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Margins, ratios and working-capital measures: the formula, a worked example from real rows, and where the number misleads.
Gross profit margin is revenue minus cost of goods sold, divided by revenue. This page gives the formula, what US GAAP and the IRS put into cost of goods sold, a worked example on three product lines with the Excel formulas, the weighted-average identity that proves the total, and the three things that move the margin: price, cost and mix.
Sep 30, 20266 min readRevenue is what a company earns from sales before any costs; profit is what is left after them, at three levels: gross, operating and net. This page walks one company's income statement from top line to bottom line, then shows a year in which revenue grew 15% while net profit fell 22.5%, with a bridge that proves which lines caused it.
Sep 30, 20266 min readThe AR turnover ratio divides net credit sales by average receivables to show how many times receivables are collected in a period. This page gives the formula and the conversion to days sales in receivables, works one quarter for a company and its five customers with the Excel formulas, compares the average and closing balance methods, and measures days beyond terms customer by customer.
Oct 1, 20265 min readAccrual accounting records revenue when earned and costs when incurred; cash accounting records them when money moves. This page works one March both ways, reconciles the two profits through receivables, payables, accruals and prepaid expenses, and covers who may use the cash method for US tax and the month-end entries that close the gap.
Oct 1, 20266 min readActivity-based costing assigns overhead by the activities each product or customer uses, rather than by revenue or volume. This page sets out the four steps, builds activity rates for a distributor's four cost pools, charges four customers both ways, proves the charges reconcile, and covers when ABC changes the answer and when time-driven ABC is the simpler route.
Oct 1, 20267 min readBreak-even analysis finds the sales at which revenue covers every cost and profit is zero. This page gives the formula in units and in revenue, works one product through break-even, target profit and margin of safety, builds the Excel table and chart, tests what moves the point, and extends it to several products.
Oct 1, 20266 min readBurn rate is how fast a company uses cash. This page gives the gross and net burn formulas, works six months of a software company's bank data with the Excel formulas, turns net burn into runway on a stated average, proves the figures by walking opening cash to closing cash, and covers the burn multiple.
Oct 1, 20265 min readInventory days, or days inventory outstanding (DIO), is average inventory divided by cost of goods sold, times the days in the period. This page gives the formula and the data it needs, works it for five categories at a distributor with the Excel formulas, proves the total as a COGS-weighted average, and places it in the cash conversion cycle.
Oct 1, 20266 min readThe cash conversion cycle counts the days between paying suppliers and collecting from customers. This page gives the formula and each leg, works it over two quarters for one company, values the change in cash, ties it to the balance sheet, explains negative cycles with figures from US 10-K filings, and lists the levers that shorten it.
Oct 1, 20266 min readThe contribution margin ratio is revenue minus variable costs, divided by revenue. This page gives the three formulas (amount, per unit and ratio), which costs count as variable, a worked example on four products with the Excel formula, the contribution margin income statement beside the traditional layout, break-even and target-profit revenue from the ratio, and why product mix moves the blended ratio.
Oct 1, 20266 min readCost of goods sold is the direct cost of the goods a company sold in the period. This page gives the COGS formula, what US GAAP and the IRS put in and leave out, a worked year for a distributor with the Excel formulas, how FIFO, weighted average and LIFO change the figure, and what service companies call cost of revenue.
Oct 1, 20266 min readCustomer acquisition cost is the sales and marketing cost of winning a new customer. This page gives the formula and what belongs in the cost, a small spreadsheet calculator for CAC and payback, a worked example across four channels with the weighted-average check, and the difference between blended, paid and fully loaded CAC.
Oct 1, 20266 min readDPO is the average number of days a company takes to pay its suppliers. This page gives the formula with COGS or purchases, works it for four suppliers over one quarter against their terms, proves the company figure as a weighted average, prices paying early and late, and sets DPO beside DSO in the cash conversion cycle.
Oct 1, 20265 min readDSO is the average number of days customers take to pay. This page gives the formula and which receivables and sales go into it, works DSO for five customers over one quarter with the Excel formulas, proves the company figure as a revenue-weighted average, and covers DSO against terms, the countback method and what a good DSO is.
Oct 1, 20267 min readEBITDA margin is earnings before interest, tax, depreciation and amortization divided by revenue. This page builds EBITDA from a P&L both ways, compares three companies whose ranking flips between operating margin and EBITDA margin, and covers the SEC non-GAAP rules and the lease trap that make EBITDA margins hard to compare.
Oct 1, 20267 min readOperating income is after depreciation and amortization; EBITDA adds them back. This page works one P&L both ways, reconciles the two EBITDA figures line by line, separates EBIT from operating income, and sets out the SEC rules that apply when a US company reports EBITDA.
Oct 1, 20265 min readFinancial KPIs are the measures a company chooses to judge its financial performance. This page lists 25 of them in seven groups, with the formula and the question each answers, computes all 25 on one company's accounts, shows the identities that tie them together, and explains how to pick the eight that go on the dashboard.
Oct 1, 20269 min readFixed costs stay the same in total as volume changes; variable costs move with every unit. This page sets out the difference in one table, gives business examples of fixed, variable, semi-variable and step costs, and splits six months of a packing operation's costs with the high-low method, checked against Excel's SLOPE and INTERCEPT.
