FIN ch 2
diluted EPS
firm's disclosure of its potential for dilution from options it has awarded which shows the earnings per share the company would have if the stock options were exercised
EBIT
firm's earnings before interest and taxes are deducted
liabilities
firm's obligations to its creditors
inventories
firm's raw materials as well as its work-in-progress and finished goods
financial statements
firm-issued (usually quarterly and annually) accounting reports with past performance information
growth stocks
firms with high market-to-book ratios
value stocks
firms with low market-to-book ratios
stock options
form of compensation a firm gives to its employees that gives them the right to buy a certain number of shares of stock at a specific date at a specific price
convertible bonds
form of debt that can be converted to shares
dilution
increase in the total number of shares that will divide a fixed amount of earnings; often occurs when stock options are exercised or convertible bonds are converted
management discussion and analysis
preface to financial statements in which a company's management discusses the recent year (or quarter), providing a background on the company and any significant events that may have occurred.
capital expenditures
purchases of new property, plant, and equipment
market-to-book ratio (price-to-book [PB] ratio)
ratio of a firm's market (equity) capitalization to the book value of its stockholders' equity
off-balance transactions
transactions or arrangements that can have a material impact on a firm's future performance yet do not appear on the balance sheet
liquidation value
value that would be left if assets were sold and liabilities paid
depreciation
yearly deduction a firm makes from the value of its fixed assets (other than land) over time according to a depreciation schedule that depends on an asset's life span
annual report
yearly summary of business sent by U.S. public companies to their shareholders that accompanies or includes the financial statement
price-earnings ratio (P/E)
(market capitalization/net income) = (share price/ earnings per share) ratio of the market value of equity to the firm's earnings, or its share price to its earnings per share
retained earnings
(net income - dividends) difference between a firm's net income and the amount it spends on dividends
inventory days
(inventory/average daily cost of sales) firm's inventory in terms of the number of days' worth of cost of goods sold that the inventory represents
EBIT margin
(EBIT/Sales) ratio of EBIT to sales
enterprise value
(Market value of equity + Debt - Cash) total market value of a firm's equity and debt, less the value of its cash and marketable securities. It measures the value of the firm's underlying business.
asset turnover
(Sales/Total Assets) ratio of sales to assets, measure of how efficiently the firm is utilizing its assets to generate sales
gross profit
(Total Sales-Cost of Sales) third line of an income statement that represents the difference between a firm's sales revenues and its costs
accounts payable days
(accounts payable /average daily cost of sales) expression of a firm's accounts payable in terms of the number of days' worth of cost of goods sold that the accounts payable represents
accounts receivable days
(accounts receivable/average daily sales) expression of a firm's accounts receivable in terms of the number of days' worth of sales that the accounts receivable represents
quick ratio
(current assets excluding inventory/current liabilities) ratio of current assets other than inventory to current liabilities
net working capital
(current assets-current liabilities) difference between a firm's current assets and current liabilities that represents the capital available in the short-term to run the business
gross margin
(gross profit/sales) ratio of gross profit to revenues
return on equity (ROE)
(net income/book value of equity) ratio of a firm's net income to the book value of its equity
DuPont Identity
(net income/sales) X (sales/total assets) X (total assets/book value of equity) expression of the ROE in terms of the firm's profitability, asset efficiency, and leverage
net profit margin
(net income/sales) ratio of net income to revenues, it shows the fraction of each dollar in revenues that is available to equity holders after the firm pays interest and taxes
return on assets (ROA)
(net income/total assets) ratio of net income to the total book value of the firm's assets
operating margin
(operating income/sales) ratio of operating income to revenues, it reveals how much a company has earned from each dollar of sales before interest and taxes are deducted
equity multiplier
(total assets/book value of equity) measure of leverage that indicates the value of assets held per dollar of shareholder equity
leverage
(total debt/total equity) amount of debt held in a portfolio or issued by a firm
debt-equity ratio
(total debt/total equity) ratio of a firm's total amount of short and long-term debt (including current maturities) to the value of its equity, which may be calculated based on market or book values
Sarbanes-Oxley Act
A 2002 Congressional Act intended to improve the accuracy of information given to both boards and to shareholders
10-K
The annual form that U.S. companies use to file their financial statements with the U.S. Securities and Exchange Commission (SEC).
