• ## WACC

Weighted average cost of capital (WACC) is a calculation used as a standard of comparison for a number of different business decisions. As it is based on rates of return that are determined by the market or observable from published data, it provides a useful measure of how well a company is creating shareholder value and its current value.

• ## Enterprise value multiple

The enterprise value multiple (EVM) is a ratio used in finance to measure the value of a company. Because it takes the debts of companies into account, it is considered to be a more comprehensive indication of a company’s worth than other multiples such as the price/earnings (P/E) ratio. It is often used by companies to evaluate potential acquisitions.

• ## Operating margin

Operating margin is a measurement of what proportion of a company’s revenue is left over, before taxes and other indirect costs (such as rent, bonus, interest, etc) after paying for variable costs of production such as wages, raw materials, etc. A good operating margin is needed for a company to be able to pay for its fixed costs, for example interest on debt. A higher operating margin means that the company has less financial risk.

• ## Jensen’s measure

Jensen’s measure is an important tool for treasurers who want to achieve the best possible return on any investment.

• ## Market capitalisation

A measure of the total value of a company’s outstanding shares according to the stock market, market capitalisation is often referred to simply as ‘market cap’ or ‘capitalised value’.

• ## Net profit margin

One of the key performance indicators (KPIs) used by investors to evaluate the performance of a particular company is the net profit margin. The formula shows how much of a company’s sales result in profit and how much is lost through, for example, depreciation or tax. Additionally, the calculation can also provide companies with the information needed for determining the effectiveness of cost control measures within their organisation. A comparatively high profit margin can be very advantageous for a business, by providing a cushion to protect the company when markets contract. Equally, a company with a relatively low net profit margin may well be faced with a higher than average risk in the event of a downturn.

• ## Asset coverage ratio

Companies use the asset coverage ratio to measure their ability to cover their debt. When a company has a high ratio this indicates that the company is likely to be able to keep operating with current debt and asset levels, whereas a low ratio – for example see below – makes this less likely.

• ## Working ratio

The working ratio is used to determine whether or not a company is able to recover its operating costs from its annual revenue.

• ## Cash conversion cycle

The cash conversion cycle (CCC) is the length of time, averaged in terms of days, which it takes for a company to convert expenditure on raw materials and other production costs into receipts of cash through the sale of its goods and services. It offers an indication of a business’s operational efficiency and liquidity.

• ## Enterprise Value Multiple

The Enterprise Value Multiple (EVM) is a ratio that determines the value of a company. It is considered to offer a more comprehensive indication of a company’s worth than the P/E ratio because it takes the company’s debt level into account.