E 120 - Chapter 2

Diluted EPS

A 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

A firm's earnings before interest and taxes are deducted.

Operating income

A firm's gross profits less its operating expenses.

Earnings per share (EPS)

A firm's net income divided by the total number of shares outstanding.

Liabilities

A firm's obligations to its creditors.

Inventories

A firm's raw materials as well as its work-in-progress and finished goods.

Stock options

A form of compensation a firm gives to its employees that gives them the right to buy a certain number of shares of stock by a specific date at a specific price.

Capital lease

A lease viewed as an acquisition for accounting purposes. The asset acquired is listed on the lessee's balance sheet, and the lessee incurs its depreciation expense for the asset. In addition, the present value of the future lease payments is listed as a liability, and the interest portion of the lease payments is deducted as an interest expense. Also known as a finance lease.

Income statement

A list of a firm's revenues and expenses over a period of time.

Balance sheet

A list of the firm's assets and liabilities that provides a snapshot of the firm's financial position at a given point in time.

Auditor

A neutral third party that corporations are required to hire that checks the annual financial statements to ensure they are prepared according to GAAP, and to verify that the information is reliable.

Management discussion and analysis (MD&A)

A preface to the financial statements in which a company's management discuss the recent year (or quarter), providing a background on the company and any significant events that may have occurred.

Current assets

Cash or assets that could be converted into cash within one year. This category includes marketable securities, accounts receivable, inventories, and pre-paid expenses such as rent and insurance.

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. See also balance sheet.

Debt-to-enterprise-value ratio

Measure of leverage that indicates the value of assets held per dollar of shareholder equity.

Turnover ratios

Measures of working capital computed by expressing annual revenues or costs as a multiple of the corresponding working capital account (accounts receivable, accounts payable, and inventory).

Capital expenditures

Purchase of new property, plant, and equipment.

Market-to-book ratio (P/B)

The ratio of a firm's market (equity) capitalization to the book value of its stockholders' equity. Also referred to as the price-to-book or P/B ratio.

Return on equity (ROE)

The ratio of a firm's net income to the book value of its equity. As a benchmark, ROE is most comparable to the firm's required return on equity.

Debt-to-capital ratio

The ratio of a firm's total amount of short- and long-term debt (including current maturities) to the sum of the values of its debt and the value of its equity, which may be calculated based on market or book values.

Debt-equity ratio

The 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.

Accounts payable turnover

The ratio of annual cost of sales to accounts payable. A measure of how quickly the firm is paying its suppliers.

Accounts receivable turnover

The ratio of annual sales to accounts receivable. A measure of how efficiently the firm is managing accounts receivable.

Cash ratio

The ratio of cash to current liabilities. It is the most stringent liquidity ratio.

Quick ratio

The ratio of current assets other than inventory to current liabilities.

Current ratio

The ratio of current assets to current liabilities.

Gross margin

The ratio of gross profit to revenues (sales).

Return on assets (ROA)

The ratio of net income plus interest expense to the total book value of the firm's assets. This measure of ROA includes the benefits of the interest tax shield associated with leverage. As a benchmark, ROA is most comparable to the firm's unlevered cost of capital.

Net profit margin

The 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.

Operating margin

The 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.

Asset turnover

The ratio of sales to assets, a measure of how efficiently the firm is utilizing its assets to generate sales.

Inventory turnover

The ratio of the annual cost of sales to inventory. A measure of how efficiently a firm is managing its inventory.

Price-earnings ratio (P/E)

The ratio of the market value of equity to the firm's earnings, or its share price to its earnings per share.

Gross profit

The third line of an income statement that represents the difference between a firm's sales and revenues and its costs.

Enterprise value

The 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.

Market capitalization

The total market value of equity; equals the market price per share times the number of shares.

Annual report

The yearly summary of business sent by U.S. public companies to their shareholders that accompanies or includes the financial statement.

Balance sheet identity

Total assets equals total liabilities plus stockholders' equity.

Net debt

Total debt outstanding minus any cash balances.

Off-balance sheet transactions

Transactions or arrangements that can have a material impact on a firm's future performance yet do not appear on the balance sheet.

Amortization

A charge the captures the change in value of acquired assets. Like depreciation, amortization is not an actual cash expense.

Generally Accepted Accounting Principles (GAAP)

A common set of rules and a standard format for public companies to use when they prepare their financial reports.

EBITDA

A computation of a firm's earnings before interest, taxes, depreciation, and amortization are deducated.

Depreciation expense

Amount deducted, for accounting purposes, from an asset's value to reflect wear and tear over a given period.

Accounts receivable

Amounts owed to a firm by customers who have purchased goods or services on credit.

Stockholders' equity

An accounting measure of a firm's net worth that represents the differences between the firm's assets and its liabilities.

Statement of stockholders' equity

An 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

An accounting statement that shows how a firm has used the cash it earned during a set period.

Interest coverage ratio

An assessment by lenders of a firm's leverage. Common ratios consider operating income, EBIT, or EBITDA as a multiple of the firm's interest expenses.

Deferred taxes

An 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.

Accounts payable days

An 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

An expression of a firm's accounts receivable in terms of the number of days' worth of sales that the accounts receivable represents.

Inventory days

An expression of a firm's inventory in terms of the number of days' worth or cost of goods sold that the inventory represents.

Dilution

An 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.

Long-term debt

Any loan or debt obligation with a maturity of more than a year.

Impairment charge

Captures the change in value of the acquired assets; is not an actual cash expense.

Convertible bonds

Corporate bonds with a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock.

Short-term debt

Debt with a maturity of less than one year.

Long-term liabilities

Liabilities that extend beyond one year.

DuPont Identity

Expression of the ROE in terms of the firm's profitability, asset efficiency, and leverage.

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.

Current liabilities

Liabilities that will be satisfied within one year. They include accounts payable, notes payable, short-term debt, current maturities of long-term debt, salary or taxes owed, and deferred or unearned revenue.

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.

Intangible assets

Non-physical assets, such as intellectual property, brand names, trademarks, and goodwill. Intangible 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.

EBIT margin

The ratio of EBIT to sales.

TEV (total enterprise value)

See enterprise value.

Total enterprise value (TEV)

See enterprise value.

Price-to-book (PB) ratio

See market-to-book ratio.

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. See also income statement.

Return on invested capital (ROIC)

The ratio of a firm's after-tax profit excluding any interest expense (or income) to the sum of the book value of its equity and net debt. As a benchmark, ROIC is most comparable to the firm's weighted average cost of capital.

Book value

The acquisition cost of an asset less its accumulated depreciation.

Leverage

The amount of debt held in a portfolio or issued by a firm. See also buying stocks on margin.

Accounts payable

The amounts owed to creditors for products or services purchased with credit.

10-K

The annual form that U.S. companies use to file their financial statements with the U.S. Securities and Exchange Commission (SEC).

Assets

The cash, inventory, property, plant and equipment, and other investments a company has made.

Accumulated depreciation

The cumulative depreciation of an asset up to a given point in its life; equal to last period's accumulated depreciation plus the current period's depreciation expense.

Net working capital

The difference between a firm's current assets and current liabilities that represents the capital available in the short-term to run the business.

Retained earnings

The difference between a firm's net income and the amount it spends on dividends.

Book value of equity

The 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

The difference between the price paid for a company and the book value assigned to its assets.

Net income or earnings

The 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.

Earnings

The net income.

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).