Financial Metrics Glossary

The number of times a company pays off its suppliers during a period, calculated as Cost of Goods Sold ÷ Average Accounts Payable. This ratio helps assess how quickly a business settles its debts, with very high turnover potentially indicating missed opportunities to use supplier credit, and very low turnover suggesting payment difficulties.

The number of times a company collects its average accounts receivable during a period, calculated as Revenue ÷ Average Accounts Receivable. A higher turnover indicates the business collects payments from customers quickly and efficiently, improving cash flow and reducing bad debt risk.

A measure of how efficiently a company uses its assets to generate revenue, calculated as Revenue ÷ Total Assets. A higher ratio indicates the business is generating more sales per dollar of assets, suggesting better operational efficiency and asset utilization.

The amount of shareholder equity attributable to each share of stock, calculated as (Total Assets - Total Liabilities) ÷ Number of Shares Outstanding. This metric represents the per-share value if the company were liquidated at book value and helps investors assess whether a stock price is reasonable relative to the company's net assets.

The difference between actual financial results and budgeted amounts, typically expressed as a percentage or dollar amount. Analyzing variances helps identify areas where performance exceeded or fell short of expectations, enabling better decision-making and more accurate future planning.

A ratio comparing Customer Lifetime Value to Customer Acquisition Cost, calculated as CLV ÷ CAC. A ratio of 3:1 or higher is generally considered healthy, indicating that the value gained from customers significantly exceeds the cost to acquire them, while lower ratios may signal unsustainable growth strategies.

The money a company spends to acquire, upgrade, or maintain physical assets like buildings, equipment, or technology. CapEx is important because these investments are essential for maintaining operations and supporting growth, though they reduce short-term cash flow and must be balanced against returns.

The rate at which a company spends its cash reserves, typically measured monthly, particularly important for startups and businesses not yet profitable. This metric helps determine how long a company can operate before running out of cash or needing additional funding.

The number of days it takes a company to convert its investments in inventory and other resources into cash from sales, calculated as DSO + DIO - DPO. A shorter cycle means the business converts inventory to cash faster, which improves liquidity and reduces the need for external financing.

The most conservative liquidity measure, showing a company's ability to pay current liabilities using only cash and cash equivalents, calculated as (Cash + Cash Equivalents) ÷ Current Liabilities. This metric reveals whether a business could immediately pay off short-term debts without selling inventory or collecting receivables.

The amount of time a company can continue operating at its current cash burn rate before depleting its cash reserves, calculated as Cash on Hand ÷ Monthly Cash Burn Rate. This metric is crucial for planning and helps businesses understand when they'll need to secure additional funding or reach profitability.

The amount of revenue remaining after subtracting variable costs (costs that change with production volume), which contributes to covering fixed costs and generating profit. This metric helps businesses understand how much each sale contributes to profitability and is critical for pricing decisions and break-even analysis.

The effective interest rate a company pays on its borrowed funds, typically calculated as total interest expense divided by total debt. This metric is important for understanding financing costs and is used in calculating WACC, with lower costs indicating better creditworthiness and financial terms.

The return that shareholders expect or require for investing in a company, representing the compensation needed for the risk of owning equity rather than safer investments. This metric is used in calculating WACC and helps businesses understand what returns they must generate to satisfy equity investors.

The direct costs required to produce or purchase the products a business sells, including materials, labor, and manufacturing expenses. COGS matters because it shows how much it actually costs to deliver your product or service, which directly impacts your profit margins.

Assets that a company expects to convert into cash or use up within one year, including cash, accounts receivable, inventory, and short-term investments. These assets matter because they represent the resources available to pay short-term obligations and fund day-to-day operations.

Debts and obligations a company must pay within one year, including accounts payable, short-term loans, accrued expenses, and the current portion of long-term debt. Understanding current liabilities is essential for managing cash flow and ensuring the business can meet its immediate financial obligations.

A measure of a company's ability to pay short-term obligations, calculated as Current Assets ÷ Current Liabilities. A ratio above 1.0 indicates the business has more current assets than current liabilities, suggesting it can cover its short-term debts, though the ideal ratio varies by industry.

The total cost of acquiring a new customer, calculated by dividing all sales and marketing expenses by the number of new customers gained in a period. CAC helps businesses evaluate marketing efficiency and ensure that the cost of gaining customers doesn't exceed the value they bring.

The total revenue or profit a business can expect from a single customer over the entire duration of their relationship. CLV is critical for understanding how much to invest in acquiring and retaining customers, with higher values justifying greater marketing and service expenditures.

