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Key Financial Metrics – Complete Guide

Key financial metrics distill a company’s financial statements and market data into actionable numbers. They span per-share fundamentals, enterprise-level valuation, returns on capital, efficiency measures, and balance sheet health. This guide explains every metric in the Key Metrics dataset.

Per-Share Metrics

Per-share metrics normalize financial data by shares outstanding, making companies of different sizes directly comparable.

Revenue per Share

Revenue per Share=Total RevenueShares Outstanding\text{Revenue per Share} = \frac{\text{Total Revenue}}{\text{Shares Outstanding}}

What it measures: The sales generated for each outstanding share.

How to use it: Growing revenue per share confirms top-line expansion on a per-share basis, accounting for dilution from stock issuance. Compare to total revenue growth — if revenue grows but revenue per share stagnates, the company may be issuing too many shares.

Net Income per Share

EPS=Net IncomeShares Outstanding\text{EPS} = \frac{\text{Net Income}}{\text{Shares Outstanding}}

What it measures: The bottom-line earnings attributable to each share — commonly known as Earnings per Share (EPS).

How to use it: The most widely watched per-share metric. Growing EPS is the primary driver of long-term stock price appreciation. Compare to analyst consensus and track multi-year growth rates. Distinguish between EPS growth from genuine earnings improvement vs. share buybacks.

Operating Cash Flow per Share

OCF per Share=Operating Cash FlowShares Outstanding\text{OCF per Share} = \frac{\text{Operating Cash Flow}}{\text{Shares Outstanding}}

What it measures: The cash generated from core operations attributable to each share.

How to use it: More reliable than EPS because cash flow is harder to manipulate through accounting choices. If OCF per share consistently exceeds EPS, earnings quality is strong. Declining OCF per share despite rising EPS is a red flag.

Free Cash Flow per Share

FCF per Share=Operating Cash Flow−Capital ExpendituresShares Outstanding\text{FCF per Share} = \frac{\text{Operating Cash Flow} - \text{Capital Expenditures}}{\text{Shares Outstanding}}

What it measures: The cash available per share after all capital investments needed to maintain and grow the business.

How to use it: Growing FCF per share indicates the company is generating increasing excess cash for shareholders. Compare to dividends per share to assess dividend sustainability. Companies with consistently growing FCF per share are often excellent long-term investments.

Cash per Share

Cash per Share=Cash + Cash EquivalentsShares Outstanding\text{Cash per Share} = \frac{\text{Cash + Cash Equivalents}}{\text{Shares Outstanding}}

What it measures: The cash and equivalents backing each share.

How to use it: High cash per share relative to the stock price can indicate undervaluation — the market may be pricing the business itself cheaply. Also useful for assessing financial resilience and capacity for acquisitions or buybacks.

Book Value per Share

BVPS=Total Shareholders’ EquityShares Outstanding\text{BVPS} = \frac{\text{Total Shareholders' Equity}}{\text{Shares Outstanding}}

What it measures: The net asset value per share from the balance sheet.

How to use it: Compare to the stock price to derive the P/B ratio. BVPS growing over time indicates equity accumulation. Most meaningful for asset-heavy industries (banking, real estate). For tech companies, book value often understates true value due to unrecognized intangibles.

Tangible Book Value per Share

TBVPS=Shareholders’ Equity−Intangible Assets−GoodwillShares Outstanding\text{TBVPS} = \frac{\text{Shareholders' Equity} - \text{Intangible Assets} - \text{Goodwill}}{\text{Shares Outstanding}}

What it measures: Net asset value per share excluding intangible assets and goodwill — the “hard” asset backing.

How to use it: A more conservative measure than BVPS. Particularly important for companies with large acquisitions (and therefore significant goodwill). A negative tangible book value is common for acquisitive companies and warrants closer scrutiny of asset quality.

Shareholders’ Equity per Share

Equity per Share=Total Shareholders’ EquityShares Outstanding\text{Equity per Share} = \frac{\text{Total Shareholders' Equity}}{\text{Shares Outstanding}}

What it measures: The shareholders’ equity attributable to each outstanding share.

