Compounding Quality’s Post

10 Crucial Investing Ratios 1️⃣ Gross margin (GM) 🎯 What? Company's gross profit compared to its revenue 💡 Formula? Sales - COGS / Sales 2️⃣ EBIT Margin 🎯What? What percentage of sales remains as profit before tax and interest 💡 Formula? EBIT / Sales 3️⃣ Debt-to-Assets 🎯What? The total amount of debt a company has relative to its assets 💡 Formula? Debt / Assets 4️⃣ Debt-to-Equity 🎯What? Ratio used to calculate a company's financial leverage 💡Formula? Debt / Equity 5️⃣ CAPEX/Sales 🎯What? Measures the capital intensity of a company 💡 Formula? Capital Expenditures / Sales 6️⃣ Return On Equity (ROE) 🎯What? Indicates how profitable a company is in relation to its equity 💡 Formula? Net Income / Equity 7️⃣ Return On Invested Capital (ROIC) 🎯What? Shows you how efficiently a company is allocating capital 💡 Formula? NOPAT / Total Inv. Capital 8️⃣ Earnings Per Share (EPS) 🎯What? How much money a company makes for each share outstanding 💡 Formula? Net Income / Shares Outstanding 9️⃣ Free Cash Flow Realization 🎯What? Measures how much earnings are translated into free cash flow 💡 Formula? Free Cash Flow / Net Income 🔟 Price-to-Earnings Ratio (P/E) 🎯What? Ratio that compares a company's share price to its earnings per share 💡Formula? Price Per Share / Earnings Per Share Which ratio would you add?

נוסחאות בנושא תזרים מזומנים: 𝗙𝗿𝗲𝗲 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 (𝗙𝗖𝗙): FCF = Operating Cash Flow - Capital Expenditures 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 (𝗢𝗖𝗙): OCF = Net Income + Depreciation + Amortization + Other Non-Cash Items - Changes in Working Capital 𝗖𝗮𝘀𝗵 𝗖𝗼𝗻𝘃𝗲𝗿𝘀𝗶𝗼𝗻 𝗖𝘆𝗰𝗹𝗲 (𝗖𝗖𝗖): CCC = Days of Inventory Outstanding + Days of Sales Outstanding - Days of Payables Outstanding 𝗡𝗲𝘁 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄: Net Cash Flow = Operating Cash Flow + Investing Cash Flow + Financing Cash Flow 𝗗𝗶𝘀𝗰𝗼𝘂𝗻𝘁𝗲𝗱 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 (𝗗𝗖𝗙): DCF = CF₁ / (1+r)¹ + CF₂ / (1+r)² + ... + CFₙ / (1+r)ⁿ 𝗖𝗙 𝗣𝗿𝗲𝘀𝗲𝗻𝘁 𝗩𝗮𝗹𝘂𝗲: PV = CF / (1+r)ᵗ 𝗖𝗙 𝗙𝘂𝘁𝘂𝗿𝗲 𝗩𝗮𝗹𝘂𝗲: FV = CF × (1+r)ᵗ 𝗖𝗙 𝗣𝗮𝘆𝗯𝗮𝗰𝗸 𝗣𝗲𝗿𝗶𝗼𝗱: Payback Period = Initial Investment / Annual Cash Flow 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 𝘁𝗼 𝗦𝗮𝗹𝗲𝘀 𝗥𝗮𝘁𝗶𝗼: Operating Cash Flow / Net Sales 𝗖𝗮𝘀𝗵 𝗥𝗮𝘁𝗶𝗼: Cash Ratio = (Cash + Marketable Securities) / Current Liabilities 𝗖𝗮𝘀𝗵 𝗕𝘂𝗿𝗻: Cash Burn = Cash from Operating Activities + Cash from Investing Activities

