Brian Feroldi on LinkedIn: 6 CASH FLOW RATIOS Every investor should know: 1: CASH FLOW TO DEBT… | 28 comments (2024)

10 Growth KPIs What gets measured gets managed.Here's a list of growth KPIs every company & investor should know:📈 Revenue Growth• Measures the increase in revenue over a specific period, typically expressed as a percentage.→ Formula: ((Current Revenue - Previous Revenue) / Previous Revenue) x 100💰 Monthly Recurring Revenue (MRR)• Tracks the predictable and recurring revenue generated.→ Formula: Average Revenue Per User x Number of Customers➗ Gross Margin •The percentage of revenue remaining after deducting the cost of goods sold.→ Formula: (Revenue - Cost of Goods Sold) / Revenue)×100👤 Customer Acquisition Cost (CAC)• Calculates how much it costs to acquire each new customer.→ Formula: Sales and Marketing Expense / Number of New Customers Acquired 💵 Customer Lifetime Value (CLV)• Assesses the total value a customer brings to the company throughout their lifetime.→ Formula: Average Purchase Value x Average Purchase Frequency × Average Customer Lifespan🤗 Customer Retention Rate (CRR)• The percentage of customers who continue to use your product or service over time.→ Formula: (Number of Customers at the End of the Period - Number of New Customers Acquired) / Number of Customers at the Start of the Period) x 100⤵️ Churn Rate• The rate at which customers stop using or subscribing to your product or service.→ Formula: (Number of Customers at the Start of the Period - Number of Customers at the End of the Period) / Number of Customers at the Start of the Period😀 Customer Satisfaction Score (CSAT)• The level of satisfaction that customers have with a company's product, service, or overall experience.→ Formula: (Number of Satisfied Responses / Total Responses) × 100💬 Net Promoter Score (NPS)• Measures how likely customers are to recommend a company's product or service to others.→ Formula: (% of Promoters) - (% of Detractors)📊 Market Share• A company's portion of the total market in terms of revenue.→ Formula: (Your Company's Sales / Total Market Sales) × 100Which growth metrics do you value most?Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/e9rrxPt3If you found this post useful, please repost ♻️ to share with your audience.

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𝗘𝗩𝗔 𝘃𝘀 𝗜𝗥𝗥 𝘃𝘀 𝗡𝗣𝗩 𝘃𝘀 𝗣𝗣What's the difference?Here's a simplified overview:𝟭. 𝗘𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗩𝗮𝗹𝘂𝗲 𝗔𝗱𝗱𝗲𝗱 (𝗘𝗩𝗔):• 𝗪𝗵𝗮𝘁 𝗶𝘁 𝗶𝘀: Evaluates company's financial performance by subtracting the cost of capital from net operating profit after tax.• 𝗣𝗿𝗼𝘀: Promotes value creation; encourages efficient capital utilization.• 𝗖𝗼𝗻𝘀: Complex and requires comprehensive financial details.• 𝗪𝗵𝗲𝗻 𝘁𝗼 𝗨𝘀𝗲: Ideal for internal performance reviews and managing based on value.𝟮. 𝗜𝗻𝘁𝗲𝗿𝗻𝗮𝗹 𝗥𝗮𝘁𝗲 𝗼𝗳 𝗥𝗲𝘁𝘂𝗿𝗻 (𝗜𝗥𝗥):• 𝗪𝗵𝗮𝘁 𝗶𝘁 𝗶𝘀: The rate where the net present value (NPV) of all cash flows is zero.• 𝗣𝗿𝗼𝘀: Reflects investment efficiency; facilitates comparison with required returns.• 𝗖𝗼𝗻𝘀: Multiple results for fluctuating cash flows; assumes reinvestment at IRR.• 𝗪𝗵𝗲𝗻 𝘁𝗼 𝗨𝘀𝗲: Effective for comparing project profitability; when the capital cost is unknown.𝟯. 𝗡𝗲𝘁 𝗣𝗿𝗲𝘀𝗲𝗻𝘁 𝗩𝗮𝗹𝘂𝗲 (𝗡𝗣𝗩):• 𝗪𝗵𝗮𝘁 𝗶𝘁 𝗶𝘀: Calculates the difference between present values of cash inflows and outflows.• 𝗣𝗿𝗼𝘀: Acknowledges the time value of money; offers a clear profitability measure.• 𝗖𝗼𝗻𝘀: Needs precise estimation of future cash flows.• 𝗪𝗵𝗲𝗻 𝘁𝗼 𝗨𝘀𝗲: Best for assessing absolute investment value; good for comparing various projects.𝟰. 𝗣𝗮𝘆𝗯𝗮𝗰𝗸 𝗣𝗲𝗿𝗶𝗼𝗱 (𝗣𝗣):• 𝗪𝗵𝗮𝘁 𝗶𝘁 𝗶𝘀: Time required for an investment to generate cash equal to its cost.• 𝗣𝗿𝗼𝘀: Straightforward and assesses risk and liquidity.• 𝗖𝗼𝗻𝘀: Ignores the time value of money; doesn’t evaluate overall profitability.• 𝗪𝗵𝗲𝗻 𝘁𝗼 𝗨𝘀𝗲: Great for initial project screening or limited funds; focuses on speed of return.Selecting the right metric is crucial for accurate financial analysis and strategic decision-making.Which method do you prefer?Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/e9rrxPt3If you found this post useful, please repost ♻️ to share with your audience.

