WHAT IS ENTERPRISE VALUE (EV)? Enterprise value, or EV, is a measure of the total value of a company. This is not to be confused with the market capitalization (market cap) value. Market cap is the equity value of a company, whereas enterprise value is the entire market value of the firm. The entire value …
WHAT IS EBITDA? EBITDA is a measure of profitability and is used to evaluate a company’s financial performance. It is used frequently by analysts and investors as an alternative to looking at net income/earnings because the metric focuses on the profitability of a company’s core operations. It dials in on the operations by stripping out the effects of non-operating items such …
WHAT IS BREAK-EVEN ANALYSIS? Break-even analysis is a type of analysis that identifies where a product, service, or business will reach the point of total costs equaling total revenues. The analysis finds the break-even point (BEP) which is the level of units or dollars of revenue required for an endeavor to recover its total costs. At the …
Depreciation is an accounting method used to allocate the cost of a tangible asset over the course of its lifespan. Assets subject to depreciation have a lifespan (or useful life in accounting language) greater than one year. Examples include: Machinery Buildings Furniture Depreciation expense reduces an asset’s book value with each passing year. This reduction represents the asset’s decline …
Free cash flow represents the amount of cash generated by a company after paying expenses to run the business and maintain capital assets. It is a measure of profitability to analyze the cash a company has on hand available to use freely. Hence the name “free cash flow.” A company will use free cash flow for a number of …
Payback period is the amount of time needed for the cash flows of an investment to recover the amount initially invested into an asset. It is a measure of liquidity that is commonly used in capital budgeting and shorter payback periods are associated with more attractive projects. Simply put, if you spent $100,000 as an initial outlay …
IRR, short for internal rate of return, is a metric used to show the profitability of a potential project or investment. Companies use it in capital budgeting when deciding where to invest their money and IRR is frequently used in the real estate industry to evaluate an investment. In addition to projects, IRR can be calculated …
Cash on cash return is a financial metric used in real estate transactions to measure profitability by showing total cash income earned versus total cash invested into a property. Total cash income earned is pre-tax cash flow. Total cash invested into the property can include the down payment, closing costs, loan fees, improvements, maintenance, and rehab fees. …
The management teams of businesses keep their eyes open to opportunities to invest and expand to increase the value of the firm. During the capital budgeting process, a company will analyze potential investments in a variety of ways. One method of analyzing the profitability of an investment is through the use of the net present …
The statement of cash flows (or cash flow statement) is a financial statement produced by a company to provide information about its cash receipts and payments during an accounting period. It is used to measure how well a company is managing its cash position and can be used to analyze a company’s liquidity, solvency and …
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