Financial Statement Analysis & Valuation Formulas

Posted on Mar 5, 2025 in Finance

Financial Statement Analysis

Key Formulas & Concepts

Balance Sheet Analysis:

  • Net Working Capital = Current Assets – Current Liabilities
  • Book Equity = Assets – Liabilities
  • Market Equity = Share Price x Market Capitalization
  • Market-to-Book Ratio = Market Equity / Book Equity
  • Enterprise Value = Market Equity + Debt – Cash

Cash Flow Analysis:

  • An increase in Accounts Receivable (A/R) reduces cash flow.
  • An increase in Accounts Payable (A/P) increases cash flow.
  • An increase in Inventory reduces cash flow.

Profitability Analysis:

  • Gross Profit Margin = (Gross Profit) / Sales
  • Operating Profit Margin = (Operating Income) / Sales
  • Net Profit Margin = (Net Income) / Sales

Liquidity Analysis:

  • Current Ratio = Current Assets / Current Liabilities
  • Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Efficiency Analysis:

  • (Fixed) Asset Turnover = Sales / (Fixed) Assets
  • A/R Days = (Accounts Receivable) / Average Daily Sales
  • A/P Days = (Accounts Payable) / Average Daily Cost of Goods Sold (COGS)
  • Inventory Turnover = COGS / Average Inventory
  • Inventory Days = Inventory / Average Daily COGS

Leverage & Coverage Analysis:

  • Times Interest Earned (Coverage Ratio) = EBITDA / Interest Expense
  • Debt/Capital Ratio = Total Liabilities / (Total Equity + Total Liabilities)
  • Equity Multiplier = Book Assets / Book Equity
  • Net Debt = Total Liabilities – (Cash & Securities)
  • Debt/Enterprise Value = Net Debt / (Market Equity + Net Debt)

Valuation Ratios:

  • P/E Ratio = Market Capitalization / Net Income = Share Price / Earnings Per Share (EPS)
  • PEG Ratio = P/E Ratio / Growth Rate (G)
  • Return on Equity (ROE) = Net Income / Book Equity
  • Return on Assets (ROA) = Net Income / Total Assets
  • DuPont Identity: ROE = (Net Income / Sales) x (Sales / Assets) x (Assets / Book Equity)

Growth Rates:

  • Internal Growth Rate = ROA x Retention Rate
  • Sustainable Growth Rate = ROE x Retention Rate

Time Value of Money (TVM)

  • Perpetuity: PV0 = C / r
  • Growing Perpetuity: PV0 = C1 / (r – g)
  • Annuity: PV0 = (C / r) * [1 – 1 / (1 + r)n]
  • Growing Annuity: PV0 = (C / r) * [1 – {(1 + g) / (1 + r)}n]
  • Annuity Future Value (FVn) = PV0 * (1 + r)n
  • Growing Annuity FVn = (C1 / (r – g)) * [(1 + r)n – (1 + g)n]

Interest Rates

  • Effective Rate = APR / m, where m is the number of compounding periods per year.
  • Effective Annual Rate (EAR) = (1 + APR / m)m – 1
  • Outstanding Loan Balance: Calculate the present value (PV) using the remaining number of periods (N), setting the future value (FV) to 0.
  • Real Interest Rate = (1 + Nominal Rate) / (1 + Inflation Rate) -1 ≈ (Nominal Rate – Inflation Rate) / (1 + Inflation Rate)

Bonds

  • Zero-Coupon Bond: YTMn = (FV / P)1/n – 1 | P = FV / (1 + YTMn)n
  • Coupon Bond: P = (CPN / YTM) * [1 – 1 / (1 + YTM)n] + [FV / (1 + YTM)n]
  • Coupon Rate > YTM = Premium; Coupon Rate < YTM = Discount; Coupon Rate = YTM = Par

Stock Valuation

Dividend Discount Model

  1. P0 = Σ [Discounted Dividends] + Discounted Capital Gain at End
  2. rE = (Div1 / P0) + (P1 – P0) / P0 = Dividend Yield + Capital Gain Rate
  3. Constant Growth: P0 = Div1 / (rE – g) | rE = (Div1 / P0) + g
  4. Changing Growth: Pn = Divn+1 / (rE – g)

Total Payout Model

  1. P0 = PV(Future Total Dividends + Share Repurchases) / Shares Outstanding

Discounted Free Cash Flow Model

  1. Free Cash Flow (FCF) = EBIT(1 – Tax Rate) + Depreciation – Capital Expenditures – ΔNet Working Capital
  2. Enterprise Value = V0 = Market Equity + Debt – Cash = PV(Future FCF)
  3. P0 = (V0 + Cash – Debt) / Shares Outstanding
  4. Vn = FCFn+1 / (rWACC – gFCF) = [FCFn * (1 + gFCF)] / (rWACC – gFCF)

Valuation Multiples

  1. Forward P/E = (P0 / EPS1) = Dividend Payout Rate / (rE – g)
  2. Forward V0 / EBITDA = (FCF1 / EBITDA1) / (rWACC – gFCF)

Capital Budgeting

  1. CCA (Capital Cost Allowance) = UCC (Undepreciated Capital Cost) x d (CCA Rate), with a half-year rule for the first year. CCA is cumulative.
  2. Unlevered Net Income = Net Income without Interest Expenses
  3. CCA is not a cash flow, but it reduces taxes, which are cash outflows.
  4. Subtract CCA before tax and add it back after tax to calculate the correct ΔFCF.
  5. NWC (Net Working Capital) = Current Assets – Current Liabilities = Cash + Inventory + Receivables – Payables
  6. ΔCash Flows is always equal and opposite to ΔNWC.
  7. FCF = (Revenues – Costs – CCA) * (1 – Tax Rate) + CCA – Capital Expenditures – ΔNWC
  8. FCF = (Revenues – Costs) * (1 – Tax Rate) – Capital Expenditures – ΔNWC + (Tax Rate * CCA)
  9. NPV = PV(FCFt) = FCFt / (1 + r)t
  10. CCA Tax Shield is a growing perpetuity where g = -d (the CCA rate).
  11. Liquidation & Salvage Capital Gains Tax = 1/2 of the Corporate Tax Rate

Risk & Return

  • Individual Stock Return = Dividend Yield + Capital Gain Yield
  • Rannual = (1 + R1) * (1 + R2) * … * (1 + Rn) – 1 (Even if R is negative)
  • Average Annual Return (R–) for T years = (1 / T) * Σ(R1 – RT)
  • Var(R) = (1 / (T – 1)) * [(R1 – R–)2 + (R2 – R–)2 + … + (RT – R–)2] = σ2
  • SD(R) = √(σ2) = σ
  • Portfolio Weight: Wi = Value of Investment i / Total Portfolio Value
  • Portfolio Return (Rp) = Σi=1 to n (Wi * Ri). The same applies to E[Rp].
  • Stock Correlation is between -1 and +1, representing how stocks share common risk and movement.