Formula sheet

Bookmark formulas to build your personal reference sheet.

Financial Statements

Balance sheet equation

Assets=Liabilities+Equity

Always balanced — the fundamental accounting identity.

Working capital

WC=Current Assets−Current Liabilities

Positive WC means the firm can meet short-term obligations.

WC: Working capital

Gross profit

Gross Profit=Revenue−COGS

Profit after direct production costs, before operating expenses.

COGS: Cost of goods sold

Operating profit (EBIT)

EBIT=Gross Profit−Operating Expenses

Earnings Before Interest and Tax — the core operating result.

EBIT: Earnings Before Interest & Tax

Net profit

Net Profit=EBT−Income Tax

Bottom line after interest and tax.

EBT: Earnings Before Tax (EBIT − Interest)

Contribution margin ratio

CM Ratio=(Price−Variable Cost per Unit)÷Price

The share of each euro of revenue left after variable costs, available to cover fixed costs.

Break-even volume (units)

BE (units)=Fixed Costs÷(Price−Variable Cost per Unit)

Units that must be sold before the firm covers all its fixed costs.

Break-even revenue

BE (revenue)=Fixed Costs÷Contribution Margin Ratio

Same break-even point expressed in euros of sales rather than units.

Gross profit margin

GP Margin=(Gross Profit÷Revenue)×100

% of revenue remaining after cost of goods sold.

Net profit margin

Net Margin=(Net Income÷Revenue)×100

Bottom-line profitability as a % of revenue.

Return on equity

ROE=Net Income÷Shareholders' Equity

Profit generated per unit of shareholder investment.

Debt-to-equity ratio

D/E=Total Debt÷Total Equity

Higher D/E = more financial leverage and risk.

Interest coverage ratio

ICR=EBIT÷Interest Expense

How many times over operating profit covers the interest bill.

ICR: Interest Coverage Ratio
EBIT: Earnings Before Interest & Tax

Asset turnover

AT=Revenue÷Total Assets

How efficiently assets generate sales — higher is better.

Current ratio

Current Ratio=Current Assets÷Current Liabilities

Above 1 means short-term assets cover short-term debts.

Quick ratio (acid-test)

Quick Ratio=(Current Assets−Inventory)÷Current Liabilities

Stricter than the current ratio — excludes inventory, the least liquid current asset.

DuPont ROE decomposition

ROE=Net Margin×Asset Turnover×Equity Multiplier

Decomposes ROE into profitability, efficiency, and leverage.

Equity Multiplier: Total Assets ÷ Shareholders' Equity

Banking & Financial Institutions

Real interest rate

Real Rate≈Nominal Rate−Inflation Rate

Strips inflation from the quoted rate to show real purchasing-power gain.

Future value (compound interest)

FV=PV×(1+r)^t

FV: Future value
PV: Present value
r: Interest rate per period
t: Number of periods

Present value

PV=FV÷(1+r)^t

Discount a future cash flow back to today's value.

Current yield

CY=Annual Coupon÷Market Price

The bond's annual income as a % of its current trading price.

CY: Current yield

Bond price–rate relationship

↑ Interest Rates→↓ Bond Price (and vice versa)

Inverse relationship: fixed coupon is less attractive when new rates rise.

Corporate Finance

Net present value

NPV=Σ [CFt÷(1+r)^t]−C₀

Accept the project if NPV > 0.

CFt: Cash flow in period t
r: Discount rate (usually WACC)
C₀: Initial investment (at t = 0)

IRR decision rule

Accept if IRR>Required Rate of Return

IRR is the discount rate at which NPV = 0.

IRR: Internal Rate of Return

Weighted average cost of capital

WACC=(E/V)·Ke+(D/V)·Kd·(1−T)

The blended required return across all funders.

E/V: Equity as a fraction of total capital
D/V: Debt as a fraction of total capital
Ke: Cost of equity
Kd: Pre-tax cost of debt
T: Corporate tax rate (debt interest is tax-deductible)

Capital asset pricing model

E(r)=Rf+β×(Rm−Rf)

Estimates the required return on equity based on systematic risk.

E(r): Expected return on the asset
Rf: Risk-free rate (e.g. government bond yield)
β: Beta — sensitivity to market movements
Rm−Rf: Market risk premium