Read the business.
Then read
the price.

Revenue records sales earned during the period, subject to recognition rules. It is not the same as cash collected: a sale on credit creates a receivable until the customer pays.

The cost of products actually sold, such as beans, milk, food, and cups used by a coffee shop. Buying inventory initially creates an asset; its cost becomes an income statement expense when that inventory is sold.

Revenue minus cost of goods sold. It shows what remains to cover other operating expenses, interest, and tax. Gross margin is gross profit divided by revenue.

Day-to-day costs such as wages, rent, and marketing generally become expenses as the business consumes those services. This teaching ledger separates cash costs from depreciation; real statements may combine them.

Earnings before interest, taxes, depreciation, and amortization. Removing those charges does not remove the need to pay tax, service debt, replace equipment, or fund working capital. EBITDA is not operating cash flow.

A long-lived asset’s cost is allocated to the periods that use it. The charge reduces this year’s profit and equipment’s book value; it is not a new cash payment. Amortization applies a similar idea to certain intangible assets.

Profit from operations before interest and income tax, after operating expenses including depreciation. EBIT literally means earnings before interest and taxes; a filing’s EBIT and operating income can differ if non-operating items are included. This guide uses reported operating income.

Interest is the cost of borrowing and is an income statement expense. Repaying the loan principal reduces cash and debt; it does not create a second expense. Under U.S. GAAP, interest paid is generally operating cash flow and principal repayment is financing cash flow.

Profit after interest and other applicable items, before income tax. In the coffee shop model, operating profit minus interest leaves pretax profit. A company’s non-operating gains can make this subtotal quite different from operating profit.

The tax expense associated with accounting profit. Actual cash taxes can differ because tax rules and accounting rules recognize items at different times. The coffee shop assumes a 20% rate on positive pretax profit and pays the tax in cash.

The accounting profit after expenses, interest, and tax. It is the starting point for the indirect cash flow reconciliation, not the amount of cash generated or dividends paid. Company comparisons here use consolidated GAAP net income.

Net income already deducted depreciation, but no cash left for that charge this year. Adding it back removes the noncash deduction when reconciling profit to operating cash. The equipment’s actual purchase appears separately as investing cash outflow.

Amounts customers owe for sales already recognized. An increase means some reported sales have not yet become cash, so it is subtracted in the indirect operating cash flow reconciliation. Collection later swaps receivables for cash without recording another sale.

Cash generated or used by the business’s operating activities. In the indirect method, start with net income, adjust for noncash items, then adjust for timing changes such as receivables, inventory, and payables. It is measured before cash capital expenditure.

The coffee shop’s equipment upgrade provides benefits over several years. It is capitalized as equipment on the balance sheet, while the cash payment is an investing outflow on the cash flow statement. Its cost reaches the income statement over time through depreciation, rather than as the full purchase price immediately. Routine repairs or purchases that do not qualify for capitalization are expensed instead.

This guide defines FCF as operating cash flow minus gross cash capital expenditure. It is an analytical subtotal, not an extra cash flow to add to the cash statement. Acquisitions, debt repayments, and other uses of cash can still follow, and companies’ own FCF definitions may differ.

A distribution to owners, not a cost of earning revenue. Under U.S. GAAP it is a financing cash outflow. It reduces cash and retained earnings, without reducing this year’s net income.

Combine operating, investing, and financing cash flows, plus any applicable exchange-rate effects. The coffee shop’s change is OCF minus capex minus dividends. FCF is already part of that calculation and must not be added a second time.

Cash is a stock of money at one date; cash flow is its movement over a period. Ending cash equals beginning cash plus the net change. Company figures here include cash equivalents, but exclude investment securities and other noncash assets.

Goods held for future sale or use in production. Buying them uses cash but initially creates an asset. Their cost enters the income statement as the goods are sold or consumed, or earlier if an accounting write-down is required.

Equipment’s recorded cost less accumulated depreciation and any applicable impairments. The coffee shop ends with starting equipment plus new capex minus depreciation. Book value is an accounting balance, not necessarily resale value.

Recorded resources such as cash, receivables, inventory, and equipment. Assets equal liabilities plus equity. Internally developed brands and some other valuable resources are not fully recognized, so recorded assets are not the whole market value of a business.

Borrowed money owed to lenders. Borrowing adds cash and a liability; it is not sales or profit. The debt number used for EV here is disclosed funded borrowing, rather than every liability, with each company’s convention explained in the methodology.

Owners’ investment recorded in equity. Issuing shares raises financing cash and equity, not revenue. Its recorded amount is different from what investors later pay each other for shares in the stock market.

Accumulated accounting profits kept in the company after distributions and applicable adjustments. The coffee shop retains net profit minus dividends. Retained earnings is an equity account, not a separate pile of cash.

The accounting residual: recorded assets minus liabilities. In the coffee shop it equals original contributed capital plus retained earnings. Market capitalization prices investors’ ownership claims; it can be much higher or lower than book equity.

