MBA Math Formulas For Review:
1) Net income
2) Profit margin
3) Return on investment (ROI)
4) Break-even point
5) Burn rate
6) Balance sheet
7) Leverage ratio
8) Price to earnings ratio (P/E)
Having a solid foundation in MBA math is essential for business success.
Businesses use math for sales forecasting, accounting, inventory management, and marketing. In addition, investors and financial analysts use MBA math to determine a company’s financial health and predict the futures of specific markets.
If you’re interested in learning more about MBA math, online courses like the Business Intensive will teach you all of the critical business math you need to succeed.
While many formulas can help guide your business, here are 8 essential MBA math formulas you need to know. We hope you enjoy the MBA math review!
MBA Math Formula # 1: Net Income
Net income, also known as net profit or net earnings, determines a company’s financial health. If your net income is positive, that’s great! It means that your company is earning money. Conversely, if your net income is negative, it is known as a net loss, which means your company has more expenses than revenue.
Net income formula:
• Net income = Revenue – Expenses
Revenue is the money a business generates from normal operations.
Expenses are a combination of the different costs it takes to run a company. For example, expenses for typical businesses include taxes, wages, operation costs, and costs of goods sold.
Your business’s goal should be to have a net income higher than expenses.
Net income example:
During a 6 month period, your business earns $150,000 in revenue. You have expenses of $140,000.
Net income = $150,000 – $140,000
Net income = $10,000
MBA Math Formula #2: Profit Margin
A company’s profit margin determines how much a company makes.
Companies use profit margin to understand what percentage of sales turn into profit.
For example, if a company has a profit margin of 50%, it means that the company has a net income of 50 cents for every dollar the company spends.
Profit margin formula:
• Profit margin = (Net income / Revenue) X 100
Profit margin example:
If a company’s revenue is 1,000,000 and their net income is $100,000, then their profit margin is:
($100,000/ $1,000,000) X 100 = 10%
A profit margin of 10% means that the company makes 10 cents in profit for every dollar they spend.
MBA Math Formula #3: Return On Investment (ROI)
Return on investment is used to understand how much you gained or lost from investing in a particular asset, project, or product.
Return on investment formula:
• ROI = [(Investment gain – Cost of Investment) / Cost of Investment]
The investment gain is how much you made from investing in a project.
The cost of investment is how much you paid to execute the project.
Return on investment example:
Let’s say you invested $100,000 to create a new product line, and the new product line generates $400,000.
ROI = ($400,000- $100,000)/ (100,000) = 3
An ROI of 3 means that for every dollar you spent investing in the product line, you made 3 dollars, which is a good return on your investment.
While the ROI formula is excellent for determining how well an investment performed, it does not consider the holding period it took to execute the investment.
MBA Math Formula #4: Break-Even Point
A business’s break-even point occurs when they don’t lose or gain any money.
Businesses use the break-even point formula to calculate how many units they need to sell to not lose money.
The break-even point formula:
• Break-even point = Fixed Costs / (Sales Price Per Unit – Variable Cost Per Unit)
Fixed costs are company expenses unrelated to specific business activities, such as mortgage payments and taxes.
The sales price per unit is how much your buyer will pay when purchasing your product.
Variable costs per unit are the production costs per unit. It is called ‘variable’ because the cost to make a product may vary based on the production level and cost of raw materials.
Break-even point example:
Your company sells baseballs for $5 each. You have a monthly fixed cost of $6,000. Your variable cost per unit is $2.
Break-even point = $6,000/ ($5-$2)
Break-even point = 2,000
Meaning your company must sell 2,000 baseballs a month to break even.
MBA Math Formula #5: Burn Rate
Burn rate is a measure of negative cash flow. It indicates how much money a company spends over a period of time. It is usually reflected as a monthly rate.
For example, if a company has a burn rate of -$200,000 per month, the company should have a cash reserve of at least $2,400,000 to cover the losses over the year.
Burn rate formula:
• Burn rate = (Starting Balance – Ending Balance) / # Months
Starting balance indicates how much money a company has at the start of a period.
The ending balance indicates how much money a company has at the end of the period.
Burn rate example:
Over 6 months, Company Z has a starting balance of $2,000,000 and an ending balance of $1,400,00.
Burn rate = ($2,000,000 – $1,400,000)/ 6 months = -$100,00/ month.
Companies often fluctuate in the amount that they burn each month. Therefore it is vital to have a long enough period of time to calculate an accurate average.
Additionally, it is important to calculate your burn rate each month, as it will change over time.
Learn more about burn rate here.
