The Most Powerful Formula in Finance

The most important formula in finance calculates the time value of money (cash flow). It is used to calculate Shareowner Value.

The 2nd most important formula in finance explains how BOTH managers and Shareowners create value for Shareowners.

Its power derives from two key facts:

Cash, not accounting numbers, is the measure and store of value.
Cash has value over time (“the time value of money”). A dollar today is worth more than the same dollar received two years from now.

With respect to valuing a company, discounted cash flow is used to calculate Enterprise Value, which is explained in the next section.