determine a company’s profitability, and the […]
Your EBITDA Margin Guide: How to Use, the Controversy, Real Examples
One of the more popular metrics to take the financial community by storm over the last twenty years is the EBITDA margin, which companies use to determine their operating profitability. The EBITDA margin is a quick, easy way to determine the profitability of any company, but it does come with a little controversy. If you […]
Contribution Margin and Unit Economics in Investing
Contribution margin is used in both investing and management accounting to make decisions regarding profitability, project feasibility, and unit economics. Contribution margin measures the incremental income associated with each additional unit of production. Particularly when investing in growth companies, contribution margin and unit economics should be analyzed very closely to understand the scalability of the […]
Defining a Good FCF Margin Formula: Basics, Examples, and Analysis
FCF margin is a valuable tool to understanding how much free cash a company can generate from its revenues. In general, a higher FCF (Free Cash Flow) margin means a company doesn’t need to spend much money to create profits and free cash. What is FCF (Free Cash Flow)? The basic definition for FCF is […]
Extended DuPont Analysis of Return on Equity – CFA Level I
The Extended DuPont analysis, also known as the 5-step DuPont equation, breaks down the already impressive DuPont model further. For investors, the Extended DuPont analysis is important because it will signify how leveraged a company is to the business cycle, financial markets, as well as government tax policy. Using the DuPont model can allow investors […]
Net Debt to EBITDA Guide: Risks, Valuation, Examples, and S&P 500 Data
Of the many ratios to measure risk with a particular stock, the Net Debt to EBITDA ratio is one of the more common you’ll see listed in company financials. The logic is simple, and the ratio isn’t terribly complex, so I’ll show you how to easily source it in this post. Feel free to skip […]
The Basics of Computer Software Depreciation – Common Q’s Answered
Some parts of GAAP accounting rules can be more tricky, and software and how it is depreciated can be one of those. Most software is depreciated over a useful life, but there can be a type of software which is not depreciated (if it is considered R&D software). First let’s talk about depreciation and amortization, […]
