Invest Sign Financial Glossary

Accounts payable

Amounts due to suppliers for goods or services purchased on credit.

Accounts receivable

Amounts due from customers arising from the extension of trade credit.

Accounts receivable turnover

The ratio of net credit sales to accounts receivables; a measure of the number of times in a period that credit sales have been created and collected.

Accumulated depreciation

The sum of depreciation taken for physical assets in the firm's possession.

Amortized

A present value that has been transformed into an equivalent series of cash flows considering the time value of money.

Assets

Anything owned by the company having a monetary value; eg, 'fixed' assets like buildings, plant and machinery, vehicles and potentially including intangibles like trade marks and brand names, and 'current' assets, such as stock, debtors and cash.

Asset turnover

Measure of operational efficiency - shows how much revenue is produced per ? of assets available to the business. (Sales revenue/total assets less current liabilities).

Balance sheet

A statement of assets, liabilities, and net worth at a point in time. Also referred to as the statement of financial position.

Best-Case Scenario

An analysis in which all of the input variables are set at their best reasonably forecasted values.

Book value of equity

The value of the ownership interest in a company according to the accounting conventions applied; the sum of the par value of equity, additional paid in capital, retained earnings, less treasury stock.

Capital

A firm's resources; funds raised from long-term sources, such as bonds and stocks.

Capital gain

A gain (profit) on the sale of an asset used in business, which may receive preferential tax treatment through an exclusion of a portion of the gain from taxation or simply from a lower tax rate.

Capitalization rate

The discount rate that translates a future series of cash flows into a present value.

Capital lease

A rental obligation that is considered a long-term debt.

Cash Flow

This term designates uneven cash flows.

Cash flow statement

A summary of cash inflows and outflows. For an individual using the cash basis of accounting, this statement is a summary of income (i.e., cash inflows) and expenses (i.e., cash outflows) during a period of time (e.g., a year).

Change in Net Working Capital

The increased current assets resulting from a new project minus the spontaneous increase in accounts payable and accruals.

Coefficient of Variation (CV)

Standardized measure of the risk per unit of return; calculated as the standard deviation divided by the expected return.

Commodity

A useful or valuable object, usually used in reference to trade.

Constant Ratio Method

A method of forecasting future financial statements, and future financial requirements, that assumes certain financial ratios will remain constant.

Correlation

The tendency of two variables to move together.

Correlation coefficient

A statistical measure of the association between two variables that is bounded by -1 (perfect negative correlation) and +1 (perfect positive correlation); the ratio of the covariance between two variables to the product of the standard deviations of the two variables.

Cost of capital

The cost of funds to a business enterprise, usually stated in percentage terms; the weighted average of the cost of debt and equity of a firm.

Cost of Retained Earnings

The rate of return required by stockholders on a firm's common stock.

Credit Period

The length of time for which credit is granted.

Cumulative

A protective features on preferred dividends previously not paid to be paid before any common dividends can be paid.

Current Ratio

This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.

Current asset

An asset that can reasonbly be expected to be liquidated (i.e., turned into cash) within one operating cycle (which is usually one year).

Current liability

A debt obligation that is due within one year.

Degree of operating leverage, DOL

The sensitivity of operating earnings to change in unit sales.

Depreciation

The allocation of the cost of an asset over its useful life.

Discounted Payback Period

The length of time required for an investment's cash flows, discounted at the investment's cost of capital, to cover its cost.

Discounting

The process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding.

Du Pont Equation

A formula which shows that the rate of return on assets can be found as the product of the profit margin times the total assets turnover.

Expected Rate of Return

The rate of return expected to be realized from an investment; the weighted average of the probability distribution of possible results.

Expected Total Return

The sum of the expected dividend yield and the expected capital gains yield.

Financial analysis

The evaluation of the financial condition and operating performance of a business enterprise.

Financial leverage

The use of debt to finance a business which, because of the fixed financing expenses associated with debt, results in a "leveraging" or accentuating effect on the returns to owners; also referred to as gearing.

Financial leverage ratio

A ratio that reflects the extent to which a firm has financed its assets with debt.

Financial Lease

A lease that does not provide for maintenance services, is not cancelable, and is fully amortized over its life; also called a capital lease.

Fixed assets

Assets held for use by the business rather than for sale or conversion into cash, eg, fixtures and fittings, equipment, buildings.

Fixed asset turnover

The ratio of sales to fixed assets; a measure of the firm's ability to put fixed assets to work to generate sales.

Fixed cost

A cost which does not vary with changing sales or production volumes, eg, building lease costs, permanent staff wages, rates, depreciation of capital items.

Future Value (FV)

The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate.

Gross profit margin

The ratio of gross profit (i.e., sales less cost of goods sold) to sales; a measure of a firm's profitability.

Income Statement

A statement summarizing the firm's revenues and expenses over an accounting period, generally a quarter or a year.

Inflow

A cash receipt.

Intangible asset

An asset that has no physical existence, such as a patent or a trademark.

Interest

The compensation for the opportunity cost of funds and the uncertainty of repayment of the amount borrowed.

Interest coverage ratio

The ratio of a firm's operating income (i.e., earnings before interest and taxes) to its interest obligation; a measure of a firm's use of financial leverage.

Internal rate of return (IRR)

The return that equates the present value of an investment's inflows with the present value of the investment's outflows; the return or interest rate that equates the cost of the investment with the present value of the investment's future cash flows.

