Fundamental Analysis
Valuing a business from its financials is the core skill of investing, and this is the largest category on the site.
The explainers cover the multiples that anchor most analysis, price-to-earnings, PEG, price-to-book, price-to-sales, and EV/EBITDA, alongside enterprise value, market capitalization, and intrinsic value.
From there they push into profitability, returns on capital, margins, growth, and the quality markers that separate a great business from a merely cheap one.
Investing With Purpose ties every ratio back to the cash a company actually produces, never to a number standing alone.
Master this category and you can value a company rigorously, compare it fairly to peers, and see what the market is paying up for.
The P/E ratio tells you how many dollars investors are paying today for each dollar of a company's annual earnings. It…
Market capitalization, or market cap, is the total dollar value the stock market currently places on a company's…
CAGR is the single annualized rate that would turn a starting value into an ending value if it compounded at the same…
A P/E ratio can be built on past earnings or on expected future earnings. Trailing P/E uses the most recent twelve…
The PEG ratio puts a stock's P/E in context by dividing it by the company's earnings growth rate. It tries to answer a…
The price-to-book ratio compares a company's market value to the accounting value of its net assets. It was a…
The price-to-sales ratio divides a company's market capitalisation by its revenue. It is the go-to multiple when…
The price-to-free-cash-flow ratio divides market capitalisation by the cash a company actually produces after funding…
Enterprise value is what it would cost to buy a business outright, inclusive of debt taken on and net of cash received.…
EV/EBITDA is the enterprise value of a business divided by its earnings before interest, taxes, depreciation, and…
Intrinsic value is what an asset is worth based on its fundamentals, independent of whatever price the market is…
The dividend discount model values a share of stock as the present value of the cash dividends it will pay forever. It…
Comparable company analysis, often shortened to "comps" or "trading comps," values a business by looking at the…
Precedent transaction analysis, also called "transaction comps," values a business by looking at the multiples paid in…
Return on equity measures how much profit a company generates for each dollar of shareholder capital it holds. It is…
Return on assets measures how efficiently a company turns its entire asset base into profit. Unlike ROE, it ignores how…
Return on invested capital is the profit a business earns on the total capital (debt plus equity) actually deployed in…
Gross, operating, and net margins are three profitability ratios taken from different levels of the income statement.…
The debt-to-equity ratio compares how much of a company's financing comes from creditors versus shareholders. It is one…
The interest coverage ratio measures how many times a company's operating earnings can cover its interest expense. It…
The current ratio and quick ratio are two short-term liquidity measures that tell you whether a company can meet the…
Revenue growth measures how fast a company's sales are expanding. Earnings growth measures how fast the bottom line is…
An economic moat is a durable competitive advantage that lets a company keep earning above-average returns on capital…
Management quality is the durable ability of a company's leadership to allocate capital well, communicate honestly, and…
The weighted average cost of capital is the blended return a firm must earn on its assets to satisfy every investor who…
Aswath Damodaran's corporate life cycle framework argues that every firm moves through predictable phases, and that the…
Terminal value captures everything a DCF does not explicitly forecast. It is typically 60 to 80 percent of total DCF…
The **gross margin ratio** measures how much of each sales dollar a company keeps after paying the direct costs of…
The **operating margin ratio** measures what a company keeps from each sales dollar after paying both direct production…
The **EBIT margin** measures earnings before interest and taxes as a share of revenue. It is the standard profitability…
The **EBITDA margin** measures earnings before interest, taxes, depreciation, and amortization as a share of revenue.…
The **EBITDAR margin** measures earnings before interest, taxes, depreciation, amortization, and rent or restructuring,…
The **EBITDAX margin** measures earnings before interest, taxes, depreciation, amortization, and exploration expenses,…
The **net profit margin** is the percentage of revenue a company keeps as net income after every cost, including…
The **pretax margin** measures earnings before income taxes as a share of revenue. It sits between EBIT margin and net…
The unit economics ratio measures the direct revenue and cost tied to a single customer, order, or product unit.…