Record revenue when earned and expenses when incurred under the applicable rules, rather than simply when money changes hands. This makes profit useful for measuring a period’s activity, but also creates timing differences that the cash flow statement reconciles.

Short-term operating resources minus operating liabilities, such as receivables and inventory less supplier payables. Growth can tie up cash before customers pay. For ROIC and cash flow analysis, distinguish operating working capital from a broad current-assets-minus-current-liabilities measure.

Compensation paid through equity awards generally reduces reported profit, even though it may not use cash at that time. Adding the noncash expense back to operating cash flow does not erase its economic cost: issued shares can dilute existing owners.

Share price multiplied by shares outstanding: the market’s price for shareholders’ claims. A share price by itself cannot compare company size or cheapness. These estimates use lagged filed share counts and value all common classes at the quoted class’s price.

A value for the operating business across capital providers. This guide’s simplified bridge is market cap + funded debt − cash and cash equivalents. A fuller calculation may adjust for preferred shares, minority interests, leases, excess cash, and other non-operating assets.

Equity value divided by annual revenue. Revenue multiplied by P/S reconstructs equity value, not enterprise value. On a consistent per-share basis, revenue per share multiplied by P/S reconstructs the share price. Sales alone do not tell you margins, reinvestment needs, or fair value.

This guide derives the combined bridge from operating income to net income as net income minus operating income. It includes the net effect of non-operating gains/losses, interest, taxes, and applicable allocations. It is not a separate reported operating-profit line.

This guide derives the combined bridge from accounting profit to operating cash as OCF minus net income. Noncash charges, gains removed from operations, working-capital timing, and other operating adjustments enter it. It must not be interpreted as depreciation alone.

All recorded obligations, including borrowing, supplier payables, accrued costs, taxes, and deferred revenue. Funded debt is only a subset. The selected balance sheet derives other liabilities by subtracting the displayed debt from total liabilities.

An ownership claim in consolidated subsidiaries held by other owners. Consolidated assets minus liabilities need not equal the parent shareholders’ equity alone. A fuller EV analysis treats these claims consistently with the consolidated operating earnings.

The usual P/E is price per share divided by diluted earnings per share. This table instead uses estimated market cap divided by consolidated net income, labeled a proxy. Temporary gains or peak-cycle profits can make a multiple look deceptively low; losses make the usual positive multiple unhelpful.

Estimated equity value divided by this guide’s OCF-minus-capex measure. It asks what equity investors pay per dollar of annual cash remaining after gross capital spending. FCF can fluctuate with investment cycles and working capital, and is not necessarily paid to owners.

Annual FCF divided by equity value, expressed as a percentage. Positive P/FCF and FCF yield are reciprocals: 20× corresponds to 5%. This is neither a promised dividend yield nor a forecast of the stock’s return; a negative value means this FCF measure consumed cash.

Compare a value including lenders’ claims with earnings measured before interest. EV/EBIT retains depreciation; EV/EBITDA removes it. Consistent treatment of leases, non-operating items, and capital requirements matters when comparing businesses.

Enterprise value divided by annual revenue. It remains calculable when earnings are negative, but says little about how much revenue can become profit or cash. Similar sales multiples can represent very different values if margins and reinvestment needs differ.

Estimated market cap divided by accounting equity. Buybacks can shrink book equity, while internally developed brands and expensed research can leave important assets unrecorded. A high or low ratio alone does not establish fair value.

Debt/EBITDA compares borrowing with an operating earnings measure; it is not literal years to repay because EBITDA has not paid tax or capex. EBIT/interest expense measures the cushion for interest. Also inspect maturities, covenants, cash, and downturn earnings.

Operating profit after an assumed normalized operating tax charge, before interest. It measures profit available to both lenders and shareholders, which matches ROIC’s debt-plus-equity capital base. It is different from after-interest net income.

Capital committed to the operating business. A starting point is book equity + interest-bearing debt − excess cash and non-operating assets, with consistent accounting adjustments. Using average beginning and ending capital matches a year’s profit to capital employed over that year.

NOPAT divided by average operating invested capital. It measures the business’s return on the capital it uses, not the shareholder’s return at today’s stock price. Returns on new investment can differ from the historical average.

The weighted required returns of equity and debt capital providers, with a consistent after-tax debt cost. It is an estimated opportunity cost, not an income statement expense. ROIC above WACC suggests value creation if the measurements and assumptions are sound.

Estimate future cash flows and convert them to present value using a discount rate consistent with their risk and capital providers. Firm cash flows use a firm discount rate; equity cash flows use an equity rate. Growth, reinvestment, and continuing-value assumptions can dominate the result.

Cash available to all capital providers before financing flows. A common model is NOPAT + noncash operating charges − capex − additional operating working capital. Unlike this guide’s simple OCF-minus-capex figure, FCFF must handle interest and taxes consistently with enterprise valuation.

The latest reported year of activity, which may end months before the stock-price date. For interim filings this guide computes annual + current year-to-date − prior year-to-date. Balance sheet figures remain a snapshot at period end, rather than a twelve-month sum.