8 P&L KPIs Save this for later Here are my top KPIs for analyzing profit and loss statements effectively: 1. Gross Margin Shows profitability from core operations before indirect costs like overhead are deducted. Formula: (Revenue – COGS) ÷ Revenue 2. Net Margin Reflects overall profitability after all expenses, including overhead, are considered. Formula: Net income ÷ Revenue 3. Overhead as % of Revenue Indicates what share of revenue is spent on indirect costs such as administration and facilities. Formula: Overhead expenses ÷ Revenue 4. Overhead per Employee Represents the average overhead cost allocated per staff member. Formula: Overhead expenses ÷ Number of employees 5. Earnings per Share (EPS) Shows profit earned per outstanding share of stock. Formula: Net income ÷ Number of shares outstanding 6. Return on Equity (ROE) Measures how efficiently equity capital (shareholders’ investment) is generating profit. Formula: Net income ÷ Shareholders’ equity 7. Compound Annual Growth Rate (CAGR) Represents the smoothed annual growth rate of revenue or investment over a specific period. Formula: (Ending value ÷ Beginning value) ^ (1 ÷ Years) – 1 8. Interest Coverage Ratio Shows how easily the company can cover interest expenses from operating earnings. Formula: EBIT ÷ Interest expense 👉 Which other KPIs would you add? Follow for more STERLING WISE

Understanding fixed costs, variable costs, and contribution is essential for profitability. - Fixed costs remain constant regardless of production levels. - Variable costs fluctuate with output. - The contribution margin, calculated as selling price minus variable cost, indicates how much each unit contributes to covering fixed costs and generating profit. By knowing your contribution per unit, you can determine the sales needed to break even and identify the sales required for growth and profitability! #business #profit #smallbusiness #businesstip #finance

Understanding the nuances of profit margins can significantly improve financial decision-making. Gross profit margin, calculated as sales less the cost of sales divided by sales, reveals the profitability of each pound of sales after direct costs. Net profit margin, found at the bottom of the profit and loss statement, reflects the overall profitability after deducting all overhead costs. While net profit margin is crucial for all businesses, gross profit margin is particularly relevant for stock and manufacturing businesses, where the cost of delivery and materials plays a significant role. #profitmargin #financialanalysis #businessstrategy #netprofit #grossprofit #finance

How to Analyze a Company in less than 5 Minutes Focus on these key ratios across 6 areas: 1️⃣ Efficiency Ratios Inventory Turnover = COGS ÷ Inventory → How fast stock is sold. Asset Turnover = Sales ÷ Total Assets → How well assets generate sales. 2️⃣ Liquidity Ratios Current Ratio = Current Assets ÷ Current Liabilities → Short-term solvency. Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities → Liquidity excluding stock. 3️⃣ Coverage Ratios Interest Coverage = EBIT ÷ Interest Expense → Ability to pay interest. 4️⃣ Profitability Ratios ROA = Net Income ÷ Total Assets → Profitability of assets. ROE = Net Income ÷ Shareholders’ Equity → Profitability of equity. Gross Margin = Gross Profit ÷ Revenue → Profit after COGS. Net Profit Margin = Net Income ÷ Revenue → Profit after all expenses. 5️⃣ Dividend Ratios Payout Ratio = Dividends ÷ Net Income → % of earnings paid to shareholders. Dividend Yield = Dividend per Share ÷ Share Price → Return from dividends. 6️⃣ Leverage & Market Value Ratios Debt-to-Equity = Total Debt ÷ Total Equity → Financial leverage. EPS = Net Income ÷ Shares Outstanding → Profit per share. P/E Ratio = Share Price ÷ EPS → Market valuation of earnings. P/S Ratio = Share Price ÷ Sales per Share → Market valuation of sales.

Topic: EBITDA Quality Assessment 🔍 EBITDA quality: What separates real business value from accounting tricks. All EBITDA isn't created equal. Buyers scrutinize: High-Quality EBITDA (Premium Valuations): • Recurring revenue base (80%+) • Diversified customer mix • Sustainable gross margins • Minimal owner adjustments • Predictable seasonality Low-Quality EBITDA (Discounted Valuations): • Project-based revenue lumps • Customer concentration >25% • Declining gross margins • Excessive owner add-backs • Unpredictable revenue patterns Red Flag Add-Backs I See: • One-time expenses that happen annually • Owner salary adjustments above market rate • Family member employment without clear value • Deferred maintenance is characterized as unusual Real example: $3M EBITDA business with 40% recurring revenue vs. $3M EBITDA with 90% recurring. The latter commanded a 60% higher valuation. Quality beats quantity every time in business valuations. How would buyers judge your EBITDA quality? #EBITDA #EarningsQuality #BusinessValuation