Segment gross margin reports the profit a single business unit earns after its own cost of revenue, before corporate…
Incremental margin is the change in a profit metric divided by the change in revenue between two periods. The ratio…
Incremental operating margin measures the change in operating income divided by the change in revenue between two…
Normalized margin is the profit margin recalculated after removing one-time, non-recurring, or non-operating items from…
The current ratio compares a company's current assets to its current liabilities and is the most widely cited measure…
The quick ratio compares a company's most liquid assets to its current liabilities, excluding inventory and prepaid…
The cash ratio compares a company's cash and cash equivalents to its current liabilities. It is the strictest of the…
The defensive interval ratio counts how many days a company can keep operating using only its liquid assets, with zero…
The operating cash flow ratio divides cash generated by core operations by current liabilities. It tells you how many…
The working capital ratio measures whether a company has enough short-term assets to cover its short-term obligations.…
The net working capital ratio expresses a company's short-term liquidity cushion as a percentage of its total assets.…
The working capital turnover ratio measures how many dollars of revenue a company generates per dollar of working…
The debt to equity ratio compares the dollars a company has borrowed against the dollars contributed by shareholders.…
The debt to assets ratio measures the share of a company's assets financed by debt rather than equity. It is the…
The debt to capital ratio measures the proportion of a firm's total capital that comes from debt rather than equity.…
The equity multiplier ratio compares a company's total assets to its shareholders' equity, showing how many dollars of…
The interest coverage ratio TIE, short for times interest earned, measures how many times operating earnings can cover…
EBITDA interest coverage divides earnings before interest, taxes, depreciation, and amortization by interest expense.…
The fixed charge coverage ratio extends interest coverage by adding lease payments, mandatory debt amortization, and…
The cash flow to debt ratio divides operating cash flow by total debt. It tells you how long it would take the business…
The capitalization ratio measures total debt as a share of total capital, where total capital equals debt plus equity.…
The long-term debt to capital ratio divides long-term debt by total capitalization, where capitalization equals…
Retained cash flow to debt divides FFO minus common and preferred dividends by total debt. It captures the cash…
The asset turnover ratio measures how many dollars of revenue a company generates for every dollar of assets on its…
The fixed asset turnover ratio measures how efficiently a company converts its long-lived operating assets into…
The inventory turnover ratio counts how many times a company sells and replaces its stock during a period. It is the…
Days inventory outstanding (DIO) converts the inventory turnover ratio into something more intuitive: the average…
The accounts receivable turnover ratio counts how many times a company collects its average accounts receivable during…
Days sales outstanding (DSO) measures the average number of days a company waits between booking a sale and collecting…
The accounts payable turnover ratio counts how many times a company pays off its average outstanding supplier invoices…
Days payables outstanding (DPO) measures the average number of days a company takes to pay its suppliers. It is the…
The cash conversion cycle (CCC) is the number of days between paying suppliers for inventory and collecting cash from…
The working capital turnover ratio measures how many dollars of revenue a company generates for every dollar of net…
Receivables conversion efficiency measures how quickly a company turns the invoices it has issued into cash in the…
Sales per employee divides total revenue by full-time-equivalent headcount to produce a single dollar figure for…
Sales per square foot measures how much revenue a physical store generates for every square foot of selling space over…
Revenue per customer, often labeled ARPU for average revenue per user, divides recurring revenue by the number of…
The price to earnings ratio P/E is the most quoted number in equity investing: it tells you how many dollars an…
The forward P/E ratio prices a stock against the earnings analysts expect over the next twelve months, rather than the…
The PEG ratio divides a stock's price-to-earnings multiple by its expected earnings growth rate so that fast and slow…
The price to book ratio P/B compares a company's market value of equity to its accounting book value of equity. It…
Price to tangible book strips goodwill and other intangible assets out of the standard book equity figure, leaving only…
The price to sales ratio P/S compares a company's market capitalization to its revenue. It is the multiple of choice…
