PAYC

What it would cost to take over the entire firm (equity plus debt, less cash) per dollar of pre-interest, pre-tax, pre-depreciation operating earnings. Capital-structure-agnostic — directly comparable across heavily and lightly levered businesses, which a P/E can't do. The weakness: EBITDA ignores capex, so capital-intensive businesses look artificially cheap on this metric. Cross-check with EV/FCF when capex is meaningful.

Valuation expressed against the cash actually available to all capital providers after capex. Often more honest than EV/EBITDA when capital expenditure is meaningful relative to depreciation, because EBITDA ignores capex entirely while FCF reflects it. The cleanest single-number 'what would I pay to own this whole business?' valuation lens for capital-intensive firms.

The multiple equity analysts most commonly quote because it reflects expected earnings rather than the trailing window. Same caveats as trailing P/E plus one extra: the denominator depends on consensus estimates, which can be systematically optimistic going into a downturn or pessimistic at a cyclical trough. Worth cross-checking against trailing P/E and sell-side estimate trend.

Sanity-check on earnings quality — a ratio of 1.0 means every dollar of GAAP earnings shows up as free cash flow. Persistently below 1.0 means working-capital build or capex is consuming earnings; persistently above 1.0 is unusual and may flag accounting conservatism (heavy non-cash charges) or a one-time release. Trend matters more than absolute level.

Easier to compare than operating margin across firms with very different leverage and depreciation profiles, because it adds D&A back. Software platforms commonly run above 30%; capital-light service businesses cluster around 20%; capital-intensive industrials sit below 15%. The weakness: ignores the cash needed to maintain the asset base — pair with FCF margin for a complete profitability picture.

End-to-end conversion ratio: of every dollar of revenue, how much falls through to genuine free cash flow available to all capital providers? More honest than net margin because it accounts for the capex needed to maintain (and grow) the business. The single best indicator of whether the business is a quality compounder or a GAAP-earnings illusion.

Free cash flow the business throws off, divided by what the market currently charges for the equity. Treats the equity claim as a perpetual stream of free cash. More honest than earnings yield because it reflects the cash actually available to shareholders after all reinvestment. Cyclicals can swing below zero in a downturn — read with the trailing-cycle range.

Joel Greenblatt's reformulation of return-on-capital, designed to filter for businesses that earn high pre-tax returns on the tangible operating capital that actually generates EBIT. Excludes goodwill, acquired intangibles, and financial assets so that two firms with the same operating economics rank similarly regardless of acquisition history. Pairs with Greenblatt's Earnings Yield (EBIT/EV) to produce the famous 'Magic Formula' rank — quality stocks at value prices.

First-line profitability measure — how much revenue is left after the direct cost of producing it. Stable or rising gross margin signals pricing power and low input-cost exposure; falling gross margin is one of the earliest reliable signals of competitive pressure or commodity-input squeeze. Industry context is everything: 30% gross margin is excellent for a grocery chain and disastrous for a software company.

Operating margin minus interest, tax, and below-the-line items. Useful but noisier than operating margin: tax rate changes, debt-service shifts, and one-time items can move net margin year-over-year even when the operating business is unchanged. Always pair with operating margin and FCF margin — divergence between them is a tell about leverage, tax structure, or earnings quality.

Captures the leverage between revenue and operating profit — the core test of whether a business converts sales into income at the operating level. Independent of capital structure (excludes interest) and tax-jurisdiction noise. Trend matters as much as level: an improving operating margin indicates pricing power or operational efficiency gains; a falling margin signals input-cost pressure, wage inflation, or competitive erosion.

Pre-tax cousin of ROIC using operating capital employed (long-term debt plus equity, approximately equal to total assets minus current liabilities). Damodaran publishes ROCE by industry annually, so it benchmarks cleanly against sector norms. Particularly useful for capital-intensive businesses where you want to see pre-tax returns on the long-term capital base.

The headline profitability metric. Net income divided by average book equity tells you how productive each dollar of shareholders' capital is. High sustained ROE compounds book value when the business can reinvest at a similar return. Two warnings: ROE rises mechanically with leverage (high D/E inflates ROE without making the business better), and aggressive buybacks can shrink the equity denominator faster than they shrink earnings, artificially boosting ROE even as fundamental returns are flat.

Measures how productive the actual operating capital base is, independent of capital structure. Strips out the effects of cash, leverage, and below-the-line items so you see the underlying economic engine. The benchmark is the firm's weighted-average cost of capital (WACC) — sustained ROIC above WACC creates value, sustained ROIC below WACC destroys it. The single most important profitability metric for long-term compounding.