The average number of days a company holds inventory before selling it, calculated as (Inventory ÷ Cost of Goods Sold) × 365. A lower DIO suggests efficient inventory management and faster turnover, while a higher DIO may indicate excess inventory, slow sales, or potential obsolescence issues.

The average number of days a company takes to pay its suppliers and vendors, calculated as (Accounts Payable ÷ Cost of Goods Sold) × 365. A higher DPO means the business retains cash longer before paying suppliers, which can improve short-term liquidity, though excessively high DPO may strain supplier relationships.

The average number of days it takes a company to collect payment after making a sale, calculated as (Accounts Receivable ÷ Revenue) × 365. A lower DSO indicates the business collects payments quickly, which improves cash flow, while a high DSO may signal collection problems or overly generous credit terms.

The average number of days a company holds inventory before selling it, calculated as (Average Inventory ÷ Cost of Goods Sold) × 365. This metric is essentially the same as Days Inventory Outstanding (DIO) and helps assess inventory management efficiency and identify potential cash flow or storage cost issues.

A percentage showing what portion of a company's assets are financed by debt, calculated as (Total Debt ÷ Total Assets) × 100. A lower ratio indicates less financial risk and more assets owned outright, while a higher ratio suggests greater reliance on borrowed money to fund operations and growth.

A percentage showing what portion of a company's total capital comes from debt, calculated as (Total Debt ÷ (Total Debt + Shareholders' Equity)) × 100. This metric provides insight into the company's capital structure and financial risk, with lower ratios generally indicating a more conservative financing approach.

A measure of financial leverage showing the proportion of debt relative to shareholder equity, calculated as Total Debt ÷ Shareholders' Equity. This ratio helps assess financial risk, with higher values indicating the company relies more heavily on borrowed funds, which increases both potential returns and financial vulnerability.

The number of days a company can continue operating using only its liquid assets without any additional revenue, calculated as (Cash + Marketable Securities + Accounts Receivable) ÷ Daily Operating Expenses. This metric helps assess how long a business could survive a sudden revenue disruption or crisis.

A more conservative measure of earnings per share that assumes all convertible securities (like stock options and convertible bonds) are exercised, calculated by dividing net income by the total of outstanding shares plus all potential shares. This metric provides a worst-case scenario for shareholders and is considered more accurate for valuation purposes.

A percentage showing what portion of earnings a company distributes as dividends, calculated as (Dividends Per Share ÷ Earnings Per Share) × 100. A lower ratio suggests the company retains more earnings for growth, while a very high ratio may indicate limited reinvestment or potential dividend sustainability concerns.

The total amount of dividends paid to shareholders divided by the number of outstanding shares, representing the cash distribution each share receives. DPS helps investors understand the income they can expect from owning the stock and track dividend growth over time.

A percentage showing the annual dividend income relative to the stock price, calculated as (Annual Dividends Per Share ÷ Current Stock Price) × 100. This metric helps income-focused investors compare the cash return from dividends across different stocks, similar to an interest rate on a bond.

A measure of a company's operating profitability calculated by subtracting all operating expenses from gross profit, before accounting for interest payments and taxes. EBIT shows how profitable the core business operations are, making it useful for comparing companies with different tax situations or debt levels.

A measure of a company's operating performance that adds back depreciation and amortization expenses to EBIT, providing a view of cash-generating ability from operations. EBITDA is commonly used to compare profitability between companies because it removes the effects of financing decisions, accounting methods, and tax environments.

A percentage that shows how much EBITDA a company generates from each dollar of revenue, calculated as (EBITDA ÷ Revenue) × 100. This metric helps assess operational efficiency and cash-flow generation, making it particularly useful for evaluating businesses with significant capital investments or comparing companies across different industries.

A ratio showing how many years it would take a company to repay all its debt using its EBITDA, calculated as Total Debt ÷ EBITDA. A lower ratio indicates the company could pay off debt more quickly and suggests stronger financial health and lower leverage risk.

A valuation measure comparing a company's enterprise value to its EBITDA, calculated as Enterprise Value ÷ EBITDA. This ratio is widely used to value companies because it accounts for debt levels and is less affected by accounting policies, with lower ratios potentially indicating better value.

The portion of a company's profit allocated to each outstanding share of common stock, calculated as Net Income ÷ Number of Shares Outstanding. EPS is a fundamental measure of profitability that allows investors to compare earnings across companies of different sizes and track a company's profitability over time.

