Financial metrics, explained
The figures used to judge a public company, in plain words: what each one measures, how it is calculated from the company's filings, and how to read it. Written for readers who are new to analyzing companies.
Income Statement
9RevenueTotal sales of goods and services in the period, before any costs are taken out.How to read it →Cost of RevenueWhat it cost to make the products or deliver the services that were sold: materials, factory labor, hosting, delivery.How to read it →Gross ProfitRevenue left after the direct cost of what was sold, before overheads like research, marketing and management.How to read it →R&D ExpensesSpending on research and development of new products and technology.How to read it →Operating IncomeProfit from running the business, after all operating costs but before interest and tax. Often called operating profit, and close to EBIT.How to read it →Net IncomeThe bottom line: profit left for the company’s shareholders after every cost, interest and tax.How to read it →EPSNet income spread over the average number of shares, so profit can be compared per share and against the share price.How to read it →EBITDAOperating profit before depreciation and amortization are deducted, a rough proxy for the cash the operations throw off before investment.How to read it →Interest ExpenseThe cost of borrowing in the period.How to read it →
Balance Sheet
12Total AssetsEverything the company owns or controls: cash, receivables, inventory, property, equipment and intangibles.How to read it →Current AssetsAssets expected to turn into cash within a year: cash, short-term investments, receivables and inventory.How to read it →Total LiabilitiesEverything the company owes: debt, payables, deferred revenue, leases and other obligations.How to read it →Current LiabilitiesObligations due within a year: payables, short-term debt, the current slice of long-term debt, accrued costs.How to read it →Stockholders' EquityThe book value of what the company’s own shareholders own.How to read it →Cash & EquivalentsCash on hand and near-cash holdings such as money-market funds.How to read it →Long-term DebtBorrowings due in more than a year, such as bonds and term loans.How to read it →Total DebtAll interest-bearing borrowings: long-term debt, the part of it due within a year, and short-term borrowings such as commercial paper.How to read it →Net DebtDebt after subtracting the cash that could repay it. A negative number means the company holds more cash than debt, a net cash position.How to read it →Invested CapitalThe money tied up in running the business, from both lenders and shareholders.How to read it →GoodwillThe premium paid over the fair value of the net assets of businesses the company acquired.How to read it →Retained EarningsCumulative profits kept in the business rather than paid out.How to read it →
Cash Flow
5Operating Cash FlowCash actually generated by day-to-day operations, before investment in the business.How to read it →Investing Cash FlowCash spent on or received from investments: capital expenditure, acquisitions, and buying or selling securities.How to read it →Financing Cash FlowCash exchanged with lenders and shareholders: debt raised or repaid, shares issued or bought back, dividends paid.How to read it →Free Cash FlowCash left after paying to maintain and expand the business. The money available for dividends, buybacks, debt repayment or acquisitions.How to read it →Capital ExpendituresCash spent on property, plant, equipment and other long-lived assets.How to read it →
Capital Allocation
7Share RepurchasesCash spent buying back the company’s own shares, which shrinks the share count and lifts per-share figures.How to read it →Dividends PaidCash paid out to shareholders as dividends.How to read it →Stock-based CompensationThe value of shares and options granted to employees. It is a real cost paid in ownership rather than cash, so it dilutes existing holders.How to read it →AcquisitionsCash paid to buy other businesses, net of the cash acquired with them where the company reports it that way.How to read it →Debt RepaidCash used to pay down borrowings during the period.How to read it →Debt IssuedCash raised from new borrowings during the period.How to read it →Shareholder ReturnsCash handed back to shareholders through buybacks and dividends combined.How to read it →
Margins & Ratios
9Gross MarginThe share of each dollar of revenue left after the direct cost of what was sold.How to read it →Operating MarginThe share of revenue that becomes operating profit after all running costs.How to read it →Net MarginThe share of revenue that ends up as net income.How to read it →Return on EquityProfit earned for each dollar of shareholder equity.How to read it →Return on AssetsProfit earned for each dollar of assets the company controls.How to read it →Current RatioWhether near-term assets cover near-term obligations.How to read it →Debt/EquityHow much the company relies on borrowed money relative to equity.How to read it →Quick RatioWhether the company can cover its near-term bills without selling inventory.How to read it →Asset TurnoverHow much revenue each dollar of assets generates.How to read it →
Returns & Safety
4ROICReturn on invested capital: the after-tax profit the business earns on all the money invested in it, from lenders and shareholders alike.How to read it →Net Debt / EBITDAHow many years of operating cash earnings it would take to repay net debt.How to read it →Interest CoverageHow many times operating profit covers the interest bill.How to read it →Effective Tax RateThe share of pre-tax profit paid as income tax.How to read it →
Cash Quality
9FCF MarginThe share of revenue that becomes free cash.How to read it →FCF / Net IncomeHow much of reported profit shows up as free cash. Sometimes called cash conversion.How to read it →Capex / D&AWhether the company is investing more in its assets than they wear out.How to read it →SBC / RevenueStock compensation as a share of sales, a measure of how much of the business is being paid to employees in shares.How to read it →Accruals RatioThe gap between accounting profit and cash profit, relative to the size of the company. High accruals often precede disappointing earnings.How to read it →Days Sales OutstandingHow many days, on average, the company waits to collect cash after a sale.How to read it →Days InventoryHow many days it takes to sell through the inventory on hand.How to read it →Days PayableHow many days the company takes to pay its suppliers.How to read it →Cash Conversion CycleHow many days cash is tied up between paying suppliers and collecting from customers. Negative means customers pay before suppliers are paid.How to read it →
Per Share
5Diluted EPSProfit per share counting all shares that could exist if options and convertibles were exercised.How to read it →Revenue / ShareSales spread over each share, which shows whether growth is reaching shareholders or being diluted away.How to read it →FCF / ShareFree cash flow spread over each share: what a share earned in real cash after the business paid to maintain itself.How to read it →Book Value / ShareShareholders’ equity spread over each share, the accounting value behind one share.How to read it →Diluted SharesThe average number of shares during the period, including shares that options and convertibles could add.How to read it →
Growth
2Year-over-year growthThe change in a figure against the same period one year earlier, as a percentage. Comparing a quarter with the same quarter last year removes seasonality.How to read it →Compound annual growth rateThe steady yearly rate that would take a figure from its starting value to its ending value over a number of years. It smooths out one-off good or bad years.How to read it →
Forensic Scores
3Piotroski F-ScoreA nine-point checklist of financial strength: profitability, cash generation, leverage, liquidity, share issuance and operating efficiency, most scored against the year before.How to read it →Altman Z-ScoreA bankruptcy-risk score that weighs working capital, retained earnings, operating profit and book equity against the size of the balance sheet.How to read it →Beneish M-ScoreA screen for manipulated earnings. It looks for the patterns that tend to precede restatements: receivables growing faster than sales, fading margins, softer asset quality, and profits that outrun cash.How to read it →
Governance
4CEO Total PayWhat the chief executive was paid for the year: salary, bonuses, the value of shares and options granted, and perks.How to read it →CEO Pay Actually PaidThe CEO’s pay with stock and option awards re-measured at their value during the year rather than at grant, so it shows what the package was really worth as the share price moved.How to read it →Board IndependenceHow many directors the company says are independent, meaning they have no job, business or family ties to the company that could sway their judgement.How to read it →Say-on-Pay SupportThe share of shareholders’ votes in favor of the executives’ pay at the latest annual meeting.How to read it →