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What are margins?Here's a simple explanation.Margin refers to the percentage difference between the costs and revenue of products or services. It indicates how much profit a company makes on its sales after covering various costs. Higher margins indicate more efficient operations and stronger financial health.Here are the 6 most important margins to know:𝗚𝗥𝗢𝗦𝗦 𝗠𝗔𝗥𝗚𝗜𝗡The percentage of revenue remaining after subtracting the cost of goods sold. It's a measure of production efficiency and pricing strategy.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: (Revenue - COGS) / Revenue𝗢𝗣𝗘𝗥𝗔𝗧𝗜𝗡𝗚 𝗠𝗔𝗥𝗚𝗜𝗡 (𝗘𝗕𝗜𝗧 𝗠𝗔𝗥𝗚𝗜𝗡): The percentage of revenue remaining after subtracting 𝘁𝗵𝗲 cost of goods sold and all operating expenses.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: Operating Income / Revenue𝗘𝗕𝗜𝗧𝗗𝗔 𝗠𝗔𝗥𝗚𝗜𝗡:Measures earnings before interest, taxes, depreciation, and amortization as a percentage of revenue.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: EBITDA / Revenue 𝗣𝗥𝗘𝗧𝗔𝗫 𝗠𝗔𝗥𝗚𝗜𝗡 (𝗘𝗕𝗧 𝗠𝗔𝗥𝗚𝗜𝗡):The company's profitability before subtracting income taxes.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: Earnings Before Taxes / Revenue𝗡𝗘𝗧 𝗠𝗔𝗥𝗚𝗜𝗡 (𝗣𝗥𝗢𝗙𝗜𝗧 𝗠𝗔𝗥𝗚𝗜𝗡):Measures the percentage of revenue that becomes net income after subtracting all expenses.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: Net Income / RevenueUnderstanding margins is crucial for investors, managers, and stakeholders to evaluate a company's operational efficiency. Each margin tells a different story, from production costs to overall profitability, providing a comprehensive picture of the company's financial performance.10 Benefits of Using Margins- Trend Analysis- Pricing Strategy- Risk Management- Financial Planning- Cost Management- Investment Decisions- Comparative Analysis- Operational Efficiency- Performance Incentives- Profitability AssessmentFollow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/e9rrxPt3If you found this post useful, please repost ♻️ to share with your audience.

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What is Working Capital?Here's a simple way to understand this confusing finance term...Working capital -- aka Net Working Capital -- is the difference between a company's current assets (expected to be used/consumed/converted into cash <1 year) and current liabilities (debts that are expected to be paid off in <1 year).💡Why is working capital important?Working Capital is a quick way to assess a company's liquidity, which is its ability to meet its short-term obligations.It serves as an indicator of a company's financial health.If working capital is positive, it indicates that a company has sufficient resources to cover its short-term financial needs.If working capital is negative, it indicates that a company may face financial difficulties.There are three ways to calculate working capital:1️⃣ THE SIMPLE METHODCurrent Assets - Current LiabilitiesThis is the most common method and easiest to calculate.2️⃣ THE NARROW METHOD(Current Assets - Cash) - (Current Liabilities - Debt)This method excludes cash & debt, which can be useful for comparing companies with different capital structures.3️⃣ THE SPECIFIC METHOD:Accounts Receivable + Inventory - Accounts Payable:This method focuses on the cash conversion cycle of a business, which is the time it takes to convert inventory into cash.Was this helpful? Let me know in the comments section below!Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/e9rrxPt3If you found this post useful, please repost ♻️ to share with your audience.

