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
Updated 4/6/2023 FCF margin is a valuable tool for 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. Why is FCF Important? Free cash flow is the amount […]
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
Updated 2/7/2024 Short-term debt and current liabilities are often combined into the same bucket. When calculating a company’s debt-to-equity ratio, most investors use the total liabilities divided by the equity. Analyzing a company’s debt position can be useful to determine whether the company uses debt to fuel its growth, which, in some cases, remains beneficial […]
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 (DSI): Evaluating Quality of Earnings and Inventories
Updated: 5/22/2023 Days Sales in Inventory, or DSI, can a great ratio to evaluate inventory management. It can also sometimes signal future demand (and thus revenue) problems in advance. In this post, we’ll discuss: Let’s dive in to what stock shorting specialist John Del Vecchio, CFA called “the second most important factor for earnings quality […]
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
Update 1/5/2023 “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 […]
What a Good Debt to Asset Ratio Is and How to Calculate It
Updated 1/5/2024 Many businesses use debt to fuel their growth in today’s low-interest business world. Because debt costs are far lower than equity, many companies raise cash to grow by taking on larger amounts of debt. The debt-to-asset ratio measures that debt level and assesses how impactful that might be for any company. Debt can […]
What is the Cost of Capital and How to Use It
Updated 12/12/2023 “I’ve never heard an intelligent discussion about ‘cost of capital.’” The value of any company or investment is the present value of future cash flows, whether Microsoft, our home, or a piece of art. Part of determining the present value of future cash flows is defining the discount rate or hurdle rate to […]
