## Using the Net Present Value (NPV) in Financial Analysis

The Net Present Value (NPV) is a profitability measure we use to figure out the present value of all expected future cash flows a project or investment will generate, including the initial capital we invest. It shows us the difference between the current value of cash inflows and outflows over Read more…

## Quick Ratio in Financial Analysis and Modeling

Introduction We perform a liquidity ratio analysis to evaluate the ability of the company to settle its obligations on time. The most common use case is when lenders and creditors want to gain a better understanding of the financial health of a borrower or customer. Analysts use the gained insights Read more…

## CAPEX, Depreciation and Amortization in Financial Modeling

If you are already familiar with the outlined concepts, maybe you would be more interested in taking a look at the Excel model, which you can download below the article. Introduction Long-term (non-current) assets of the company have a long useful life (more than one year). When acquiring capital assets, Read more…

## Dividend Discount Model in Financial Analysis

Introduction to the Dividend Discount Model The Dividend Discount Model (DDM) is used to estimate the price of a company’s stocks. The model is based on the theory that the present value of the stock is equal to the present value of all future dividend payments when discounted back to Read more…

## Performing Contribution Margin Analysis

Introduction The Contribution Margin is a significant financial metric that is sometimes neglected by managers. While profit margin is one we usually hold very important, it gives information only on the amount with which revenues exceed costs. On the other hand, Contribution Margin provides us with a way to see Read more…

## Materiality in Financial Analysis and Modeling

What is Materiality The materiality of a transaction amount or a financial statement line item is determined based on the impact of a misstatement of information on the intended users of that information. If the stakeholder is most likely to alter their actions if we presented the information correctly, the Read more…

## Decision Trees in Financial Analysis

Introduction to Decision Trees We use Decision Trees to clarify the expected value of capital investment opportunities. Decision Trees can also be helpful in business operations, where companies continuously struggle with big decisions on product development, operations management, human resources, and others. With Decision Tree analysis, we can better evaluate Read more…

## Applying the Pareto Principle in Financial Analysis

Introduction The Pareto Analysis is a statistical technique employed in decision-making to identify a limited set of tasks to produce the most significant effect. We base it on the Pareto Principle, which stipulates that 20% of the work on a project generates 80% of the outputs. The technique is also Read more…

## Scenario Analysis of Financial Models

Introduction to Scenario Analysis Scenario Analysis represents the process of calculating an estimation model under a variety of scenarios for the future. The idea behind this analysis method is to assess the effect of risk on values in a financial model. Scenario Analysis helps us outline how realistic are the Read more…

## Cash Conversion Cycle Analysis

What is the Cash Conversion Cycle The Cash Conversion Cycle is a metric that tells us how long it takes the company to convert capital invested in inventory back to cash. Here’s a cool-looking process diagram to illustrate the cash conversion cycle: Elements of the Cash Conversion Cycle The Cash Read more…