All throughout college, I memorized complex formulas and ideas by making up little phrases. It is super effective, and I thought I’d share a few with you guys, and see if you can come up with any. For example… The Cash Conversion Cycle = Days Inventory on Hand + Days Sales Outstanding - Days of Payables Looking at it using acronyms: CCC = DOH + DSO - DP So the phrase I made to remember this: I want to CONVERT my CASH into some DOnut Holes and a Diet Soda, but don’t want (-) to Pay for it any Day DOH = Days On Hand = DOnut Holes DSO = Days Sales Outstanding =Diet Soda DP = Days Payables = Pay for them any Day ------------------------------------------------------------------------------------------------------------------- Didn’t like that one? How about 5 ratio decomposed ROE? It’s equal to NI/EBT * EBT/EBIT * EBIT/Revenue * Revenue/Avg. Assets * Avg. Assets/ Avg. Equity What a PITA!! You should know that the first numerator is NI, and last denominator is Equity (NI/Equity is basic ROE)… so the problem is remembering the middle numbers. Notice that as soon as a number appears in the denominator, it moves up to the numerator of the next ratio, so you ONLY have to remember the first four denominators!! They are (in order) EBT, EBIT, Revenue, Assets… or in other words, E, E, R, A E E R A = Everyday Eat Red Apples Or if you want to include NI and Equity: N E E R A E = Never Ever Eat Red Apples, Ever! Remember that phrase, you’ll remember the first letters, & you’ll remember the ratios. ------------------------------------------------------------------------------------------------------------------- OK one more very simple easy one. The Growth Rate = ROE * Retention Rate Or, G = ROE*RR just pronounce ROE*RR as “ROWER” (like boat rower)… think of the growth rate as the “GROWER” So you have: GROWER = ROWER (ROE*RR) You need the GROWER? Calculate the ROERR!! You got the GROWER, and the ROE… what else do you need?? well, you got the “row”, now you need a “er” to make ROERR!! Hope this helps someone… after writing it up it seems really complicated, but trust me, these things are lifesavers!!!
actually most of the phrases I come up with are super vulgar and offensive, but that seriously makes them easier to remember. Don’t think I should post them here as is though. For example, the “red” in my original ROE phrase is “redhead”… I’ll let you figure out the rest : )