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 […]

Short-Term Debt: Evaluating Financial Strength and Cash-Generating Growth

Short-term debt and current liabilities often get combined into the same bucket. When looking at the debt to equity ratio of the company, most investors calculate the ratio using the total liabilities divided by the equity. Analyzing a company’s debt position can be useful to determine if the company uses debt to fuel the company’s […]

What is PPE in Accounting?

PPE accounting refers to long term assets categorized as PPE (plant, property, and equipment), which are tangible assets that are expected to create cash flows over the long term. These can be significant to investors because their depreciation schedules directly influence the bottom line (earnings). This post will cover: The Basics of PPE and Depreciation […]

Days Sales in Inventory Guide – With Examples That Signal Future Problems

Days Sales in Inventory, or DSI, can be a invaluable ratio in evaluating inventory management of a public company—which can also sometimes signal future demand (and thus revenue) problems in advance. In this post, we’ll discuss: The Days Sales in Inventory (DSI) calculation Examples of bad DSI trends Best applications of the Days Sales in […]

How to Calculate Days Sales Outstanding (DSO) – w. Real Examples

The DSO acronym in finance stands for average days sales outstanding, and is critical to understanding a company’s revenue and sales trends. The DSO calculation is simple, yet its usefulness should not be glossed over. Using the DSO formula can help a financial analyst spot when a company could be “stuffing the channel”, leading to […]

Return on Total Capital and How to Calculate it

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” – Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter All great businesses generate high returns on capital, and they do so regularly. Companies such as Microsoft, […]