A measure of a company's financial performance that calculates the value created beyond the required return on capital, essentially Net Operating Profit After Tax minus the cost of the capital employed. EVA matters because it shows whether a business is truly creating wealth for shareholders or just meeting the minimum expected returns.

A percentage showing the average rate at which a company's pre-tax profits are taxed, calculated as (Tax Expense ÷ Pre-Tax Income) × 100. This metric matters because it reveals the actual tax burden on the business, which can differ from statutory rates due to deductions, credits, and tax planning strategies.

A comprehensive measure of a company's total value, calculated as Market Cap + Total Debt - Cash and Cash Equivalents. EV represents the theoretical takeover price of a company and is often considered more accurate than market cap because it accounts for debt and cash positions.

A percentage showing what portion of a company's assets are financed by shareholder equity rather than debt, calculated as (Shareholders' Equity ÷ Total Assets) × 100. A higher equity ratio indicates lower financial risk and greater financial stability, as the company relies less on borrowed funds.

A percentage showing how much of every revenue dollar goes toward expenses, calculated as (Total Expenses ÷ Revenue) × 100. A lower ratio indicates better expense management and higher profitability, while a rising ratio may signal inefficiency or cost control problems.

A measure of how much a company uses debt to finance its assets, calculated as Total Assets ÷ Shareholders' Equity. This ratio shows the degree of financial leverage employed, with higher values indicating greater use of debt, which can amplify both returns and risks.

A measure of how efficiently a company uses its fixed assets like property, plant, and equipment to generate revenue, calculated as Revenue ÷ Net Fixed Assets. This ratio helps assess whether investments in long-term assets are producing adequate sales, with higher values indicating better utilization of physical infrastructure.

A measure of a company's ability to cover all fixed charges including interest, lease payments, and other fixed obligations, calculated as (EBIT + Fixed Charges) ÷ (Fixed Charges + Interest Expense). This provides a more comprehensive view of debt service capability than the interest coverage ratio alone.

The cash a company generates after accounting for capital expenditures needed to maintain or expand its asset base, calculated as Operating Cash Flow - Capital Expenditures. FCF is crucial because it represents the cash available for debt repayment, dividends, share buybacks, or strategic investments without compromising operations.

The cash available to equity shareholders after all expenses, debt payments, and reinvestment needs are met, calculated as FCF - Net Debt Payments. This metric shows how much cash could theoretically be distributed to shareholders and is particularly useful for dividend analysis and equity valuation.

The cash flow available to all investors (both debt and equity holders) after operating expenses and investments, calculated before any debt payments. FCFF is used in enterprise valuation because it represents the cash generated by operations available to all capital providers.

The money left over after subtracting the cost of goods sold from revenue, calculated as Revenue minus COGS. This metric shows how much profit you make from your core products or services before accounting for operating expenses like rent, salaries, and marketing.

A percentage that shows how much profit you keep from each dollar of revenue after covering production costs, calculated as (Gross Profit ÷ Revenue) × 100. A higher margin means you're keeping more money from each sale, which indicates better pricing power or operational efficiency.

Capital expenditures made to expand business capacity, enter new markets, or enhance capabilities beyond current operations. This discretionary spending is aimed at increasing future revenue and represents investment in the company's growth strategy rather than just maintaining existing operations.

The discount rate that makes the net present value of all cash flows from an investment equal to zero, essentially representing the expected annual return. IRR is used to evaluate and compare the profitability of investments, with higher IRRs indicating more attractive opportunities, though it should be used alongside NPV for better decision-making.

The number of times a company sells and replaces its inventory during a period, calculated as Cost of Goods Sold ÷ Average Inventory. A higher turnover indicates efficient inventory management and strong sales, while a low ratio may signal overstocking, weak sales, or obsolete inventory.

Capital expenditures required to maintain existing operations and replace worn-out assets without expanding capacity or capabilities. This spending is necessary to keep the business running at current levels and represents the baseline investment needed before any growth initiatives.

The total market value of a company's outstanding shares, calculated as Current Stock Price × Number of Shares Outstanding. Market cap determines company size categories (small-cap, mid-cap, large-cap) and represents what investors collectively believe the company is worth.

A company's operating profit after taxes but before financing costs, calculated as Operating Profit × (1 - Tax Rate). NOPAT is useful for evaluating operational efficiency independent of capital structure and is a key component in calculating metrics like EVA and ROIC.