Useful complement to debt-to-equity. Banks, REITs, and post-buyback firms can carry small or even negative book equity, which makes D/E unstable; D/A stays well-behaved because total assets is always positive. Industry context still matters — utilities run higher than software by design — but the comparability across capital structures is much better.

How much the company funds itself with debt vs. equity. Higher leverage amplifies both returns (through ROE) and risk (through interest coverage and refinancing exposure). The 'right' level varies enormously by industry — utilities and REITs run higher than industrials, software runs near zero. Becomes unstable when book equity is small or negative; complement with debt-to-assets in those cases.

Solvency-under-stress measure. A ratio of 1x means EBIT exactly covers interest with nothing left over for taxes, capex, or principal; 5x is comfortable for an industrial; below 2x is a credit-watch level. Especially important when leverage is rising or profits are cyclical — the ratio should be evaluated at a stress-cycle EBIT, not the current peak.

Strips out short-term operating debt and revolver use to focus on the permanent capital structure. Useful when comparing companies that fund working capital differently — a high D/E that's mostly short-term commercial paper means something different from a high D/E that's mostly long-dated bonds. Watch refinancing maturities alongside the level.

Bond covenants are commonly written against this ratio because it directly answers 'how many years of operating cash earnings would it take to retire all the debt?' Above ~5x is high-yield territory for industrials; investment-grade industrials typically run below 3x. Negative net debt (more cash than debt) means the firm could pay off its bonds and still hold cash — a common position for mature tech.

The acid-test variant of current ratio strips inventory from the numerator, since inventory can be stale, obsolete, or written down before it converts to cash. A purer view of near-term liquidity than current ratio. Sweet spot around 1.2x; below 0.5x signals real liquidity stress, above 3x suggests trapped working capital that could be returned to shareholders or reinvested.

The single best operations-quality metric. Negative CCC means the firm is funded by suppliers — the customer pays before the supplier needs to be paid (Apple, Costco, Amazon at scale). Long CCC ties up working capital and forces operating-loan dependence. Combines three sub-metrics: days inventory outstanding, days sales outstanding, days payable outstanding.

How long the average sale sits as a receivable before becoming cash. Earnings-quality flag: receivables growing faster than revenue is one of the cleanest tells for revenue recognition stretching — Beneish flagged exactly this pattern as a primary fraud indicator. Industry context matters: B2B / project businesses run longer DSO than retail, but the trend is more important than the level.

DuPont productivity measure. Combined with margin, it tells the asset-light vs. asset-heavy story: low turnover with high margin is the luxury / branded model, high turnover with thin margin is the supermarket / discount model. Very high turnover in retail can also flag stockouts (lost sales) — the metric reads best industry-relative, not absolute.

Beneish (1999) calibrated eight financial-statement indices against a sample of known earnings manipulators vs. matched controls. M < -2.22 reads as 'unlikely manipulator'; M ≥ -1.78 reads as 'likely manipulator'; the gap between is grey. Companion to Altman Z but for fraud risk rather than bankruptcy. Famously flagged Enron prior to the public disclosure of accounting fraud.

Richard Sloan's 1996 accruals-quality measure. Persistent positive accruals (net income meaningfully exceeds cash flow) tend to mean-revert via earnings disappointments — Sloan documented that high-accruals firms underperform low-accruals firms over the following year. Large negative values are usually fine but can flag one-time working-capital releases or non-cash drags. Phase D-2 made this a target-window metric centred on zero.

Fires on the bar where the MACD line (EMA12 minus EMA26) crosses through the signal line (EMA9 of MACD). Bullish when MACD crosses up through signal, bearish when it crosses down. Far more commonly used as a trade trigger than divergence — see macd_divergence for the slower confirmatory tell. Whipsaws in chop; cleanest when combined with a trend-regime filter.

+1 on bullish cross (MACD crosses up through signal); -1 on bearish cross (MACD crosses down through signal); 0 otherwise.

+1 = bullish MACD-signal cross, -1 = bearish MACD-signal cross.

ADX (Average Directional Index) measures trend strength regardless of direction — high ADX means a strong trend (in either direction), low ADX means chop. Below ~20 historically associates with sideways/choppy markets unfavourable to trend strategies and favourable to mean-reversion strategies. Used as a regime gate to disable trend-following systems when the tape isn't trending.

+1 while ADX is below the threshold (weak trend); 0 otherwise.

+1 = weak trend (chop) — typically a signal to disable trend strategies, not to trade direction.