How to use it: Functionally equivalent to book value per share. Declining equity per share may indicate accumulated losses, excessive buybacks funded by debt, or large dividend payments exceeding earnings.

Interest-Bearing Debt per Share

Debt per Share=Interest-Bearing DebtShares Outstanding\text{Debt per Share} = \frac{\text{Interest-Bearing Debt}}{\text{Shares Outstanding}}

What it measures: The interest-bearing debt burden per share.

How to use it: Rising debt per share with stagnant or falling cash per share is a warning sign. Compute net debt per share (debt minus cash) for a more complete picture. Compare trends to FCF per share to assess whether the company can manage its debt load.

Capex per Share

Capex per Share=Capital ExpendituresShares Outstanding\text{Capex per Share} = \frac{\text{Capital Expenditures}}{\text{Shares Outstanding}}

What it measures: The capital investment made per share to maintain and grow the business.

How to use it: Track alongside FCF per share. The gap between OCF per share and capex per share equals FCF per share. Rising capex per share can indicate growth investment (positive) or aging infrastructure requiring replacement (neutral to negative).

Enterprise-Level Valuation

These metrics assess the company’s total value, incorporating both equity and debt.

Market Capitalization

Market Cap=Share Price×Shares Outstanding\text{Market Cap} = \text{Share Price} \times \text{Shares Outstanding}

What it measures: The total market value of the company’s outstanding equity.

How to use it: Market cap is the starting point for most valuation exercises. It classifies companies by size (micro-cap, small-cap, mid-cap, large-cap, mega-cap). Use it as the numerator in price-based valuation ratios (P/S, P/FCF) and compare to enterprise value for a debt-adjusted perspective.

Enterprise Value

EV=Market Cap+Total Debt−Cash and Cash Equivalents\text{EV} = \text{Market Cap} + \text{Total Debt} - \text{Cash and Cash Equivalents}

What it measures: The theoretical takeover price of the entire business, accounting for debt that must be assumed and cash that offsets the cost.

How to use it: Enterprise value is a more complete measure of company value than market cap alone. Use it in EV-based multiples (EV/EBITDA, EV/Sales, EV/FCF) to compare companies with different capital structures on a level playing field.

Valuation Multiples

Valuation multiples compare price or enterprise value to fundamental financial metrics.

P/E Ratio

P/E=Price per ShareEarnings per Share\text{P/E} = \frac{\text{Price per Share}}{\text{Earnings per Share}}

What it measures: How much investors pay for each dollar of earnings.

How to use it: A P/E of 15-25 is typical for mature companies. Higher ratios suggest elevated growth expectations. Always compare within the same industry. Negative earnings render P/E meaningless.

Price to Sales Ratio

P/S=Market CapitalizationTotal Revenue\text{P/S} = \frac{\text{Market Capitalization}}{\text{Total Revenue}}

What it measures: What investors pay per dollar of revenue.

How to use it: Useful for companies that aren’t yet profitable. Compare within sectors — SaaS companies often trade at much higher P/S than traditional businesses. Lower values may indicate better relative value.

Price to Operating Cash Flow Ratio (POCF)

P/OCF=Market CapitalizationOperating Cash Flow\text{P/OCF} = \frac{\text{Market Capitalization}}{\text{Operating Cash Flow}}

What it measures: What investors pay per dollar of operating cash flow.

How to use it: A cash-based alternative to P/E. Lower ratios suggest the company generates strong cash flow relative to its price. Useful when earnings are distorted by non-cash items.

Price to Free Cash Flow Ratio (PFCF)

P/FCF=Market CapitalizationFree Cash Flow\text{P/FCF} = \frac{\text{Market Capitalization}}{\text{Free Cash Flow}}

What it measures: What investors pay per dollar of free cash flow.

How to use it: Many value investors prefer P/FCF over P/E because free cash flow better reflects the cash actually available to shareholders. Lower values are more attractive. Negative FCF makes this metric unreliable.