Profit ≠ Cash. Don't confuse them. You can be profitable and still run out of money. Here’s why cash disappears even when your P&L looks healthy: Slow collections: Revenue is booked, but cash hasn’t been received yet. AR is eating your runway. Inventory drag: Cash tied up on the shelves, not in the bank. Upfront expenses: Capex, annual licenses, deposits—profit spreads them out, cash pays upfront. Debt & taxes: Loan EMIs and taxes don't show up in operating profit the same way.  Hyper-growth: Sales usually mean more working capital before cash catches up.   Fix the Gap (Simple Playbook) • Draw in credit terms; collect AR weekly with a clear DSO goal. • Sell slow inventory; buy smaller, more often; track inventory turns. • Forecast cash weekly: inflows, outflows, headroom. • Align payment terms: negotiate supplier days in line with collection days. • Ring-fence non-negotiables: salary, taxes, EMIs—pay them first. • Delay nice-to-have spend when cash flow is strong. Bottom line: Profit looks good on paper. Cash keeps you alive. Want my basic cash-flow forecast sheet? DM “CASH” and I’ll share it with you.

📊 Key Financial Ratios: Analyze a Company in Under 5 Minutes If you want to quickly understand a company’s performance, focus on these essential ratios: 💡 Efficiency Ratios • Inventory Turnover = COGS ÷ Inventory → How fast inventory is sold & replaced • Asset Turnover = Sales ÷ Total Assets → Efficiency of assets in generating sales 🚰 Liquidity Ratios • Current Ratio = Current Assets ÷ Current Liabilities → Ability to cover short-term obligations • Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities → Liquidity excluding inventory ☔ Coverage Ratios • Interest Coverage = EBIT ÷ Interest Expense → Ability to service debt interest 💰 Profitability Ratios • ROA = Net Income ÷ Total Assets → Asset efficiency • ROE = Net Income ÷ Equity → Equity efficiency • Gross Margin = Gross Profit ÷ Revenue → Profitability before expenses • Net Profit Margin = Net Income ÷ Revenue → Profitability after all expenses 💸 Dividend Policy Ratios • Dividend Payout Ratio = Dividends ÷ Net Income → Earnings distributed as dividends • Dividend Yield = Annual Dividend ÷ Price per Share → Shareholder return from dividends 🛠️ Leverage Ratios • Debt-to-Equity Ratio = Total Debt ÷ Total Equity → Capital structure balance 📈 Market Value Ratios • EPS = Net Income ÷ Shares Outstanding → Profit per share • P/E Ratio = Share Price ÷ EPS → Valuation per dollar of earnings • P/S Ratio = Share Price ÷ Sales per Share → Market value relative to sales ✨ Key Takeaway: Master these ratios, and you can decode a company’s performance, risk, and value in minutes. #Finance #FinancialRatios #Accounting #FinancialAnalysis #Investing #CFO #EquityResearch #Valuation #FinancialStatements #FinancialLiteracy Follow Mohammad Afsar Abid

#FinanceSimplified: Margin vs Mark-Up — Why They’re Not the Same Many business owners say: “We add 30% mark-up, so our margin is 30%.” But that’s not true — and this small confusion can make your pricing strategy completely off. Let’s simplify it Mark-Up = How much you add on top of your cost. Margin = How much you keep from your selling price. 💬 Example: If your product costs $100 and you sell it for $130 — your mark-up is 30%, but your margin is only 23% ($30/$130). Why does this matter? Because when you plan profits or compare your prices to competitors, using the wrong metric can make you think you’re more profitable than you actually are. ✅ Knowing the difference helps you: - Set realistic selling prices - See true profit in every sale - Align pricing, cost control, and growth targets How do you decide your prices — by mark-up or by margin? Share your approach in comments #FinanceSimplified #SMEFinance #BusinessFinance #VirtualCFO #Profitability #PricingStrategy #FinancialPlanning #BusinessGrowth #EntrepreneurMindset #CashFlow #FinancialLiteracy #FinanceForNonFinance #SmallBusinessTips #FinanceForSMEs #BusinessAdvisory #ManagementAccounting #CFOInsights #FinancialClarity #MuyassarMagdalieva