Market Capitalization (Market Cap)
Definition: The total equity value of a company based on its current share price and shares outstanding.
Formula: Market Cap = Share Price × Shares Outstanding
Example: A company with a share price of $50 and 100 million shares outstanding has a Market Cap of $5 billion.
Enterprise Value (EV)
Definition: The total value of a company’s operating assets, representing the value of the entire business to both equity and debt holders.
Formula: EV = Market Cap + Total Debt - Cash and Cash Equivalents
Example: Market Cap = $5B, Debt = $2B, Cash = $500M → EV = $6.5B. EV is considered the true theoretical acquisition cost.
Free Float Market Cap
Definition: Market capitalization based only on shares available for public trading (excluding insider and government holdings).
Formula: Free Float Market Cap = Share Price × Free Float Shares
Example: Total shares = 100M, Free float = 70M, Price = $50 → Free Float Market Cap = $3.5B. This is often used for index inclusion.
EPS (Earnings Per Share)
Definition: The amount of net income earned per share of stock. Basic EPS uses current shares, while Diluted EPS includes the impact of options and convertibles.
Formula: EPS = (Net Income - Preferred Dividends) / Weighted Avg. Shares Outstanding
Example: Net Income = $200M, Shares = 100M → EPS = $2.00.
ROE (Return on Equity)
Definition: Measures how efficiently a company uses shareholder equity to generate profit.
Formula: ROE = Net Income / Average Shareholders' Equity
Example: Net Income = $300M, Equity = $2B → ROE = 15%.
ROIC (Return on Invested Capital)
Definition: Shows how effectively a company uses all its capital (debt + equity) to generate returns.
Formula: ROIC = NOPAT / Invested Capital (where NOPAT is Net Operating Profit After Tax)
Example: NOPAT = $500M, Invested Capital = $5B → ROIC = 10%. This should be compared against WACC.
ROA (Return on Assets)
Definition: Profitability relative to a company's total assets.
Formula: ROA = Net Income / Average Total Assets
Example: Net Income = $200M, Assets = $4B → ROA = 5%.
Margins
- Gross Margin: (Revenue - COGS) / Revenue
- Operating Margin: Operating Income / Revenue
- Net Margin: Net Income / Revenue
Debt-to-Equity (D/E)
Formula: Total Debt / Shareholders' Equity. A high D/E ratio implies more leverage and more risk.
Example: Debt = $3B, Equity = $2B → D/E = 1.5x.
Net Debt / EBITDA
Formula: (Total Debt - Cash) / EBITDA. Shows how many years of EBITDA it would take to pay off all debt.
Example: Debt = $4B, Cash = $1B, EBITDA = $1B → Net Debt / EBITDA = 3.0x.
Interest Coverage Ratio
Formula: EBIT / Interest Expense. Measures a company's ability to meet its interest payments.
Example: EBIT = $500M, Interest Expense = $100M → Interest Coverage = 5.0x. A ratio below 2.0x is often considered risky.
Free Cash Flow (FCF)
Definition: The cash available to all providers of capital (debt and equity holders) after all investments in the business have been made.
Formula: FCF = Operating Cash Flow - Capital Expenditures (CapEx)
Example: OCF = $800M, CapEx = $300M → FCF = $500M. This is a core metric for DCF valuation.
CapEx Ratios
- CapEx / Sales: Measures reinvestment intensity.
- CapEx / Depreciation: If >1, it indicates growth CapEx; if <1, it suggests the company is in maintenance mode.
| Multiple | Formula | Insight |
|---|---|---|
| P/E | Price per Share / EPS | A core earnings valuation multiple. |
| EV/EBITDA | Enterprise Value / EBITDA | Capital structure-neutral multiple for core operations. |
| EV/Sales | Enterprise Value / Revenue | Used for loss-making or early-stage growth companies. |
| P/B | Price / Book Value per Share | Common in asset-heavy sectors like banks. |
| P/CF | Price / Operating Cash Flow per Share | Focuses on cash-generating ability. |
Example: Price = $50, EPS = $5 → P/E = 10x. EV = $10B, EBITDA = $2B → EV/EBITDA = 5x. Lower multiples can signal undervaluation or higher risk.
Dividend Yield
Formula: Annual Dividend per Share / Share Price
Example: Annual Dividend = $2, Share Price = $50 → Yield = 4%.
Payout Ratio
Formula: Total Dividends / Net Income. Shows the proportion of earnings paid out as dividends.
Example: Dividends = $100M, Net Income = $200M → Payout Ratio = 50%.
Dividend Coverage
Formula: EPS / DPS (Dividend Per Share). Measures the safety of the dividend.
Beta (β)
Measures a stock's sensitivity to market movements. Beta > 1 means more volatile than the market; Beta < 1 means less volatile.
Alpha (α)
The excess return of an investment relative to its benchmark, after adjusting for risk (beta).
Sharpe Ratio
Measures risk-adjusted return. A ratio > 1.0 is generally considered good.
Sortino Ratio
Similar to the Sharpe Ratio, but it only penalizes for downside volatility, not all volatility.
Information Ratio
Measures a portfolio manager's ability to generate excess returns relative to a benchmark, adjusted for the volatility of those returns (tracking error).