Price to Book Ratio (P/B)

P/B=Price per ShareBook Value per Share\text{P/B} = \frac{\text{Price per Share}}{\text{Book Value per Share}}

What it measures: The stock price relative to the company’s net asset value per share.

How to use it: A P/B below 1.0 may signal undervaluation or distress. High P/B ratios (3+) are normal for asset-light, high-return businesses. Most useful for financials and asset-heavy industries.

Price to Tangible Book Ratio (P/TB)

P/TB=Price per ShareTangible Book Value per Share\text{P/TB} = \frac{\text{Price per Share}}{\text{Tangible Book Value per Share}}

What it measures: The stock price relative to tangible net asset value, excluding goodwill and intangibles.

How to use it: A stricter version of P/B. More conservative for companies with significant acquired intangibles. Especially relevant for banks and financial institutions where tangible equity is a key regulatory and valuation measure.

EV to Sales

EV/Sales=Enterprise ValueTotal Revenue\text{EV/Sales} = \frac{\text{Enterprise Value}}{\text{Total Revenue}}

What it measures: Enterprise value relative to revenue, providing a capital-structure-neutral view of revenue valuation.

How to use it: Preferred over P/S when comparing companies with different debt levels. Lower multiples may indicate better value. Particularly useful for high-growth, unprofitable companies where earnings-based metrics are unavailable.

EV to EBITDA

EV/EBITDA=Enterprise ValueEBITDA\text{EV/EBITDA} = \frac{\text{Enterprise Value}}{\text{EBITDA}}

What it measures: Enterprise value relative to earnings before interest, taxes, depreciation, and amortization.

How to use it: One of the most widely used valuation multiples. A ratio of 10-14 is common for established companies. Lower values may signal undervaluation. Ideal for cross-company comparison because it neutralizes differences in capital structure, taxes, and depreciation policies.

EV to Operating Cash Flow

EV/OCF=Enterprise ValueOperating Cash Flow\text{EV/OCF} = \frac{\text{Enterprise Value}}{\text{Operating Cash Flow}}

What it measures: Enterprise value relative to the cash generated from operations.

How to use it: Combines the completeness of EV with the reliability of cash flow. Lower ratios indicate the company generates more cash relative to its total value. Useful when EBITDA doesn’t reflect true cash generation due to working capital swings.

EV to Free Cash Flow

EV/FCF=Enterprise ValueFree Cash Flow\text{EV/FCF} = \frac{\text{Enterprise Value}}{\text{Free Cash Flow}}

What it measures: Enterprise value relative to free cash flow — the most stringent EV-based valuation multiple.

How to use it: Accounts for capital expenditures that EV/EBITDA ignores. A lower EV/FCF multiple suggests the company generates strong free cash flow relative to its total value. Preferred by value investors for capital-intensive industries.

Earnings Yield

Earnings Yield=Earnings per SharePrice per Share×100\text{Earnings Yield} = \frac{\text{Earnings per Share}}{\text{Price per Share}} \times 100

What it measures: The inverse of the P/E ratio, expressed as a percentage return.

How to use it: Allows direct comparison of stock returns to bond yields. A higher earnings yield means you pay less for each dollar of earnings. Useful in the “Fed Model” framework comparing equity returns to treasury yields.

Free Cash Flow Yield

FCF Yield=Free Cash Flow per SharePrice per Share×100\text{FCF Yield} = \frac{\text{Free Cash Flow per Share}}{\text{Price per Share}} \times 100

What it measures: The free cash flow return an investor would receive at the current stock price.

How to use it: Higher yields indicate better value. Yields above 5-7% are often attractive. Compare to bond yields and the company’s historical average. A useful screening metric for identifying cash-rich value opportunities.

Leverage & Solvency

These metrics evaluate the company’s debt levels and ability to service its obligations.

Debt to Equity

D/E=Total DebtShareholders’ Equity\text{D/E} = \frac{\text{Total Debt}}{\text{Shareholders' Equity}}

What it measures: The balance between debt and equity financing.

How to use it: Lower ratios indicate less leverage. Ratios below 1.0 mean equity exceeds debt. Compare within industries — utilities and real estate naturally carry higher debt. Watch for rising trends that increase financial risk.

