Liquidity Ratios

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Liquidity RatioDescriptionWhen to UseExampleFormula
Current RatioCompares a company’s current assets to its current liabilities.Assess short-term liquidity and solvency.A current ratio of 2 indicates good liquidity with twice as many assets as liabilities.Current Ratio = Current Assets / Current Liabilities
Quick Ratio (Acid-Test Ratio)Similar to the current ratio but excludes inventory from current assets.Assess immediate liquidity without relying on inventory.A quick ratio of 1 means current liabilities can be fully covered by liquid assets.Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Cash RatioMeasures the percentage of current liabilities that can be covered by cash and cash equivalents.Assess immediate liquidity with cash on hand.A cash ratio of 0.3 indicates 30% of current liabilities can be covered by cash.Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities
Operating Cash Flow RatioCompares a company’s operating cash flow to its current liabilities.Assess the ability to meet short-term obligations from operations.An operating cash flow ratio of 1.2 indicates sufficient cash from operations to cover current liabilities.Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities
Receivables Turnover RatioMeasures how quickly a company collects payments from its customers.Assess accounts receivable collection efficiency.A receivables turnover ratio of 6 suggests accounts receivable turn over 6 times a year.Receivables Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Days Sales Outstanding (DSO)Calculates the average number of days it takes to collect payment from customers.Assess the average collection period for receivables.A DSO of 45 days means, on average, it takes 45 days to collect payment.DSO = 365 days / Receivables Turnover Ratio
Inventory Turnover RatioMeasures how quickly a company sells and replaces its inventory.Assess inventory management efficiency.An inventory turnover ratio of 5 suggests inventory is sold and replaced 5 times a year.Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Days Sales of Inventory (DSI)Calculates the average number of days it takes to sell the entire inventory.Assess the average time it takes to sell inventory.A DSI of 60 days indicates it takes 60 days to sell the entire inventory.DSI = 365 days / Inventory Turnover Ratio
Working Capital RatioCompares a company’s current assets to its current liabilities as a ratio.Assess short-term liquidity and solvency.A working capital ratio of 1.2 suggests sufficient working capital to cover current liabilities.Working Capital Ratio = Current Assets / Current Liabilities
Cash Conversion CycleMeasures the time it takes for a company to convert inventory and receivables into cash, considering payables.Assess cash flow efficiency and liquidity management.A CCC of 30 days indicates quick conversion of assets into cash.CCC = Operating Cycle – Average Days of Payables
Quick Liquidity RatioCompares a company’s quick assets (cash, marketable securities, and receivables) to its current liabilities.Assess immediate liquidity without relying on inventory.A quick liquidity ratio of 1.5 indicates strong immediate liquidity.Quick Liquidity Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities
Cash Flow to Debt RatioMeasures the ability to cover total debt with operating cash flow.Assess the ability to meet debt obligations from operating cash flow.A cash flow to debt ratio of 0.8 suggests that operating cash flow covers 80% of total debt.Cash Flow to Debt Ratio = Operating Cash Flow / Total Debt
Debt Service Coverage Ratio (DSCR)Measures a company’s ability to cover its debt payments with cash flow.Assess the ability to meet debt obligations, including interest and principal.A DSCR of 2 indicates cash flow covers debt payments twice over.DSCR = Operating Cash Flow / Total Debt Service
Cash Interest Coverage RatioMeasures a company’s ability to cover interest expenses with operating cash flow.Assess the ability to meet interest obligations from cash flow.A cash interest coverage ratio of 3 indicates cash flow covers interest expenses three times over.Cash Interest Coverage Ratio = Operating Cash Flow / Interest Expense
Operating Cash Flow to Sales RatioMeasures the percentage of sales revenue that is converted into operating cash flow.Assess the conversion of sales into cash.An operating cash flow to sales ratio of 15% means 15% of sales become cash flow.Operating Cash Flow to Sales Ratio = Operating Cash Flow / Revenue
Cash Flow MarginMeasures the percentage of revenue that remains as cash flow after all expenses.Assess cash flow generation relative to revenue.A cash flow margin of 10% means 10% of revenue is available as cash flow.Cash Flow Margin = Operating Cash Flow / Revenue
Free Cash Flow to Equity (FCFE) RatioMeasures the percentage of free cash flow available to shareholders.Assess the proportion of free cash flow available to equity investors.An FCFE ratio of 20% indicates that 20% of free cash flow is available to equity shareholders.FCFE Ratio = Free Cash Flow / Equity
Operating Cash Flow to Total Debt RatioMeasures the percentage of total debt covered by operating cash flow.Assess the ability to meet debt obligations from cash flow.An operating cash flow to total debt ratio of 0.6 indicates that operating cash flow covers 60% of total debt.Operating Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
Cash Flow to Current Liabilities RatioMeasures the percentage of current liabilities covered by operating cash flow.Assess the ability to meet short-term obligations from cash flow.A cash flow to current liabilities ratio of 1.2 indicates that cash flow can cover 120% of current liabilities.Cash Flow to Current Liabilities Ratio = Operating Cash Flow / Current Liabilities
Operating Cash Flow to Total Liabilities RatioMeasures the percentage of total liabilities covered by operating cash flow.Assess the ability to meet all liabilities from cash flow.An operating cash flow to total liabilities ratio of 0.5 indicates that cash flow can cover 50% of total liabilities.Operating Cash Flow to Total Liabilities Ratio = Operating Cash Flow / Total Liabilities
The Enlightened Accountant by Gennaro Cuofano – FourWeekMBADownload

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The circle of competence describes a person’s natural competence in an area that matches their skills and abilities. Beyond this imaginary circle are skills and abilities that a person is naturally less competent at. The concept was popularised by Warren Buffett, who argued that investors should only invest in companies they know and understand. However, the circle of competence applies to any topic and indeed any individual.

What is a Moat

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Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Buffet Indicator

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The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Venture Capital

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Venture capital is a form of investing skewed toward high-risk bets, that are likely to fail. Therefore venture capitalists look for higher returns. Indeed, venture capital is based on the power law, or the law for which a small number of bets will pay off big time for the larger numbers of low-return or investments that will go to zero. That is the whole premise of venture capital.

Foreign Direct Investment

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Foreign direct investment occurs when an individual or business purchases an interest of 10% or more in a company that operates in a different country. According to the International Monetary Fund (IMF), this percentage implies that the investor can influence or participate in the management of an enterprise. When the interest is less than 10%, on the other hand, the IMF simply defines it as a security that is part of a stock portfolio. Foreign direct investment (FDI), therefore, involves the purchase of an interest in a company by an entity that is located in another country. 

Micro-Investing

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Micro-investing is the process of investing small amounts of money regularly. The process of micro-investing involves small and sometimes irregular investments where the individual can set up recurring payments or invest a lump sum as cash becomes available.

Meme Investing

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Retail Investing

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Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.

Accredited Investor

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Accredited investors are individuals or entities deemed sophisticated enough to purchase securities that are not bound by the laws that protect normal investors. These may encompass venture capital, angel investments, private equity funds, hedge funds, real estate investment funds, and specialty investment funds such as those related to cryptocurrency. Accredited investors, therefore, are individuals or entities permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.

Startup Valuation

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Balance Sheet

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Income Statement

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Cash Flow Statement

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The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.

Capital Structure

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Capital Expenditure

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Financial Statements

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Financial Modeling

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Business Valuation

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Financial Ratio

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WACC

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Financial Option

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A financial option is a contract, defined as a derivative drawing its value on a set of underlying variables (perhaps the volatility of the stock underlying the option). It comprises two parties (option writer and option buyer). This contract offers the right of the option holder to purchase the underlying asset at an agreed price.

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