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
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 […]
Depreciation Expense: How to Decode
Updated 8/7/2023 Depreciation is an accounting term that has a big impact on a company’s future profitability. It is a controversial topic because, as Warren Buffett states in many shareholder letters, it is unquestionably a proxy for required capital expenditures. Buffett includes depreciation in his owner’s earnings calculations and why most free cash flow calculations […]
The Basics of Computer Software Depreciation – Common Q’s Answered
Updated 9/25/2023 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 that is not depreciated (if it is considered R&D software). First, let’s talk about depreciation […]
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 […]
Simple Balance Sheet Structure Breakdown (by Each Component)
“Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets.” Peter Lynch The ability to read a company’s financials, such as the income statement, balance sheets, and cash flow statement, is a key source of data for investors, both do-it-yourselfers and institutional investors. As […]
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 […]