Debt to Assets

D/A=Total DebtTotal Assets\text{D/A} = \frac{\text{Total Debt}}{\text{Total Assets}}

What it measures: The proportion of total assets financed by debt.

How to use it: A ratio below 0.5 is generally conservative. Higher ratios mean greater dependence on debt financing. Useful for comparing leverage across companies of different sizes.

Net Debt to EBITDA

Net Debt/EBITDA=Total Debt−CashEBITDA\text{Net Debt/EBITDA} = \frac{\text{Total Debt} - \text{Cash}}{\text{EBITDA}}

What it measures: How many years of EBITDA it would take to pay off net debt.

How to use it: One of the most widely used leverage metrics. Ratios below 2x are conservative, 2-3x is moderate, and above 4x raises concern. Lenders and rating agencies use this metric extensively. Negative net debt (more cash than debt) yields a negative ratio, which is a strong position.

Current Ratio

Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}

What it measures: The company’s ability to pay short-term obligations with short-term assets.

How to use it: A ratio above 1.0 is the minimum for short-term solvency. Values of 1.5-2.0 are generally healthy. Too high may indicate idle assets. Below 1.0 doesn’t automatically mean distress — some industries (retail) operate with low current ratios.

Interest Coverage

Interest Coverage=EBITInterest Expense\text{Interest Coverage} = \frac{\text{EBIT}}{\text{Interest Expense}}

What it measures: How many times operating earnings cover interest payments.

How to use it: Above 3x is comfortable, above 5x is strong. Below 1.5x signals potential difficulty servicing debt. A declining trend is a warning, especially during economic downturns.

Profitability & Returns

Return metrics measure how effectively management generates profits from the resources under its control.

Income Quality

Income Quality=Operating Cash FlowNet Income\text{Income Quality} = \frac{\text{Operating Cash Flow}}{\text{Net Income}}

What it measures: Whether reported earnings are backed by actual cash flow.

How to use it: A ratio above 1.0 indicates that cash flow exceeds reported earnings — a sign of high-quality earnings. Below 1.0 suggests earnings may be inflated by accruals or non-cash items. Persistently low income quality can signal aggressive accounting.

ROIC (Return on Invested Capital)

ROIC=NOPATInvested Capital×100\text{ROIC} = \frac{\text{NOPAT}}{\text{Invested Capital}} \times 100

Where:

NOPAT=Operating Income×(1−Tax Rate)\text{NOPAT} = \text{Operating Income} \times (1 - \text{Tax Rate}) Invested Capital=Total Debt+Equity−Cash\text{Invested Capital} = \text{Total Debt} + \text{Equity} - \text{Cash}

What it measures: The return generated on all capital invested in the business (both debt and equity).

How to use it: One of the best measures of management effectiveness and competitive advantage. If ROIC exceeds the company’s cost of capital (WACC), the company is creating value. ROIC above 15-20% often indicates a strong competitive moat. Track over time — consistent high ROIC is a hallmark of great businesses.

ROE (Return on Equity)

ROE=Net IncomeShareholders’ Equity×100\text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}} \times 100

What it measures: The return generated on shareholder equity.

How to use it: ROE of 15-20% is often excellent. However, high ROE can result from high leverage rather than operational excellence. Always examine alongside debt ratios. Use DuPont analysis (margin × turnover × leverage) to understand what drives ROE.

Return on Tangible Assets

Return on Tangible Assets=Net IncomeTotal Assets−Intangible Assets−Goodwill×100\text{Return on Tangible Assets} = \frac{\text{Net Income}}{\text{Total Assets} - \text{Intangible Assets} - \text{Goodwill}} \times 100

What it measures: How efficiently the company generates profit from its tangible (physical and financial) assets.

How to use it: A stricter version of ROA that excludes intangibles. Useful for companies with large goodwill from acquisitions. Higher values indicate better utilization of hard assets. Compare within capital-intensive industries.

Dividend Metrics

Dividend metrics assess a company’s dividend policy, sustainability, and income potential.