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How to analyze a Cash Flow Statement in <2 minutes:Understand these cash flow formulas.The Cash Flow Statement shows a company's profitability at multiple levels over a period of time using cash accounting.3 Main sections:💰 OPERATING ACTIVITIESShows cash inflows & outflows from normal operations💰 INVESTING ACTIVITIESShows cash outflows from capital expansion & long-term investments💰 FINANCING ACTIVITIESShows cash changes to the company’s capital structure6 Cash Flow Ratios to watch💳 LIQUIDITY RATIOSCash Ratio = Cash Balance ➗ Current LiabilitiesCurrent Ratio = Current Assets ➗ Current Liabilities⛱ COVERAGE RATIOSCash Coverage Ratio = Cash Balance ➗ Interest ExpenseDebt To OCF = Total Debt➗ Operating Cash Flow⚖ VALUATION RATIOSPrice to CFFO = Share Price ➗ Cash Flow From Operations Per SharePrice to FCF = Share Price ➗ Free Cash Flow Per ShareWhich ratio do you think is the most useful? Let me know in the comments below!Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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6 Amortization Methods, Explained 📊AMORTIZATION 📜 🖥️ 📈An accounting method used to allocate the cost of intangible assets (such as patents, trademarks, and software) over their useful lives. It represents the systematic reduction in the value of an asset due to factors like expiry, obsolescence, or legal limits.Amortization happens to INTANGIBLE Assets (you CANNOT touch them)Examples:→ Patent 📜→ Software 🖥️→ Trademarks 📈6 AMORTIZATION METHODS1️⃣ STRAIGHT-LINEThe most common and easiest method to calculate amortization. Divide the cost of an intangible asset by the useful life of the asset (in years).🔎 FORMULA: Cost / Useful Life2️⃣ DECLINING BALANCEUsed for assets that lose value quickly. Multiply the book value at the beginning of the period by the amortization rate.🔎 FORMULA: Opening book value x (100% / Useful Life of asset)3️⃣ UNITS OF PRODUCTION METHODTailored for assets whose utility is more related to production than time, like copyrights for books based on sales.🔎 FORMULA: (Total Number of Units / Total Production ) x Cost of Intangible Asset4️⃣ SUM OF THE YEARS' DIGITSAn accelerated amortization method where the expense is higher in the early years. Multiply the cost by the fraction of remaining life over sum of the years' digits.🔎 FORMULA: Cost x (Remaining Life / Sum of the Years' Digits)5️⃣ IMPAIRMENT ONLYThere is no systematic amortization, only impairment losses when the asset's fair value drops below carrying value.🔎 FORMULA: Carrying Amount - Recoverable Amount6️⃣ REVENUE BASEDAmortization is based on the revenue generated or performance metrics.🔎 FORMULA: (Revenue for the Period / Total Revenue ) x Cost of Intangible AssetFollow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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FCF vs EBITDA, Visualized 🖼️Accounting is the language of business.Today, let's demystify two essential accounting terms: FCF & EBITDA.💰 FCFStands for Free Cash FlowIt is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.💰 EBITDAStands for: Earnings Before Interest, Taxes, Depreciation, and AmortizationIt is often used to evaluate a company's operating performance. It focuses on the business's core operations, excluding the effects of financing and accounting decisions.💡PURPOSE→ FCF: reveals how much cash is available for dividends, debt repayment, and reinvestment after covering all expenses, including CapEx.→ EBITDA: provides a view of a company's operational efficiency by excluding non-operating expenses.🎢 USAGE→ FCF is crucial for assessing a company's ability to generate cash and fund growth, repurchase stock, pay dividends, and reduce debt.→ EBITDA is often used by investors to compare companies within the same industry without the effects of financing and accounting decisions.🔢 CALCULATIONFCF➡ Cash Flow From Operations - Capital ExpendituresEBITDA➡ Operating Income + Depreciation + AmortizationEach metric serves a unique purpose in financial analysis, and each offers valuable insights for investors, managers, and stakeholders.Was this explanation helpful?Let me know in the comments below!Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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Life-Changing Books You Can (Legally) Read For Free!1) “The Almanack of Naval Ravikant” by Eric Jorgenson A complication of the writing and teaching of the hugely influential entrepreneur and investor Naval Ravikant. It's loaded with practical advice on how to become wealthy, healthy, and happy.Link: https://lnkd.in/enqxBp3g2) “The Anthology of Balaji” by Eric Jorgenson A complication of the writing and thoughts of futurist balaji.s srinivasan. Balaji explores the future of tech, media, politics, countries, and more.Link: https://lnkd.in/e3efQw5D3) "Poor Charlie Alamanack" by Charlie MungerCharlie Munger was one of the greatest thinkers, teachers, and investors of the last 100 years.This book is filled with timeless lessons on investing, strategy, mental models, and living a good life.Link: https://lnkd.in/esNCssZj4) “The Pathless Path” by Paul Millerd This book will teach you how to design your life in an intentional and meaningful way.Link: https://lnkd.in/eAiBHyp85 & 6) "$100 Million Offers" & "$100 Million Leads" by Alex Hormozi Alex Hormozi is the best business teacher on the planet. His books are filled with practical information on how businesses can create offers that sell and find an unlimited number of leads. Everything is explained in simple terms, and the advice is highly actionable.$100 Million Offers Audiobook: https://lnkd.in/emDRCkbp$100 Million Leads Audiobook: https://lnkd.in/eg6aa-G7➕ Follow me Brian Feroldi for more content like this.***💾 I keep a Google sheet with links to the best podcast, ted talks, youtube channels, investing resources, and more. Grab a free copy of it here: https://lnkd.in/ea3qW5K2If this post was useful, please share (repost ♻️) to help make LinkedIn a better platform for all.

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