MBA Math Formula #6: Balance Sheet Formula
The balance sheet is a financial statement used to show a company’s liabilities, assets, capital, equity, and debt at a single point in time.
It is called a balance sheet because the liabilities and equity must equal assets.
Balance sheet formula:
• Assets = Liabilities + Equity
Assets include cash, inventory, accounts receivable, property plant and equipment, and investments.
Liabilities include costs that a company owes, such as accounts payable and payroll.
Equity represents the shareholder’s stake in a company.
Balance sheet formula example:
If a company owes $100,000 and has a shareholder stake of $150,000, what is the value of its assets?
Assets = $100,000 + $150,000
Assets = $250,000
Click here to learn more about balance sheets.
MBA Math Formula #7: Leverage Ratio
The leverage ratio is a financial measurement used to assess a company’s ability to meet its financial obligations by showing how it is financed with debt or equity.
Common leverage ratio formulas:
• Debt to assets ratio = total debt/ total assets
• Debt to equity ratio = total debt/ total equity
• Debt to capital ratio = total debt/ (total debt + total equity)
• Debt to EBITA ratio = total debt/ EBITA (earnings before interest taxes depreciation and amortization)
• Assets to equity ratio = total assets/ total equity
The easiest way to calculate the leverage ratio of your company is by looking at your balance sheet.
Total debt is calculated by adding your company’s current liabilities and long-term liabilities together.
Total assets are calculated by adding your liabilities with your owner’s equity.
EBITA is calculated by taking your net income and then adding back interest, taxes, and depreciation and amortization.
Leverage ratio example:
Business Z has total debt of $1,000,000, total equity of $2,000,000, total assets worth $3,000,000 and an EBITA of $500,000.
•Their debt to assets ratio = $1,000,000/ 3,000,000 = ⅓
• Their debt to equity ratio = 1,000,000/ $2,000,000 = ½
• Their debt to capital ratio = $1,000,000/ ($1,000,000 + $2,000,000) = ⅓
• Their debt to EBITA ratio = $1,000,000/ $500,000 = 2
• Their assets to equity ratio = $3,000,000/ $2,000,000 = 1.5
Learn more about leverage ratios here.
MBA Math Formula #8: Price To Earnings Ratio (P/E)
The price to earnings ratio is used by financial analysts and investors to determine the value of a particular stock.
If a company has a high P/E ratio compared to its competitors, it usually indicates that stock is overvalued; if the P/E is lower than competitors, it means that the stock is undervalued (this is not investment advice).
Price to earnings ratio formula:
• P/E = (Market value per share/ Earnings per share)
Market value per share is the share price available to the public.
Earnings per share is a company’s profit divided by the outstanding shares of its common stock.
Price to earnings ratio example:
Company X finished their fiscal year with these statistics:
• Stock price/ market value per share: $45
• Earnings per share: $5
Then the price to earnings ratio would be $45/ $5 = 9.
A P/E ratio of 9 usually indicates that the stock is undervalued, though it depends on the industry and other factors (this is not investment advice).
Learn more about the nuances of the price to earnings ratio here.
What Are The MBA Math Requirements?
When applying to an MBA program, applicants must show that they have a strong background in mathematics.
While MBA math requirements vary depending on the program, most MBA programs require students to have algebra, calculus, statistics, and probability skills.
Each of these skills will be useful because the MBA curriculum requires business math courses in accounting, finance, quantitative analysis, economics, and game theory.
You can boost your business math for MBA skills by reviewing math topics such as linear equations, algebraic expressions, derivatives, and function composition.
Where Can I Do More MBA Math Review?
Here is the Business Intensive at a glance:
• Length: 7 Weeks
• Format: Online
• Cost: Starting at $1,499
The 7-week course teaches 8 core business skills, including finance, accounting, pricing, sales, branding, and marketing. Students will finish hands-on projects including:
• Run a market sizing, revenue growth, and competitor analysis
• Analyze financial reports and models
• Develop and execute a marketing and sales plan
• Develop and test a business strategy
• Pitch a business idea
• Conduct user interviews
• Build a no-code website
There are live weekly guest speakers. Past guest speakers include Andrew Yang, PayPal Founding COO David Sacks, Ellevest Cofounder, CEO Sallie Krawcheck, product gurus Jackie Bavaro, and Gayle Laakman Mcdowell, and Peloton Cofounder Graham Stanton.
The Business Intensive teaches students the core skills necessary to give them the confidence to become active business leaders.
If you’re interested in more alternative MBA programs, here are the best micro MBA courses.