The net amount of cash generated or consumed by a company's operating activities during a specific period, calculated as cash inflows from operations minus cash outflows. Positive net cash flow from operations indicates the business generates more cash than it uses, a sign of financial health and sustainability.

The total profit remaining after all expenses, including operating costs, interest, taxes, and other deductions, have been subtracted from revenue. It's called the 'bottom line' because it appears at the bottom of the income statement and represents the actual money the business earned that can be reinvested or distributed to owners.

The difference between the present value of cash inflows and outflows over time, discounted at a specific rate to account for the time value of money. A positive NPV indicates an investment is expected to generate more value than it costs and should be undertaken, while a negative NPV suggests the investment should be rejected.

A percentage that shows how much of each revenue dollar becomes actual profit after all expenses are paid, calculated as (Net Income ÷ Revenue) × 100. This is one of the most important profitability metrics because it reveals the overall financial health and efficiency of a business.

The percentage of total revenue generated from products or services launched within a specific recent timeframe, typically the past 1-3 years. This metric indicates a company's innovation effectiveness and ability to remain competitive, with higher ratios suggesting successful product development and market responsiveness.

The amount of cash generated by a company's normal business operations, excluding financing and investing activities. OCF is critical because it shows whether the core business generates enough cash to sustain operations, pay debts, and fund growth without relying on external financing.

A percentage showing how efficiently a company converts revenue into actual cash from operations, calculated as (Operating Cash Flow ÷ Revenue) × 100. A higher margin indicates the business is effectively turning sales into cash, which is essential for financial stability and growth.

The ongoing costs of running a business that aren't directly tied to producing goods or services, such as rent, utilities, salaries, marketing, and administrative expenses. These expenses matter because controlling them is essential to turning gross profit into actual bottom-line profitability.

A percentage that shows how much operating profit a business generates from each dollar of revenue, calculated as (EBIT ÷ Revenue) × 100. This metric reveals how efficiently a company runs its core operations and is useful for benchmarking against competitors in the same industry.

A percentage that measures how efficiently a company uses its assets to generate operating profit, calculated as (Operating Income ÷ Total Assets) × 100. This metric focuses specifically on operational performance and excludes the effects of financing and tax decisions.

A percentage showing how much profit a company earns before paying taxes, calculated as (Earnings Before Tax ÷ Revenue) × 100. This metric is useful for comparing profitability across companies in different tax jurisdictions or evaluating operational performance without tax implications.

A valuation measure comparing a company's market value to its book value, calculated as Market Price Per Share ÷ Book Value Per Share. A P/B ratio below 1.0 may suggest the stock is undervalued, while higher ratios indicate investors are willing to pay more than the accounting value, often due to growth prospects or intangible assets.

A valuation measure comparing a company's stock price to its earnings per share, calculated as Market Price Per Share ÷ EPS. A higher P/E ratio suggests investors expect higher future growth, while a lower P/E may indicate an undervalued stock or concerns about the company's prospects.

A valuation metric that adjusts the P/E ratio for expected earnings growth, calculated as P/E Ratio ÷ Annual EPS Growth Rate. A PEG ratio around 1.0 suggests fair valuation, below 1.0 may indicate undervaluation, and above 1.0 could signal overvaluation relative to growth expectations.

The average amount of profit generated by each employee, calculated as (Net Profit ÷ Number of Employees). This metric helps assess workforce productivity and efficiency, with higher values indicating the business is generating more profit from its human capital investment.

A stringent measure of a company's ability to meet short-term obligations using only its most liquid assets, calculated as (Current Assets - Inventory) ÷ Current Liabilities. This ratio matters because it excludes inventory, which may not convert to cash quickly, providing a more conservative view of liquidity than the current ratio.

A percentage showing how much of revenue is invested in research and development, calculated as (R&D Expenses ÷ Revenue) × 100. This metric indicates a company's commitment to innovation and future growth, with appropriate levels varying significantly by industry and business strategy.

The predictable and recurring revenue components of a business, typically from subscriptions or contracts, with ARR representing the annualized value of these recurring revenue streams. Recurring revenue is highly valued because it provides financial predictability, stability, and is generally more cost-effective than constantly acquiring new customers.

A percentage showing what portion of earnings a company reinvests in the business rather than paying out as dividends, calculated as 1 - Dividend Payout Ratio or (Retained Earnings ÷ Net Income) × 100. A higher retention rate indicates more earnings are being used to fund growth and expansion.

A percentage that measures how efficiently a company uses its assets to generate profit, calculated as (Net Income ÷ Total Assets) × 100. A higher ROA indicates the business is better at converting its investments in assets like equipment, inventory, and property into actual profit.