The EV/Sales ratio compares a firm's enterprise value to its revenue. Because revenue is almost never negative, the…
The EV/FCF ratio divides enterprise value by free cash flow to the firm. Where EV/EBITDA tolerates heavy capex and…
The dividend yield ratio divides the annual dividend per share by the current share price. It tells you the cash return…
The dividend payout ratio divides dividends paid by net income, showing what share of profit a firm returns to…
The plowback retention ratio measures the share of net income a firm keeps inside the business rather than paying out…
The dividend coverage ratio divides net income (or a cash flow proxy) by dividends paid, telling you how many times the…
The dividend yield vs bond yield comparison sets the cash income from owning a stock against the coupon income from…
The earnings yield is the inverse of the price-to-earnings ratio, expressed as a percentage. A stock trading at 20…
Free cash flow yield is the cash a business produces after capital spending, expressed as a percentage of market…
The owner earnings yield divides Warren Buffett's "owner earnings" by market capitalization, giving a cash-based…
The sales yield is the inverse of the price-to-sales ratio, expressed as a percentage of revenue per dollar of share…
The book yield divides the accounting book value of equity per share by the share price, producing the inverse of the…
Book value per share is the portion of a company's accounting equity that belongs to each common share. It is the…
Tangible book value per share is the equity per share that remains after subtracting goodwill and other intangible…
Free cash flow per share converts a company's discretionary cash generation into a per-share figure that scales…
Dividends per share is the cash paid to each common share over a stated period, usually a quarter or a year. It is the…
Sales per share, often called revenue per share, is total revenue divided by shares outstanding. It is the denominator…
Cash per share is the dollar value of cash and short-term investments on a company's balance sheet, divided by shares…
EBITDA per share is earnings before interest, taxes, depreciation, and amortization scaled to each diluted share. It is…
Net asset value per share is the total assets of an investment company or fund, minus liabilities, divided by shares…
Capex per share is capital expenditures divided by shares outstanding. It reveals how much of the operating cash a…
Operating cash flow per share is the cash a company generated from running its core business, divided by diluted shares…
Retained earnings per share takes the cumulative profit a company has kept since inception, after paying dividends, and…
EBIT per share takes earnings before interest and taxes, then divides by shares outstanding. It strips capital…
Segment revenue per share takes the sales reported for each business segment under ASC 280 or IFRS 8 and divides each…
Backlog per share divides a company's firm, unfulfilled customer orders by shares outstanding. For project-based and…
Working capital per share divides the difference between current assets and current liabilities by shares outstanding.…
Discounted cash flow is the standard method for estimating the intrinsic value of a cash-generating asset. You project…
The Altman Z-Score is a bankruptcy-prediction model that combines five balance sheet and income statement ratios into a…
The Piotroski F-Score is a 0-to-9 fundamental checklist that separates financially healthy value stocks from value…
The Beneish M-Score is a statistical model that flags firms whose financial statements show patterns consistent with…
Beta measures how much a stock moves with the market, but the measured beta bundles business risk and financial risk…
The country risk premium is the extra return investors demand for holding equities in a riskier country relative to a…
Sum-of-the-parts valuation values a diversified company by valuing each of its business segments separately and then…
A reverse DCF starts with the current stock price and solves backward to find the growth, margin, or cost-of-capital…
The implied growth rate is the growth assumption backed out of a stock's current price, given a chosen valuation model…
The implied cost of capital is the discount rate that equates a firm's current market price with the present value of…
Real options valuation applies financial option pricing theory to physical investment decisions. It captures the value…
Synergy is the extra value created when two firms combine, over and above their stand-alone values. Most deal prices…
A control premium is the extra amount an acquirer pays above a public trading price to secure control of a company. A…
Working capital analysis looks beyond the headline number on the balance sheet to ask whether a company's short-term…
Return on invested capital tells you how much operating profit a company earns per dollar of capital employed.…
Economic Value Added measures the dollar profit a company earns above the full cost of the capital it uses. It was…