Inventory

Raw materials and work-in-process used in the production of goods, as well as finished goods held for sale.

Inventory turnover

The ratio of the cost of goods sold to inventory; a measure of how many times the investment in inventory "turns over" or completely cycles through the firm from raw materials to sold finished goods.

Liquidity ratio

A ratio that conveys the ability of a business to satisfy its immediate obligations.

Long term debt to equity ratio

The ratio of a firm's long-term debt (i.e., debt obligations due beyond one year) to its shareholders' equity.

Long-term liabilities

Debt obligations that are due beyond one year into the future.

Marketable Securities

Securities that can be sold on short notice.

Modified IRR (MIRR)

The discount rate at which the present value of a project's cost is equal to the present value of its terminal value, where the terminal value is found as the sum of the future values of the cash inflows, compounded at the firm's cost of capital.

Monte Carlo Simulation

A risk analysis technique in which probable future events are simulated on a computer generating estimated rates of return and risk indexes.

Net assets (also called total net assets)

Total assets (fixed and current) less current liabilities and long-term liabilities that have not been capitalized (e.g., short-term loans).

Net cash flow

In the context of capital budgeting, the sum of the investment cash flow and operating cash flow for a given period.

Net operating loss

An excess of deductions over gross income from business operations.

Net present value

The difference between the present value of the future cash inflows and the present value of the cash outflows of a project, where all cash flows are discounted at the cost of capital for the project.

Net profit margin

The ratio of net income to sales; a measure of a firm's profitability.

Net Working Capital

Current assets minus current liabilities.

Net working capital to sales ratio

The ratio of net working capital (i.e., current assets minus current liabilities) to sales; a measure of liquidity.

Operating cycle

The length of time it takes to turn the investment of cash in goods and services back into cash in terms of collections from customers.

Operating profit margin

The ratio of operating income (i.e., earnings before interest and taxes) to sales; a measure of a firm's profitability.

Overheads

An expenses that cannot be attributed to any one single part of the company's activities.

Payback Period

The length of time required for an investment's net revenues to cover its cost.

Present value

The current value of a cash flow or a series of cash flows.

Probability Distribution

A listing of all possible outcomes, or events, with a probability (chance of occurrence) assigned to each outcome.

Profitability index

The ratio of the present value of a project's cash inflows to the present value of a project's cash outflows.

Profit and loss account

One of the three principal business reporting and measuring tools (along with the balance sheet and cashflow statement). The statement is essentially a trading account for a period, usually a year, but also can be monthly and cumulative. It shows profit performance, which often has little to do with cash, stocks and assets (which must be viewed from a separate perspective using balance sheet and cash flow statement).

Profit Margin on Sales

This ratio measures income per dollar of sales; it is calculated by dividing net income by sales.

Profitability Ratios

A group of ratios which show the combined effects of liquidity, asset management, and debts on operating results.

Project Cost of Capital

The risk-adjusted cost of capital for an individual project.

Property insurance

Insurance that protects against losses of real or personal property from event such as fire, wind, and theft.

Quick ratio

The ratio of current assets less inventory to current liabilities; a measure of the firm's ability to meet its most immediate obligations.

Real estate

Land, including any buildings or structures on it.

Reinvestment rate

Is the rate of return earned on the excess cash flow that is generated by the property.

Residual loss

The implicit cost in an firm that remains after monitoring and bonding efforts, resulting from the misalignment of managers and owners' interests.

Return

The income on an investment, generally stated as a percentage of the original investment or beginning of year value.

Return on assets (ROA)

The ratio of net income to total assets; a measure of a firm's return on its investment in total assets.

Return on common equity (ROE)

The ratio of earnings available to common shareholders to common shareholders' equity; a measure of common shareholdes' return on their investment.

Risk

In insurance, a danger or a hazard of a loss of the insured property. The chance of deviating from the average or expected value.

Risk

The chance that some unfavorable event will occur.

Risk Management

Involves the management of unpredictable events that have adverse consequences for the firm.

Scenario Analysis

A risk analysis technique in which "bad" and " good" sets of financial circumstances are compared with a most likely, or base-case, situation.

Share capital

The balance sheet nominal value paid into the company by shareholders at the time(s) shares were issued.

Sensitivity Analysis

A risk analysis technique in which key variables are changed one at a time and the resulting changes in the NPV and IRR are observed.

Standard Deviation

A statistical measure of the variability of a set of observations.

Statement of Cash Flows

A statement reporting the impact of a firm's operating, investing, and financing activities on cash flows over an accounting period.

Synergy

The condition wherein the whole is greater than the sum of its parts; in a synergistic merger, the post merger value exceeds the sum of the separate companies' pre merger values.

Total debt to assets ratio

The ratio of a firm's total debt (i.e., current and long term debt) to its total assets; a measure of a firm's financial leverage.

Turnover ratio

A measure of the gross benefit from the employment of resources, expressed as a ratio of this gross benefit (e.g., sales revenue) to resources (e.g. total assets).

Variance

The square of the standard deviation.

Weighted Average Cost of Capital, WACC

A weighted average of the component costs of debt, preferred stock, and common equity.

Working Capital

A firm's investment in short-term assets-cash, marketable securities, inventory, and accounts receivable.

Worst-Case Scenario

An analysis in which all the input variables are set at their worst reasonably forecasted values.