skills/accounting-analysis/references/appendices/Appendix-C-formula-and-concept-encyclopedia.md

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<!-- Appendix: C | Title: FORMULA AND CONCEPT ENCYCLOPEDIA -->

# APPENDIX C - FORMULA AND CONCEPT ENCYCLOPEDIA

| Metric / concept | Formula / construction | Interpretation / expert caution |
| --- | --- | --- |
| NOPAT | Adjusted operating profit x (1 - normalized cash tax rate) | After-tax operating profit independent of financing; normalize unusual operating items and tax appropriately. |
| Invested capital | Operating assets - non-interest-bearing operating liabilities, or financing approach reconciled to same economics | Use average invested capital for ROIC and treat goodwill consistently with the question being answered. |
| ROIC | NOPAT / average invested capital | Compare with opportunity cost and reinvestment runway. High legacy ROIC does not prove high incremental ROIC. |
| Incremental ROIC | Change in NOPAT / change in invested capital over a meaningful interval | Measures economics of new investment. Noisy over short periods and distorted by M&A/accounting. |
| Reinvestment rate | Net investment in operating assets / NOPAT | Connects growth to capital required. Include working capital and other operating investment, not just capex. |
| Sustainable growth | Reinvestment rate x return on incremental invested capital | Useful terminal identity. Growth without reinvestment is inconsistent when returns are finite. |
| FCFF | NOPAT + D&A and other noncash operating charges - capex - change in NWC - other operating investment | Cash available to all capital providers before financing flows. |
| FCFE | Net income + noncash charges - capex - change in NWC + net borrowing | Cash available to common equity after debt financing; less robust when leverage changes materially. |
| Enterprise value | Equity value + debt + preferred + minority interest - excess cash - non-operating investments | Add/subtract claims/assets consistently with the operating metric being valued. |
| Net debt | Debt + debt-like obligations - excess cash - non-operating liquid investments | Restricted/operating cash may not be fully subtractable. |
| WACC | E/(D+E) x Ke + D/(D+E) x Kd x (1-T) | Use market-value weights and risk inputs consistent with cash-flow currency and risk. |
| Terminal value, perpetuity | FCFF in next period / (WACC - g) | Requires WACC > g and terminal economics consistent with reinvestment and returns. |
| Midyear PV factor | 1 / (1 + discount rate)^(t - 0.5) for annual flows occurring through year | Adjust exponent for actual valuation date and cash-flow timing. |
| FCF yield | Normalized FCFE / equity value | Useful equity cash-return lens; weak if current FCF is cyclically abnormal. |
| EV/EBITDA | Enterprise value / normalized EBITDA | Useful where D&A comparability helps, but ignores capex and working-capital intensity. |
| EV/EBIT | Enterprise value / normalized EBIT | Better than EBITDA when depreciation approximates economic asset consumption. |
| P/E | Diluted equity value per share / normalized diluted EPS | Affected by leverage, tax, non-operating items, and buyback financing. |
| PEG | P/E / growth rate | Heuristic only. Ignores duration, reinvestment, capital intensity, and risk. |
| Gross margin | Gross profit / revenue | Interpret with mix, capitalization, pass-through revenue, and principal-agent presentation. |
| Incremental margin | Change in profit / change in revenue over an economically comparable interval | Reveals operating leverage, but can be distorted by price-cost timing and mix. |
| DSO | Average receivables / revenue x days | Collection/billing behavior. Segment/customer mix can change the normal level. |
| Inventory days | Average inventory / COGS x days | Inventory intensity. Rising days with weakening demand can signal channel or obsolescence risk. |
| DPO | Average payables / COGS or purchases x days | Supplier financing. A sharp increase may flatter operating cash flow. |
| Cash conversion cycle | DSO + inventory days - DPO | Working-capital timing. Not comparable across structurally different business models without normalization. |
| Accrual proxy | Net income - CFO, scaled consistently | Screen for earnings/cash divergence, not proof of manipulation. |
| NRR | Beginning-cohort recurring revenue after churn, contraction, and expansion / beginning-cohort recurring revenue | Do not mix logo and revenue retention or inconsistent cohort definitions. |
| GRR | Beginning-cohort revenue retained before expansion / beginning-cohort revenue | Measures defensive retention without expansion masking churn. |
| CAC payback | Customer acquisition cost / monthly gross profit from acquired cohort | Use cohort gross profit and real acquisition cost. Companywide S&M shortcuts are approximate. |
| LTV | Present value of expected cohort gross profit less servicing/retention costs | Use observed retention curve and finite economics rather than a perpetual churn shortcut. |
| Net leverage | Net debt / normalized EBITDA or other appropriate cash earnings | Test covenant definition separately from analyst economic definition. |
| Interest coverage | Normalized EBIT/EBITDA/cash earnings / cash interest | Match numerator to fixed obligations and include debt-like claims when material. |
| Dilution rate | Ending diluted shares / beginning diluted shares - 1, adjusted for major issuance/repurchases | Evaluate together with SBC and repurchase cash cost. |
| Book-to-bill | Bookings / revenue for matched definitions and period | Leading signal only if cancellations, backlog conversion, and timing are understood. |
| Probability-weighted value | Sum of scenario value x scenario probability | Probabilities are judgments. Always show unweighted cases and thesis-break case. |