10-Q
The quarterly reporting form that U.S. companies use to file their financial statements with the U.S. Securities and Exchange Commission (SEC).
stockholders' equity
accounting measure of a firm's net worth that represents the difference between the firm's assets and its liabilities
statement of stockholders' equity
accounting statement that breaks down the stockholders' equity computed on the balance sheet into the amount that came from issuing new shares versus retained earnings
statement of cash flows
accounting statement that shows how a firm has used the cash it earned during a set period
book value
acquisition cost of an asset less its accumulated depreciation
accounts receivable
amounts owed to a firm by customers who have purchased goods or services on credit
accounts payable
amounts owed to creditors for products or services purchased with credit
interest coverage ratio
an assessment by lender's of a firm's leverage. Common ratios consider operating income, EBIT, or EBITDA as a multiple of the firm's interest expenses
long-term debt
any loan or debt obligation with a maturity of more than a year
deferred taxes
asset or liability that results from the difference between a firm's tax expenses as reported for accounting purposes, and the actual amount paid to the taxing authority
impairment charge
captures the change in value of the acquired assets; is not an actual cash expense
current assets
cash or assets that could be converted into cash within one year (marketable securities, accounts receivable, inventories, and pre-paid expenses such as rent and insurance
assets
cash, inventory, property, plant and equipment, and other investments a company has made
amortization
charge that captures the change in the value of acquired assets, is not an actual cash expense
GAAP
common set of rules and a standard format for public companies to use when they prepare their financial reports
EBITDA
computation of a firm's earnings before interest, taxes, depreciation, and amortization are deducted
current ratio
current assets/current liabilities
short-term debt
debt with a maturity of less than one-year
book value of equity
difference between the book value of a firm's assets and its liabilities; also called stockholders' equity, it represents the net worth of a firm from an accounting perspective
goodwill
difference between the price paid for a company and the book value assigned to its assets
net income or earnings
last or "bottom line" of a firm's income statement that is a measure of the firm's income over a given period of time
long-term liabilities
liabilities that extend beyond one year
current liabilities
liabilities that will be satisfied within one year (accounts payable, notes payable, short-term debt, current maturities of long-term debt, salary or taxes owed, and deferred or unearned revenue
balance sheet
list of a firm's assets and liabilities that provides a snapshot of the firm's financial position at a given point in time
income statement
list of firm's revenues and expenses over a period of time
statement of financial position
list of the firm's assets and liabilities that provides a snapshot of the firm's financial position at a given point in time
capital leases
long-term lease contracts that obligate the firm to make regular lease payments in exchange for use of an asset.
earnings per share
net income/shares outstanding firm's net income divided by the total number of shares outstanding
long-term assets
net property, plant, and equipment, as well as property not used in business operations, start-up costs in connection with a new business, investments in long-term securities, and property held for sale
auditor
neutral third party that corporations are required to hire that checks that annual financial statements to ensure they are prepared according to GAAP, and to verify that the information is reliable
intangible assets
non-physical assets, such as intellectual property, brand names, trademarks, and goodwill. _______ assets appear on the balance sheet as the difference between the price paid for an acquisition and the book value assigned to its tangible assets
marketable securities
short-term, low-risk investments that can be easily sold and converted to cash (such as money market investments, like government debt, that mature within a year).
statement of financial performance
statement showing the firm's revenues and expenses over a period of time
market capitalization
total market value of equity; equals the market price per share times the number of shares
operating income
total sales - cost of sale = gross profit - selling, general, and administrative expenses - research and development - depreciation and amortization = operating income firm's gross profit less its operating expenses