Over the past few weeks I have been giving a weekly training session to the younger support staff around financial accounts and their uses. Today we went through the basic financial ratios, and how they can be used to asses the various strengths/weaknesses of a company. Because i am a geek this got me thinking…what is your favourite equation?!?
Personally I love the 5-stage Du Pont analysis. I love how you can construct such a brilliant breakdown of ROE into the key constituent parts, and the best bit is you effectively do it by multiplying by ‘1’ several times over!
It’s the good ol’ dividend discount model for me. It’s simple, makes sense, I guess one of the basic valuation methodology. Forms a basis to all the different variations in cash flow definitions later on (FCFF, FCFE).
hmm… actually I like the derivatives part pay off calculations… perhaps not strictly formula per se, because that section makes sense with all those charts of payoff and I never have to remember much formula for them!