Dividend Yield

Dividend Yield=Annual Dividend per SharePrice per Share×100\text{Dividend Yield} = \frac{\text{Annual Dividend per Share}}{\text{Price per Share}} \times 100

What it measures: The annual dividend return as a percentage of the stock price.

How to use it: Yields of 2-4% are typical for stable companies. Very high yields may signal dividend risk or a declining stock price. Combine with payout ratio to assess sustainability.

Payout Ratio

Payout Ratio=Dividends per ShareEarnings per Share×100\text{Payout Ratio} = \frac{\text{Dividends per Share}}{\text{Earnings per Share}} \times 100

What it measures: The share of earnings paid out as dividends.

How to use it: Ratios of 30-50% are generally healthy. Above 80% may be unsustainable unless earnings are very stable. A payout ratio above 100% means the company is paying more in dividends than it earns — this is not sustainable long-term.

Efficiency & Cost Structure

These metrics reveal how the company allocates its revenue across different cost categories and how efficiently it manages working capital.

SG&A to Revenue

SG&A/Revenue=Selling, General & Administrative ExpensesRevenue×100\text{SG\&A/Revenue} = \frac{\text{Selling, General \& Administrative Expenses}}{\text{Revenue}} \times 100

What it measures: What percentage of revenue is consumed by overhead and selling costs.

How to use it: Lower ratios indicate better cost control. Track over time — declining SG&A as a percentage of revenue suggests operating leverage (the business scales without proportional cost increases). Compare to industry peers to benchmark efficiency.

R&D to Revenue

R&D/Revenue=Research & Development ExpensesRevenue×100\text{R\&D/Revenue} = \frac{\text{Research \& Development Expenses}}{\text{Revenue}} \times 100

What it measures: The share of revenue invested in research and development.

How to use it: Higher R&D spending can indicate a commitment to innovation and future growth (tech, pharma). However, R&D must eventually translate into revenue growth. Compare to peers — a company spending significantly more on R&D should be growing faster or building a pipeline.

Intangibles to Total Assets

Intangibles/Total Assets=Intangible Assets + GoodwillTotal Assets×100\text{Intangibles/Total Assets} = \frac{\text{Intangible Assets + Goodwill}}{\text{Total Assets}} \times 100

What it measures: The proportion of total assets that are intangible (patents, trademarks, goodwill from acquisitions).

How to use it: High ratios indicate significant acquisition activity or reliance on intellectual property. Intangible-heavy balance sheets carry impairment risk if acquired businesses underperform. Compare to tangible book value for a fuller picture.

Capex to Operating Cash Flow

Capex/OCF=Capital ExpendituresOperating Cash Flow×100\text{Capex/OCF} = \frac{\text{Capital Expenditures}}{\text{Operating Cash Flow}} \times 100

What it measures: What percentage of operating cash flow is reinvested in capital expenditures.

How to use it: Lower ratios mean more cash is available after reinvestment (capital-light model). High ratios indicate the business requires heavy ongoing investment. Compare to industry norms — utilities and telecoms naturally have high capex/OCF.

Capex to Revenue

Capex/Revenue=Capital ExpendituresRevenue×100\text{Capex/Revenue} = \frac{\text{Capital Expenditures}}{\text{Revenue}} \times 100

What it measures: The capital intensity of the business relative to its revenue.

How to use it: Lower ratios indicate more asset-efficient business models. Software companies may spend 2-5% of revenue on capex, while manufacturers might spend 15-25%. Rising capex/revenue may indicate expansion or replacement cycles.

Capex to Depreciation

Capex/Depreciation=Capital ExpendituresDepreciation\text{Capex/Depreciation} = \frac{\text{Capital Expenditures}}{\text{Depreciation}}

What it measures: Whether the company is investing enough to replace depreciating assets.

How to use it: A ratio above 1.0 means the company is investing more than it depreciates, suggesting growth or replacement of aging assets. Below 1.0 may indicate underinvestment and potential future capacity constraints. A ratio near 1.0 suggests maintenance-level spending.