The cash conversion cycle (CCC) is the number of days a company's cash is tied up in inventory and receivables before…
The 5-step DuPont equation breaks return on equity into five distinct drivers, separating operating performance from…
Net debt is total debt minus cash and cash equivalents. It shows how much debt would remain if a company used every…
Capital expenditure on a cash flow statement is a single line, but it really covers two very different things.…
Owner earnings is Warren Buffett's preferred way to answer a simple question: how much cash can the owners of a…
Gross margin tells you how much of every revenue dollar survives the direct cost of producing whatever the company…
Operating leverage measures how much operating profit moves when revenue moves by one percent. Companies with high…
Selling, general, and administrative expense (SG&A) is the cost of running the business below the cost of goods.…
Under US GAAP, research and development is expensed as incurred. Under IFRS, qualifying development costs are…
Inventory cost flow assumptions decide which dollars sit on the balance sheet and which dollars hit the income…
The allowance for doubtful accounts is a contra-asset that reduces gross receivables to the amount management expects…
Pension funded status is the difference between what a defined-benefit plan owes its participants (the projected…
Before 2019, US operating leases were off the balance sheet. ASC 842 brought them on, but it kept a split presentation:…
Synergy is the value created (or destroyed) by combining two firms that did not exist in either standalone business.…
Terminal value is the present value of all cash flows beyond the explicit forecast horizon. In most discounted cash…
The **return on equity ROE** ratio measures the profit a company generates for every dollar of common shareholder…
The **return on assets ROA** ratio measures the profit a company earns for every dollar of assets it controls. Because…
Return on tangible common equity (ROTCE) measures how much profit a company earns on every dollar of equity once…
Return on net operating assets (RNOA) measures the profitability of a company's core operations by comparing operating…
Cash flow return on investment, or CFROI, is an internal rate of return earned by a company on its inflation-adjusted…
Cash return on assets divides operating cash flow by average total assets to show how many cents of real cash each…
Return on capital employed measures how efficiently a company turns its long-term funding, both debt and equity, into…
Return on invested capital, or ROIC, is the most important after-tax return measure in corporate finance. Damodaran and…
DuPont 3-step analysis breaks return on equity into three multiplicative drivers: net profit margin, asset turnover,…
The 5-step DuPont analysis, sometimes called the extended DuPont, splits return on equity into five drivers instead of…
NOPAT margin expresses net operating profit after tax as a percentage of revenue. It is the after-tax cousin of EBIT…
Contribution margin ratio is the share of each revenue dollar that remains after subtracting variable costs. It is a…
The LCR liquidity coverage ratio is a Basel III rule that requires large banks to hold enough high-quality liquid…
The NSFR net stable funding ratio is the Basel III rule that pairs every long-dated asset on a bank's balance sheet…
The debt to EBITDA ratio measures how many years of cash earnings a firm would need to repay its total debt, assuming…
The net debt to EBITDA ratio is the same leverage measure as gross debt to EBITDA, but with cash and equivalents…
FFO to debt divides funds from operations by total debt and is the cash flow metric rating agencies anchor on. Unlike…
The financial leverage ratio measures total assets relative to shareholders equity, capturing how many dollars of…
Customer lifetime value (LTV) estimates the total gross profit a single customer is expected to deliver across the full…
Customer acquisition cost (CAC) measures the average dollar amount a company spends on sales and marketing to bring in…
The LTV to CAC ratio compares the gross profit a customer generates over their lifetime against the dollars spent to…
The SaaS magic number measures how much new annual recurring revenue a company generates for every dollar it spent on…
The burn multiple measures how many dollars a company spends to generate one dollar of new annual recurring revenue.…
The Rule of 40 SaaS framework states that a software company's revenue growth rate plus its profit margin should add up…
The price to cash flow ratio scales a company's market capitalization to its cash flow from operations, side-stepping…
Price to free cash flow values a company on the cash that remains after the business has paid for the capital…
The EV/EBITDA ratio compares the total enterprise value of a company to its earnings before interest, taxes,…
The EV/EBIT ratio compares the total enterprise value of a company to its operating income, which is earnings before…
