Finance formular cheatsheet simple guidance

FINANCE FORMULAE

(Simplest Explanation)

CHEAT SHEET

Use: To calculate the value of a future amount of money in today’s terms.

Helps in comparing cash flows received

at different times.

Example: Used in discounting future cash flows in projects, investments, or loans to evaluate their current worth.

PV = FV (1+r)^n

FV = Future Value

r = Discount rate (interest rate)

n = Number of periods

Present Value (PV)

Use: To calculate how much a sum of money today will grow to at a specified

interest rate over a given period.

Example: Used for retirement planning, savings accounts, and investment growth projections.

Use: To assess the profitability of an investment by summing the present values of expected cash flows and

subtracting the initial investment.

Example: Used in capital budgeting to evaluate project viability (e.g., buying equipment or expanding a business).

NPV = ∑ Ct - C₀

(1+r)^t

Cₜ = Cash inflow at time t

r = Discount rate C₀ = Initial investment

Net Present Value (NPV)

Use: To calculate a firm’s cost of capital from all sources (debt and equity) Used

to determine the minimum return a company must earn to satisfy investors.

Example: Used in valuation models to discount future cash flows and evaluate mergers, acquisitions, or expansions.

WACC = (E/V) × Ke + (D/V) × Kd × (1 - Tax

Rate)

Where E = Equity, D = Debt, V = E + D, Ke =

Cost of Equity, Kd = Cost of Debt

Weighted Average Cost of Capital

(WACC)

Use: To calculate the expected return

on an investment based on its risk,

measured by beta.

Example: Used in portfolio management to determine if an investment offers a reasonable expected return given its risk.

Use: Measures a company’s profitability on a per-share basis, indicating how much profit is available

to each share of stock.

Example: Used by investors to compare the profitability of companies

and determine share valuation.

EPS = Net Income − Preferred Dividends

Weighted Average Shares

Outstanding

Earnings Per Share (EPS)

Use: To evaluate if a stock is overvalued

or undervalued by comparing the price investors are willing to pay for each

dollar of earnings.

Example: Used in stock analysis and

comparison with industry peers.

P/E = Market Price per Share

Earnings per Share

Price-to-Earnings Ratio (P/E)

Use: Measures a company’s financial leverage and its reliance on debt versus

equity for funding.

Example: Used by investors and creditors to assess a company’s risk and

financial health.

D/E = Total Liabilities Shareholder′s Equity

Debt-to-Equity Ratio

Use: Measures how efficiently a company uses shareholders’ equity to

generate profits.

Example: Used by investors to compare

profitability across companies and

Use: Measures how efficiently a

company uses its assets to generate

profit.

Example: Used to assess a company’s operational efficiency and effectiveness

in managing its assets.

ROA = Net Income Total Assets

Return on Assets (ROA)

Use: Measures the profitability of an

investment relative to its cost

Example: Used to evaluate the efficiency or profitability of an investment or to compare the efficiency

of several different investments.

ROI = Net Profit Investment Cost

Return on Investment (ROI)

Use: Measures a company’s ability to pay its short-term liabilities with its

short-term assets.

Example: Used by creditors to assess a

company’s liquidity and short-term

financial health.

Current Ratio = Current Assets

Current Liabilities

Current Ratio

Use: A more stringent liquidity measure than the current ratio, excluding inventory from assets.

Example: Used to evaluate a company’s ability to meet short-term obligations without relying on the sale

of inventory.

Quick Ratio = Current Assets − Inventory

Current Liabilities

Quick Ratio

Use: Indicates a company’s operating

performance by excluding operating expenses like interest, taxes,

non-depreciation, and amortization.

Example: Used to compare profitability across companies without

the impact of different capital

Use: Measures the time it takes for an investment to repay its initial cost from

its cash inflows.

Example: Used in project evaluation to assess risk by determining how quickly

an investment can recover its initial

cost.

Payback Period = Initial Investment

Annual Cash Inflows

Payback Period

Use: Shows how much a company

pays out in dividends each year relative

to its stock price.

Example: Used by income-focused

investors to compare stocks based on

their return from dividends.

Dividend Yield = Annual Dividends per Share

Price per Share

Dividend Yield

Use: Measures the total value of a company, including debt and excluding

cash, giving a clearer picture of its

worth.

Example: Used in valuation metrics

such as EV/EBITDA to compare companies with different capital

Use: Measures a company’s ability to

pay its interest expenses from

operating profits (EBIT).

Example: Used by creditors to assess the risk of lending to a company based

on its ability to service debt.

Interest Coverage Ratio =

EBIT Interest Expense EBIT = Earnings Before Interest And Tax

Interest Coverage Ratio

Use: Evaluates the risk-adjusted return

of an investment by measuring excess

return per unit of risk.

Example: Used in portfolio management to compare the performance of investment strategies.

Sharpe Ratio = Rp −Rf σp

Rₚ = Expected return of the portfolio or

Use: Measures a stock’s volatility

relative to the market, indicating its risk

level.

Example: Used in risk analysis to

determine how much a stock’s price

moves compared to the broader

market.

β = Covariance (Stock, Market)

Variance of Market

Beta (β)