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
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 (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
“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, […]
What a Good Debt to Asset Ratio Is and How to Calculate It
Many businesses use debt to fuel their growth in today’s low-interest business world. Because the cost of debt is far lower than equity, many companies choose to 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 […]
What is the Cost of Capital and How to Use It
“I’ve never heard an intelligent discussion about ‘cost of capital.’” – Charlie Munger 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 the future cash flows is defining the discount rate or hurdle […]
Non-Cash Working Capital: A Critical Component of Valuation and FCF
Working capital is one of the engines that drives a business to profitability and growth. It is the combination of current assets and current liabilities that the company uses for short-term needs. But the combination includes cash items such as short-term cash, which is not working capital. Working capital is a critical component of valuation, […]