Stock-Based Compensation to Revenue

SBC/Revenue=Stock-Based CompensationRevenue×100\text{SBC/Revenue} = \frac{\text{Stock-Based Compensation}}{\text{Revenue}} \times 100

What it measures: The share of revenue consumed by stock-based compensation to employees.

How to use it: High SBC dilutes existing shareholders even if the cash flow statement looks clean. Tech companies often have SBC of 5-15% of revenue. Subtract SBC from free cash flow for a more conservative valuation. Rising SBC/revenue is a dilution concern.

Intrinsic Value Indicators

These metrics attempt to estimate a company’s intrinsic or floor value.

Graham Number

Graham Number=22.5×EPS×BVPS\text{Graham Number} = \sqrt{22.5 \times \text{EPS} \times \text{BVPS}}

What it measures: An estimate of the maximum fair price for a stock based on Benjamin Graham’s value investing criteria, combining earnings and book value.

How to use it: If the stock trades below the Graham Number, it may be undervalued by Graham’s standards. This is a conservative screen — many quality companies will trade above their Graham Number. Most useful for value-oriented, asset-heavy sectors.

Graham Net-Net

Graham Net-Net=Current Assets−Total LiabilitiesShares Outstanding\text{Graham Net-Net} = \frac{\text{Current Assets} - \text{Total Liabilities}}{\text{Shares Outstanding}}

What it measures: The per-share liquidation value if all current assets were sold and all liabilities paid. This is Benjamin Graham’s most conservative valuation floor.

How to use it: If a stock trades below its net-net value, you’re theoretically getting the business for less than its liquidation value. These situations are rare in modern markets and often indicate distress. When they do occur, they can represent deep-value opportunities.

Working Capital & Balance Sheet

These metrics provide absolute measures of a company’s financial position.

Working Capital

Working Capital=Current Assets−Current Liabilities\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}

What it measures: The net short-term financial resources available to fund day-to-day operations.

How to use it: Positive working capital means the company can cover near-term obligations. Negative working capital isn’t always bad — some businesses (like Amazon) operate with negative working capital by collecting from customers before paying suppliers. Track trends to identify emerging liquidity concerns.

Tangible Asset Value

Tangible Asset Value=Total Assets−Intangible Assets−Goodwill\text{Tangible Asset Value} = \text{Total Assets} - \text{Intangible Assets} - \text{Goodwill}

What it measures: The total value of physical and financial assets, excluding intangibles.

How to use it: Provides a floor estimate of recoverable asset value. Compare to enterprise value — if EV is close to or below tangible asset value, the market is pricing the business cheaply. Most relevant for asset-intensive businesses.

Net Current Asset Value

NCAV=Current Assets−Total Liabilities\text{NCAV} = \text{Current Assets} - \text{Total Liabilities}

What it measures: The value of current assets after paying off all liabilities (both current and long-term) — a very conservative liquidation estimate.

How to use it: A negative NCAV means total liabilities exceed current assets. Companies trading below per-share NCAV are deep-value candidates by Graham’s criteria. Extremely conservative and increasingly rare in modern markets.

Invested Capital

Invested Capital=Total Debt+Total Equity−Cash\text{Invested Capital} = \text{Total Debt} + \text{Total Equity} - \text{Cash}

What it measures: The total capital deployed in the business from both debt and equity holders, net of cash.

How to use it: The denominator in ROIC calculations. Track over time — growing invested capital should be paired with growing returns. Invested capital growing faster than revenue or profits may indicate diminishing returns on new investment.

Operational Efficiency

Operational efficiency metrics measure how well a company manages its receivables, payables, and inventory cycles.

Average Receivables

Average Receivables=Beginning Receivables+Ending Receivables2\text{Average Receivables} = \frac{\text{Beginning Receivables} + \text{Ending Receivables}}{2}

What it measures: The average accounts receivable balance over a period.

How to use it: Used as the denominator in receivables turnover and DSO calculations. Growing average receivables faster than revenue can signal collection problems or overly generous credit terms.

