General

Alpha (α) is a term used in investing to describe an investment strategy’s ability to beat the
market, or its “edge.” Alpha is thus also often referred to as excess return or the abnormal rate
of return in relation to a benchmark, when adjusted for risk.
Beta(β) is a measure of a stock's volatility in relation to the overall market. By definition, the
market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according
to how much they deviate from the market. (systematic risk)

Total liabilities
Debt-to-equity ratio (D/E) = '
Total sharholder s equity
1
Ending value t
Compound annual growth rate (CAGR) = ( ) −1
Beginning value

Financial Statements
1. Income Statement
Gross profit （毛利/总利润）= Revenue (营业收入) – COGS（销售成本/营业成本）
Operating income/Operating profit/EBIT = Gross profit – Operating expenses (R&D, SG&A,
wages, depreciation, etc.)
EBITDA = Operating income + D&A
Pre-tax income (EBT) = EBIT – Interest expenses
Net income = EBIT – Interest expenses – Tax = Pre-tax income - Tax
Depreciation could show up as a separate line item, or could be embedded in COGS or
Operating expenses.
Accrued compensation (Accrued wages) represent the unmet employee compensation
remaining at the end of a reporting period, i.e. the balance of unfulfilled payroll expenses.
A Write-down impacts both the Income statement and the Balance sheet. A loss is reported on
the income statement. If the write-down is related to inventory, it may be recorded as a cost of
goods sold (COGS). Otherwise, it is listed as a separate impairment loss line item on the income
statement so that lenders and investors can assess the impact of devalued assets.
EBITDA excludes investment in (and depreciation of) long-term assets, interest and one-time
charges – and all of these could end up bankrupting the company.
Net operating profit after tax (NOPAT) = Operating income * (1 – Tax rate)

2. Balance Sheet
Current assets (流动资产) include Cash and cash equivalents, Accounts receivable, Stock Inventory,
Marketable securities, Inventories, Prepaid expenses, etc.
Non-current assets (固定资产) include PP&E, Investments, Intangible assets, etc. Fixed assets are a
kind of non-current asset.
Current liabilities (流动负债) include Accounts payable, Short-term debt, Deferred revenue,
Accrued expenses, etc.
Non-current liabilities (非流动负债) include Long-term debt, Deferred revenue, Leases, etc.
Shareholders’ equity = Total assets – Total liabilities
Shareholders’ equity includes Common stock, Retained earnings, Additional paid in capital,
Treasury stock, and Accumulated other comprehensive income.

Retain earnings = old Retained earnings + Net income – Dividends issued

Additional paid in capital (APIC) = old APIC + Stock-based compensation + Stock created by
option exercises
Accrued expenses are payments that a company is obligated to make in the future for goods and
services that were already delivered. (Current liabilities)
Deferred revenue, also known as unearned revenue, refers to advance payments a company
receives for products or services that are to be delivered or performed in the future. (Current or
Non-current liabilities)
Retained earnings are the cumulative net earnings or profits of a company after accounting for
dividend payments (Shareholders’ equity)

The difference between Accounts receivable and Deferred revenue is that Accounts receivable
has not yet been collected in cash from customers, whereas Deferred revenue has been.
Accounts receivable represents how much revenue the company is waiting on, whereas deferred
revenue represents how much it is waiting to record as revenue.
Goodwill in business is an intangible asset that's recorded when one company is purchased by
another. It's the portion of the purchase price that's higher than the sum of the net fair value of all
of the assets purchased in the acquisition and the liabilities assumed in the process.

C urrent assets
Current ratio (流动比率) =
Current liabilities
Cash∧cash equivalents+ AR+ Short term investments
Quick ratio/Acid-test ratio (速动比率) =
Current liabilities
Net income
Return on assets (ROA) =
Average of beginning∧ending total assets
 Net income
Return on equity (ROE) =
Average of beginning∧ending book value of equity
Net operating profit after tax(NOPAT )
Return on invested capital (ROIC) =
Invested capital

Revenue
Asset turnover ratio =
Average of beginning∧ending total assets

Cost of Goods Sold

Inventory turnover ratio (存货周转率) =
Average of beginning∧endinginventory

Revenue
Receivables turnover ratio =
Average of beginning∧ending accounts receivables
Cost of Goods Sold
Accounts payable turnover ratio =
Average beginning∧ending accounts payable
EBITDA −Capex
Debt service coverage ratio (DSCR) =
Mandatory principal repayment + Interest expense

EBIT + Lease charges

Fixed charge coverage ratio (FCCR) =
Lease charges+ Interst expense
 3. Cash Flow Statement
Working capital = Current assets – Current liabilities
Operating/Net working capital = Operating current assets – Operating current liabilities =
(Current assets – Cash and cash equivalents) – (Current liabilities - Debt)

Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain
physical assets such as property, plants, buildings, technology, or equipment.

Cash flow from operating activities (CFO) = Funds from Operations + Changes in Working
capital = Net income + Depreciation, Depletion, & Amortization + Adjustments to Net income +
Changes in Accounts receivables + Changes in Liabilities + Changes in Inventories + Changes in
other operating activities
Cash flow from investing activities (CFI) includes any sources and uses of cash from a
company’s investments, such as purchase or sales of PP&E and Marketable securities, Proceeds
from Marketable securities, Capital expenditure, etc.
Cash flow from financing activities (CFF) includes Cash flow from issuing equity or debt, Cash
paid as dividends, Repurchase of debt and equity, etc.
 Enterprise/Equity Value
Enterprise value (EV) = Equity value + Debt + Preferred stock + Minority interest – Cash
 Valuation
Three major valuation methodologies: Comparable companies, Precedent Transactions, and
Discounted cash flow analysis.
The most common multiples used in Valuation: EV/Revenue, EV/EBITDA, P/E (Share
price/Earnings per share), P/BV (Share price/Book value)
 Discounted Cash Flow

Weighted average cost of capital (WACC) = Cost of Equity * (% Equity) + Cost of Debt * (%
Debt) * (1 – Tax Rate) + Cost of Preferred * (% Preferred).
Cost of equity = Risk-Free Rate + Beta * Equity Risk Premium
Merger Model
LBO Model