A percentage that measures how efficiently a company generates profits from its capital employed (total assets minus current liabilities), calculated as (EBIT ÷ Capital Employed) × 100. This metric helps assess how well a business uses its long-term funding to generate operating profits.

A percentage that measures how much profit a company generates with the money shareholders have invested, calculated as (Net Income ÷ Shareholder Equity) × 100. ROE is a key metric for investors because it shows how effectively the business is using ownership capital to create returns.

A percentage that measures how efficiently a company generates profit from all capital invested in the business, including both debt and equity, calculated as (Net Operating Profit After Tax ÷ Invested Capital) × 100. ROIC is particularly useful for evaluating whether a company is creating value and earning more than its cost of capital.

A percentage measuring the gain or loss generated on an investment relative to its cost, calculated as ((Current Value - Initial Cost) ÷ Initial Cost) × 100. ROI is widely used to evaluate investment efficiency and compare the profitability of different investment opportunities.

The total amount of money a business brings in from selling its products or services before any expenses are subtracted. It's called the 'top line' because it appears at the top of an income statement and represents the starting point for measuring profitability.

The percentage of total revenue that comes from a single customer, product, or market segment. High revenue concentration creates business risk because losing a major customer or having one product fail could significantly impact overall financial performance.

The average amount of revenue generated by each employee, calculated as (Total Revenue ÷ Number of Employees). This metric helps measure workforce productivity and operational efficiency, making it particularly useful for comparing performance against industry benchmarks or tracking improvements over time.

The percentage increase or decrease in revenue over a specific period, calculated as ((Current Period Revenue - Previous Period Revenue) ÷ Previous Period Revenue) × 100. This metric is essential for tracking business expansion, evaluating marketing effectiveness, and forecasting future performance.

A percentage showing what portion of revenue is consumed by overhead costs like salaries, rent, marketing, and administrative expenses, calculated as (SG&A Expenses ÷ Revenue) × 100. Monitoring this ratio helps identify whether overhead costs are growing faster than sales and helps benchmark efficiency against competitors.

The residual value belonging to owners after subtracting total liabilities from total assets, calculated as Total Assets - Total Liabilities. This represents the net worth of the company and shows what would theoretically be left for shareholders if all assets were sold and all debts paid.

The maximum rate at which a company can grow its revenue using internally generated funds without requiring external financing, calculated using profitability and retention ratios. This metric helps business owners understand realistic growth expectations and plan for when additional capital investment might be needed.

A measure of how easily a company can pay interest on its debt, calculated as EBIT ÷ Interest Expense. A higher ratio indicates the business generates sufficient earnings to comfortably cover interest payments, while a low ratio suggests potential difficulty meeting debt obligations.

The total revenue opportunity available if a product or service achieved 100% market share in its entire potential market. TAM helps businesses and investors understand the maximum growth potential and size of the opportunity, which is essential for strategic planning and investment decisions.

The sum of everything a company owns that has economic value, including cash, inventory, equipment, property, and intangible assets like patents. Total assets represent the resources available to generate revenue and fulfill obligations, serving as a measure of company size and financial strength.

The sum of all short-term and long-term borrowings a company owes, including loans, bonds, and other debt obligations. This metric matters because it represents the total amount the business must repay to creditors and affects financial flexibility, risk, and borrowing capacity.

The sum of all debts and obligations a company owes to outside parties, including both short-term and long-term liabilities. Understanding total liabilities is essential for assessing financial risk and determining how much of the company's assets are claimed by creditors versus owners.

The portion of the Total Addressable Market that a company can realistically serve given its current business model, geographic reach, and capabilities. TSM provides a more practical view of market opportunity than TAM by accounting for real-world constraints and competitive positioning.

The average rate a company must pay to finance its assets, weighted by the proportion of debt and equity in its capital structure. WACC matters because it represents the minimum return a business must earn on investments to satisfy all creditors and shareholders, serving as a key hurdle rate for evaluating projects.

The difference between current assets and current liabilities, calculated as Current Assets minus Current Liabilities, representing the cash and liquid assets available to run daily operations. Positive working capital indicates a business has enough short-term assets to cover short-term debts, while negative working capital may signal potential cash flow problems.

A measure of how efficiently a company uses its working capital to generate revenue, calculated as Revenue ÷ Working Capital. A higher ratio suggests the business is effectively using its short-term assets and liabilities to support sales growth, though extremely high ratios may indicate insufficient working capital.