Average Payables

Average Payables=Beginning Payables+Ending Payables2\text{Average Payables} = \frac{\text{Beginning Payables} + \text{Ending Payables}}{2}

What it measures: The average accounts payable balance over a period.

How to use it: Used in payables turnover and DPO calculations. Rising average payables relative to COGS may indicate the company is stretching supplier payments (which can be positive bargaining power or negative cash flow stress).

Average Inventory

Average Inventory=Beginning Inventory+Ending Inventory2\text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2}

What it measures: The average inventory held over a period.

How to use it: Used in inventory turnover and DIO calculations. Growing inventory faster than sales may signal demand weakness or overproduction. Declining inventory during revenue growth suggests efficiency improvements.

Days Sales Outstanding (DSO)

DSO=Accounts ReceivableRevenue×365\text{DSO} = \frac{\text{Accounts Receivable}}{\text{Revenue}} \times 365

What it measures: The average number of days it takes to collect payment from customers.

How to use it: Lower DSO means faster collection. Rising DSO can indicate loosening credit standards or collection issues. Compare to industry norms and payment terms. A sudden spike may precede bad debt write-offs.

Days Payables Outstanding (DPO)

DPO=Accounts PayableCOGS×365\text{DPO} = \frac{\text{Accounts Payable}}{\text{COGS}} \times 365

What it measures: The average number of days the company takes to pay its suppliers.

How to use it: Longer DPO preserves cash but may strain supplier relationships. Shorter DPO may indicate early payment discounts or weaker bargaining position. Compare to DSO — if DPO > DSO, the company collects faster than it pays, which is favorable for cash flow.

Days of Inventory on Hand (DIO)

DIO=InventoryCOGS×365\text{DIO} = \frac{\text{Inventory}}{\text{COGS}} \times 365

What it measures: The average number of days inventory sits before being sold.

How to use it: Lower DIO indicates faster inventory turns. Rising DIO can signal slowing demand or potential obsolescence. The “cash conversion cycle” is DSO + DIO − DPO — a shorter cycle means faster cash generation.

Receivables Turnover

Receivables Turnover=RevenueAverage Accounts Receivable\text{Receivables Turnover} = \frac{\text{Revenue}}{\text{Average Accounts Receivable}}

What it measures: How many times per year the company collects its average receivables balance.

How to use it: Higher turnover means faster collection. Declining turnover may signal collection problems. Track alongside DSO for a consistent picture.

Payables Turnover

Payables Turnover=COGSAverage Accounts Payable\text{Payables Turnover} = \frac{\text{COGS}}{\text{Average Accounts Payable}}

What it measures: How many times per year the company pays off its average payables balance.

How to use it: Lower turnover means the company takes longer to pay suppliers. Context is key — strong companies may have low turnover due to favorable payment terms, while struggling companies may delay payments out of necessity.

Inventory Turnover

Inventory Turnover=COGSAverage Inventory\text{Inventory Turnover} = \frac{\text{COGS}}{\text{Average Inventory}}

What it measures: How many times per year the company sells and replaces its inventory.

How to use it: Higher turnover means faster-moving inventory and less capital tied up in stock. Compare within the same industry. Declining turnover may signal demand weakness or obsolescence risk.

Using Key Metrics Together

Key metrics are most powerful when combined into a coherent analysis framework:

  • Per-share trends: Track EPS, FCF per share, and book value per share together over 3–5 years to assess whether the company is genuinely building shareholder value
  • Valuation cross-check: Use P/E, P/FCF, EV/EBITDA, and earnings yield together — if all point to the same conclusion, confidence is higher
  • Quality screen: High ROIC + income quality above 1.0 + growing FCF per share = a high-quality compounder
  • Cash conversion cycle: DSO + DIO − DPO reveals how quickly the business converts its operations into cash
  • Capital allocation: Compare capex/revenue, SBC/revenue, and R&D/revenue to understand how the company invests its revenue
  • Graham deep value: Graham Number and Graham Net-Net are most useful as initial screens, not standalone buy signals

Always interpret metrics in the context of the company’s industry, growth stage, and macroeconomic environment.