Financial Intelligence, Revised Edition: A Manager's Guide to Knowing What the Numbers Really Mean

Some investors—Warren Buffett, for example—like to look at the “market to book” ratio. Buffett often tries to find companies that are trading at a market cap close to or even below their book value.

Incidentally, EBITDA is often used in valuing businesses. Many companies are bought and sold at a price that is an agreed-upon multiple of EBITDA.

A company’s market cap is simply the current stock price of a company multiplied by the number of shares outstanding.

The Big Five are: • Revenue growth from one year to the next • Earnings per share (EPS) • Earnings before interest, taxes, depreciation, and amortization (EBITDA) • Free cash flow (FCF) • Return on total capital (ROTC) or return on equity (ROE). ROE is the right metric for financial businesses such as banks and insurance companies.

the economist John Maynard Keynes once pointed out, buying stocks is like trying to anticipate who will win a beauty contest. You want to choose not the person who you think is the most beautiful but the person you think everyone else will see as most beautiful.

operating expense reduces the bottom line immediately, and a capital expenditure spreads the hit out over several accounting periods.

You can also look up the answer in the present value/future value tables found in finance textbooks. But we’ll also show you what the actual formula—it’s called the discounting equation—looks like, so you can look “underneath” the result and really know what it means. The discounting equation looks like this: where: PV = present value FV = projecte

The price-to-earnings ratio or P/E is the current stock price divided by the prior year’s earning per share.

Now move from an individual to a business. Same concepts, different language: • What the company owns is called its assets. • What it owes is called its liabilities. • What it’s worth is called owners’ equity or shareholders’ equity. And the basic equation now looks like this: or this: