Finance Crib Sheet

finance crib sheet

Finance Crib Sheet

A quick reference for key financial concepts and formulas.

Basic Financial Statements

Income Statement: Revenue – Expenses = Net Income. Measures profitability over a period.
Balance Sheet: Assets = Liabilities + Equity. Shows a company’s financial position at a specific point in time.
Cash Flow Statement: Tracks the movement of cash, categorized into operating, investing, and financing activities.

Ratios help analyze a company’s performance.

Liquidity Ratios: Measures a company’s ability to meet short-term obligations.
- Current Ratio: Current Assets / Current Liabilities. Ideal is generally > 1.
- Quick Ratio (Acid Test): (Current Assets – Inventory) / Current Liabilities. More conservative than current ratio.
Profitability Ratios: Measures how effectively a company generates profit.
- Gross Profit Margin: (Revenue – Cost of Goods Sold) / Revenue. Shows profit after accounting for the cost of goods.
- Net Profit Margin: Net Income / Revenue. Shows overall profitability.
- Return on Equity (ROE): Net Income / Shareholder’s Equity. Measures return generated for shareholders.
Solvency Ratios: Measures a company’s ability to meet its long-term obligations.
- Debt-to-Equity Ratio: Total Debt / Shareholder’s Equity. Shows the proportion of debt financing vs. equity financing.
Efficiency Ratios: Measures how efficiently a company uses its assets.
- Inventory Turnover: Cost of Goods Sold / Average Inventory. Measures how quickly inventory is sold.
- Accounts Receivable Turnover: Net Credit Sales / Average Accounts Receivable. Measures how quickly receivables are collected.

Money received today is worth more than the same amount received in the future.

Future Value (FV): FV = PV (1 + r)^n, where PV = Present Value, r = interest rate, n = number of periods.
Present Value (PV): PV = FV / (1 + r)^n.

Net Present Value (NPV): Sum of the present values of all cash flows, both positive and negative. Projects with a positive NPV are typically accepted.
Internal Rate of Return (IRR): Discount rate that makes the NPV of all cash flows equal to zero. Projects are accepted if the IRR is greater than the required rate of return.

Used to determine the required rate of return for an asset.

Required Return = Risk-Free Rate + Beta * (Market Return – Risk-Free Rate)

Inflation: Erodes the purchasing power of money over time. Consider its impact on investment returns.
Risk: Higher returns generally come with higher risk. Understand your risk tolerance.
Diversification: Spreading investments across different asset classes to reduce risk.

Disclaimer: This crib sheet provides a simplified overview of financial concepts. Consult with a financial professional for personalized advice.