Oct 1, 20266 min readGross profit is revenue minus cost of goods sold; net profit is what is left after every cost, interest and tax. This page sets the two side by side, works one quarter's P&L from revenue to net income, and shows a second quarter where gross profit rises while net profit falls.
Oct 1, 20266 min readCustomer lifetime value is the gross profit a customer brings over the whole relationship. This page gives the standard LTV formula, where each input comes from, a worked example on three segments with LTV against CAC, a discounted version, a method for B2B businesses without subscriptions, and the check that proves the segment figures.
Oct 1, 20266 min readThe inventory turnover ratio is cost of goods sold divided by average inventory. This page gives the formula and the data it needs, works it for three categories of a food distributor with the Excel formulas, proves the total as a weighted average, converts turns to days of inventory, and shows why one company figure hides slow categories.
Oct 1, 20265 min readThe loan-to-deposit ratio divides a bank's loans by its deposits. This page gives the formula as US regulators report it, compares five banks, shows why the aggregate is not the average of the ratios, follows one bank through four quarters of deposit outflows, and sets the ratio against FDIC data by bank size and the US liquidity rules.
Oct 1, 20266 min readThe LTV to CAC ratio divides a customer's lifetime gross profit by the cost of winning them. This page gives the formula, works three segments with CAC payback in months, shows why a blended ratio hides the segment below 3:1, and caps the lifetime so a low churn rate cannot turn into a ten-year customer.
Oct 1, 20266 min readMarkup divides profit by cost; margin divides the same profit by the selling price. This page gives both formulas, works them on five products, converts between them in a table and in Excel, and shows the pricing mistake that turns a 40% margin target into 28.6%.
Oct 1, 20265 min readNet interest margin is a bank's net interest income divided by its average earning assets. This page gives the formula and the inputs from the call report, works one bank through yields, funding costs, NIM and net interest spread, shows what a deposit rate rise does to it, proves the figure two ways, and sets it against FDIC industry data by bank size.
Oct 1, 20266 min readNet profit margin is net income divided by revenue, after every cost, interest and tax. This page gives the formula, works it on four quarters and a full year, proves why the year is not the average of the quarters, places it beside gross and operating margin on one P&L, and shows what counts as good by US industry.
Oct 1, 20265 min readOperating margin is operating profit divided by revenue: what is left of each sale after cost of goods sold and operating expenses, before interest and tax. This page gives the formula, separates it from EBIT and EBITDA, works it for three business units and a group, shows operating leverage, and explains why US GAAP and IFRS 18 define the line differently.
Oct 1, 20266 min readOperating expenses are charged to profit in the period; capital expenditure buys long-lived assets that go on the balance sheet and are depreciated. This page compares the two in one table, gives examples, the test that decides, and works a buy-or-subscribe decision through EBITDA, operating profit and cash over five years.
Oct 1, 20266 min readPrice volume mix analysis explains a revenue change as three effects that add up exactly to it. This page gives the three formulas and the order that leaves no residual, works a bridge on three product lines with every effect product by product, proves it sums to the change, and shows the Excel layout and waterfall chart.
Oct 1, 20267 min readA filled-in profit and loss statement for a US distributor with $47,000,000 of net revenue, this year against last, read line by line from gross sales to net income. It shows how each subtotal is built, the same P&L as percentages of revenue, and the bridge that explains why net income rose 52% on 7% more revenue.
Oct 1, 20267 min readProfitability ratios measure the profit a company makes from its sales and its capital; liquidity ratios measure whether it can pay what falls due within the year. This page gives the formula for each, works them all on two years of one distributor's accounts, reads the movement, and proves the returns with the DuPont identity.
Oct 1, 20266 min readReturn on assets is net income divided by average total assets. This page gives the formula and where its inputs sit in a 10-K, works ROA for five companies from a distributor to a bank, proves each figure with the DuPont split into net margin and asset turnover, explains why bank ROA sits near 1%, and compares ROA with ROE and ROIC.
Oct 1, 20267 min readRevenue per employee is annual revenue divided by average full-time equivalent staff. This page gives the formula and which people to count, works it for a five-practice professional services firm, shows why the firm figure is not the average of the practices, and builds a dated comparison from 10-K filings.
Oct 1, 20266 min readThe Rule of 40 adds a software company's revenue growth rate to its profit margin and asks whether the sum reaches 40%. This page gives the formula and the Excel version, works five companies, shows how the choice between EBITDA and free cash flow margin can flip the result, and covers which growth figure to use and what the score cannot tell you.
Oct 1, 20266 min readUnit economics is the profit and loss of one customer: what it pays, what it costs to serve, what it cost to win and how long it stays. This page builds the per-customer P&L for three segments of one software company, ties CAC, payback and LTV together, caps the lifetime so low churn cannot inflate it, and shows the same method for businesses without subscriptions.
Oct 1, 20268 min readVariance analysis compares actual results with the budget or standard and splits the gap into its causes. This page lists the main types, gives the formula for each pair, works a sales variance into volume and price and a material variance into price and usage, proves the parts sum to the total, and shows how budget variance analysis fits a monthly reporting package.
Oct 1, 20266 min readWorking capital is current assets minus current liabilities. This page works it from one quarter-end balance sheet with the current and quick ratios, separates trade working capital from cash and debt, turns it into days with DSO, DIO and DPO, and shows how change in working capital moves cash.
Oct 1, 20267 min read