The EV/EBITDAR ratio adds back rent and lease expense to EBITDA, removing differences in how firms finance their…
The EV/EBITDAX ratio adds exploration expense back to EBITDA, neutralizing the gap between the successful efforts and…
The EV/NOPAT ratio compares enterprise value to net operating profit after taxes. NOPAT is the earnings figure that…
The Shiller CAPE ratio divides the inflation-adjusted price of the S&P 500 by the average of ten years of…
The EV to invested capital multiple compares what the market pays for a business against the cumulative capital its…
The implied perpetuity growth rate is the long term growth rate that the current price or your DCF terminal value…
The EV to replacement cost multiple asks one disciplined question. Could you build this company's physical and…
Tobin's Q ratio, developed by Nobel laureate James Tobin, compares the total market value of an economy or firm to the…
The EV to installed base multiple prices a business by what investors pay per subscriber, customer, or active device.…
The EV to ARR SaaS multiple is the dominant pricing yardstick for cloud software businesses. It divides enterprise…
The EV to revenue growth ratio adapts the classic PEG idea for enterprise value. It divides the EV to revenue multiple…
The forward EV/EBITDA multiple uses next twelve months estimated EBITDA in the denominator instead of trailing results.…
The next twelve months PE NTM ratio divides current share price by the analyst consensus earnings per share expected…
The last twelve months PE LTM ratio divides current share price by EPS for the last four reported quarters. It is the…
The price-to-funds-from-operations ratio is the FFO multiple REIT analysts use in place of the price-to-earnings ratio…
The price-to-adjusted-funds-from-operations multiple is the AFFO multiple REIT investors use to measure distributable…
The price-to-net-asset-value ratio compares a REIT's stock price to a per-share appraisal of its underlying real…
The NAV discount premium is the gap, expressed as a percentage, between a REIT's share price and its consensus net…
Net interest margin (NIM) measures the spread between what a bank earns on loans and securities and what it pays on…
The banking efficiency ratio measures how many cents of operating cost a bank incurs to produce one dollar of revenue.…
The cost-to-income ratio in banking divides operating costs by operating income, expressed as a percentage. European…
The Tier 1 capital ratio divides a bank's Tier 1 regulatory capital by its risk-weighted assets, expressed as a…
The CET1 capital ratio divides a bank's Common Equity Tier 1 capital by its risk-weighted assets. Under Basel III, CET1…
The Tier 2 capital ratio measures a bank's gone-concern loss-absorbing capital as a percentage of risk-weighted assets.…
The total capital ratio in banking is the sum of Common Equity Tier 1, Additional Tier 1, and Tier 2 capital divided by…
The leverage ratio in banking is the non-risk-based capital floor that Basel III layers under the risk-weighted ratios.…
The LCR liquidity coverage banking rule requires large covered banks to hold enough high-quality liquid assets to fund…
The NSFR net stable funding banking rule requires banks to fund their long-dated assets with funding that is itself…
The NPL ratio banking metric measures loans that are 90 days or more past due or on nonaccrual status as a share of…
The charge off ratio banking metric tracks the value of loans a bank has formally written off as uncollectible during a…
The provision for credit losses ratio scales the income statement provision against the loan book, showing how much…
The deposit beta ratio measures the share of a change in market interest rates that a bank passes through to its…
The loan to deposit ratio LDR is the simplest funding mix measure on a bank's balance sheet. It divides total loans by…
The combined ratio insurance metric is the headline profitability gauge for property and casualty underwriters. It sums…
The loss ratio insurance metric tells you what share of every premium dollar the insurer expects to pay out as claims…
The expense ratio insurance metric measures what share of premium an underwriter spends on running the business apart…
The underwriting margin insurance metric is the profit a property and casualty insurer earns from its core risk-taking…
The retention ratio insurance metric measures how much of the premium an insurer keeps for its own account after…
The embedded value insurance metric estimates the economic worth of a life insurer to its shareholders, equal to net…
The value of new business insurance metric, often abbreviated VNB or NBV, measures the present value of future profits…
The Solvency II ratio is the headline capital adequacy figure for insurance and reinsurance undertakings in the…
The risk-based capital ratio insurance metric, often shortened to RBC ratio, is the principal solvency gauge for…
The free surplus insurance metric is the slice of a life insurer's capital that is not required to support policies…