Finance formulas have a reputation for being intimidating — long acronyms, Greek letters, and textbook explanations that assume you already understand the concept before explaining it. Most of them, once translated out of jargon, are actually straightforward ideas: how much is this worth, how much did this cost, how much did I make back. Here are 17 of the most useful ones, explained the way they're actually used in practice.
Valuation Formulas
1. Discounted Cash Flow (DCF)
What it answers: What is a business (or investment) actually worth today, based on the cash it's expected to generate in the future?
The idea: Money in the future is worth less than the same amount today, because of inflation, risk, and the opportunity cost of not having it now. DCF takes projected future cash flows, "discounts" each one back to today's value using a chosen discount rate, and sums them up. The result is an estimate of intrinsic value — what the asset is worth based on fundamentals, independent of what the market currently says it's worth.
Where it's used: Company valuations, M&A analysis, and evaluating whether a stock is over- or under-priced relative to its underlying cash-generating ability.
2. Net Present Value (NPV)
What it answers: Is a specific investment or project worth doing?
The idea: NPV is DCF applied to a decision rather than a whole company — it takes the discounted value of a project's future cash flows and subtracts the upfront cost. A positive NPV means the project is expected to create more value than it costs; a negative NPV means it's expected to destroy value.
3. Internal Rate of Return (IRR)
What it answers: What annualized return is this investment actually generating?
The idea: IRR is the discount rate at which an investment's NPV equals exactly zero — in plain terms, it's the break-even growth rate. It's often used to compare multiple investment opportunities against each other, or against a minimum acceptable return threshold.
4. Price-to-Earnings Ratio (P/E)
What it answers: How much are investors paying for each dollar of a company's earnings?
The idea: Divide a company's share price by its earnings per share. A high P/E generally signals that investors expect strong future growth; a low P/E can signal undervaluation — or it can signal that the market has real concerns about the business. P/E is only meaningful compared against similar companies or the company's own historical average, not in isolation.
5. EBITDA
What it answers: How profitable is the core business, before accounting and financing decisions distort the picture?
The idea: Earnings Before Interest, Taxes, Depreciation, and Amortization strips out expenses that vary based on how a company is financed or how it accounts for assets, leaving a cleaner view of operating performance. It's widely used to compare companies with different capital structures or tax situations on a more level footing.
Return and Performance Formulas
6. Return on Investment (ROI)
What it answers: How much did I actually gain relative to what I put in?
The idea: (Gain from investment − Cost of investment) ÷ Cost of investment, usually expressed as a percentage. It's the most general-purpose return metric — simple, but it doesn't account for the time period involved, which is why a 20% ROI over one month is very different from 20% over five years.
7. Return on Equity (ROE)
What it answers: How efficiently is a company generating profit from shareholders' invested capital?
The idea: Net income divided by shareholder equity. A high ROE can indicate an efficient, well-run business — or it can indicate a company carrying a lot of debt, which mechanically boosts ROE without necessarily reflecting operational strength. Worth checking alongside debt levels, not in isolation.
8. Compound Annual Growth Rate (CAGR)
What it answers: What was the smoothed, annualized growth rate of an investment over multiple years?
The idea: CAGR smooths out year-to-year volatility into a single average annual growth figure, making it easier to compare investments with very different, choppy year-by-year performance on equal footing.
Risk Formulas
9. Sharpe Ratio
What it answers: Is this investment's return worth the risk taken to achieve it?
The idea: It divides an investment's excess return (return above a "risk-free" baseline, like a treasury bond) by its volatility. Two investments with identical returns can have very different Sharpe ratios if one achieved that return with much wilder swings along the way — the Sharpe ratio rewards smoother, more consistent returns.
10. Risk-Reward Ratio
What it answers: For a specific trade or position, how much is being risked relative to how much could be gained?
The idea: Potential loss compared to potential gain, usually expressed as a ratio (like 1:3, meaning risking $1 to potentially gain $3). Traders often set a minimum acceptable ratio before entering a position, regardless of how confident they feel about the trade.
11. Beta
What it answers: How volatile is this stock compared to the overall market?
The idea: A beta of 1 means a stock tends to move in line with the market. Above 1 means more volatile than the market; below 1 means less volatile. It's a rough proxy for a stock's risk profile relative to a broad benchmark.
Business and Cash Flow Formulas
12. Gross Margin
What it answers: After the direct cost of producing a product or service, how much revenue is left?
The idea: (Revenue − Cost of goods sold) ÷ Revenue. It reflects pricing power and production efficiency, before accounting for overhead like marketing, salaries, or rent — which is why it's a different (and usually higher) number than net margin.
13. Net Margin
What it answers: After every single expense, what percentage of revenue is actual profit?
The idea: Net income divided by total revenue. It's the most complete profitability snapshot, but it's also affected by one-time items (like a large tax adjustment or a legal settlement), so it's worth checking whether a given period's net margin reflects the ongoing business or a temporary anomaly.
14. Burn Rate
What it answers: For a company not yet profitable, how quickly is it spending through its cash reserves?
The idea: Typically calculated as net monthly cash outflow. Paired with total cash on hand, it produces "runway" — how many months remain before the company runs out of money at the current spending pace, assuming no new funding or revenue growth.
15. Customer Acquisition Cost (CAC)
What it answers: How much does it cost, on average, to acquire one new paying customer?
The idea: Total sales and marketing spend divided by the number of new customers acquired in that period. It's most useful compared against Customer Lifetime Value — a low CAC relative to lifetime value suggests a healthy, scalable acquisition channel; a CAC close to or above lifetime value suggests the growth strategy is losing money per customer.
Personal Finance Formulas
16. The Rule of 72
What it answers: Roughly how long will it take an investment to double at a given interest rate?
The idea: Divide 72 by the annual interest rate to get an approximate number of years to double. It's a fast mental-math shortcut, not a precise calculation, but it's accurate enough for quick comparisons between different rates of return.
17. Debt-to-Income Ratio (DTI)
What it answers: How much of monthly income is already committed to debt payments?
The idea: Total monthly debt payments divided by gross monthly income. Lenders use this heavily when evaluating loan applications, and it's a useful personal check on whether new debt is sustainable relative to existing obligations.
Why these formulas matter more together than alone
No single formula tells the whole story. A high ROE means little without checking debt levels. A strong ROI means little without knowing the time period involved. A low CAC means little without knowing lifetime value. The real skill isn't memorizing the formulas individually — it's knowing which ones to check against each other for a given decision.
Where a Business Cheatsheet fits in
Keeping 17 formulas straight — let alone remembering which ones pair with which — is exactly the kind of thing that benefits from a quick-reference format rather than memory. A Business Cheatsheet condenses formulas like these, along with valuation multiples and core business metrics, into a single ink-friendly reference sheet built for a desk or trading terminal.
For the productivity side of managing financial analysis work, a Career Cheatsheet covers the frameworks for staying focused on complex, detail-heavy work like this. And for anyone applying formulas like CAC and margin to a digital product or creator business specifically, a Creator Economy Cheatsheet translates the same principles into that context.
Want these formulas at your desk? The Business Cheatsheet gives you a condensed, executive-ready reference for the finance formulas that come up again and again — no need to re-derive them from memory every time.