Accounts Payable - AP - Trade Credit
obligation created when inventory or supplies are purchased on credit from suppliers.
on balance sheet
as a current liability
Accounts Payable Turnover
short term liquidity measure used to quantify the rate at which a company pays offits suppliers
AP trunover = cost of goods sold/AP
a higher # means the co. is paying its suppliers faster
Accounts Receivable Days Sales Outstanding
= 365 days/ A/R Turnover
Accounts Receivables - AR
money owed by customers for goods or services that have been received but not yet paid for.
created when a co. sells its products/services on credit
on balance sheet
as a current asset
Accounts Receivable Turnover
used to quantify a firm's effectiveness in extending credit and collecting from its customers.
Measures how quickly a credit customers will pay.
=Credit Sales /Accounts Receivables
(total sales can replace credit sales)
Accrual Accounting
system where revenue is recognized when earned (products sold or services performed) and expenses are recognized when incurred to generate revenues during a specific period of time regardless of when cash transaction occur.
Accrued Expenses
Any expense incurred and shown on the income statement, but not paid for with cash.
listed as a current liability
Accrued Expenses
Any expense incurred and shown on the income statement, but not paid for with cash.
listed as a current liability
Accrued Liabilities
expense incurred but not yet paid.
either short or long-term liabilities
on a company's balance sheet
Accumulated Depreciation
aggregate depreciation of an asset up to a single point in its life. the depreciation expense of an asset during a period is added to the previous periods accumulated depreciation to get the current accumulated depreciation.
An asset's carrying value (net or book value) on the balance sheet is the difference between its purchase price and accumulated depreciation
Acid Test ratio or Quick Ratio
indicator of a firm's ability to cover short term liabilities with short-term assets without selling inventory.
other test of liquidity is current ratio
ATR - (Current Assets-Inventory)/Current Liabilities
Asset Turnover
amount of sales generated for every dollar of assets
AT = Sales/Totals Assets
one measure of how effectively using capacity
Assets
Owned or controlled business rsources that have future, quantifiable benefits.
people, brand, logo not included on a balance sheet
Balance Sheet
financial statement summarizing a company's assets, liabilities and owners' investment (owners' equity or net worth) at a specific point in time.
Gives investors idea of what is owned, owed and how much has been invested.
Assets = Liabilities +Shareholders' Equity
Balance Sheet Equation Format (BSE)
used to illustrate the recording of business transaction and the construction of financial statements
Assets = Liabilities + Shareholder Equity
Cash Flow
cash that moves in and out of a business.
inflows are a result of operating, investing or financing.
Outflows result from expenses, investments in assets, payments to creditors or owners
Cash Flow from Financing Activities
category in cash flow statement that accounts for funding
aciivites with the firm's capital providers
ex: issuing dividends, borrowing or repaying loans, sale or repurchase of equity
Cash Flow From Investing Activities
item on cash fow statement that reports the aggregate change in a company's cash position resulting from investments or the sale of fixed assets, other companies' shares, or intangible assets.
Cash Flow From Operating Activities
Accounting item indicating the cash a company gets from its ongoing, regular business activities.
happiness is a positive cash flow refers to operating cash flows
Cash Flow Statement
financial statement that summarizes information about the cash inflows and outflows for a specific period of time.
Cash flows are categorized as
operating, investing, or financing
Cash Operating Cycle
measures how many days a company is "out cash" from the time it pays for its inventory until it collects cash from its customers.
= Inventory Days on Hand + A/R Days Outstanding - A/P Days
negative cash operating cycle means collect from their customers before they pay their supplier for the product - this is rare
Common Size Analysis
financial statement that displays all items as %'s of a common base figure. These statements allow for easy comparison between companies or across time periods for a given company.
the income statement base figure is Total Revenues
the balance sheet base figure is Total AssetS
Common Size Balance Sheet
lists each line item as a % of total assets
allows for easy comparison between companies or accross time periods for a given company
Common Size Income Statement
each line item expressed as a percentage of total revenue (sales)
allows for easy comparison between companies or across time periods for a given company
Common Stock (Equity or Shares)
a security that represents ownership in a corporation.
Holders of common stock exercise control by electing a board of directors and voting on corporate policy.
In the event of liquidation, common shareholders have residual rights to a company's assets, i.e., they are paid only after bondholders, perferred shareholders and other debtholders have been paid in full
Comparbles (Multiples or Relative) Analysis
method which estimates value based on metrics of similar businesses. Comparables analysis uses the assumption companies with similar risks and business models with be values comparably by investors. common metrics for comparison include revenue, EBITDA, and Net Income. Also referred to as comparable Company Analysis (CCA)
Convertable Bond
a bond that can be converted into a specified number of common shares, usually at the discretion of the bondholder
Cost of Goods Sold or Cost of Sales
direct costs attributable to the production or purchase of goods sold by a company. It excludes indirect expenses such as distribution costs and sales force costs
for a retailer - COGS is the wholesale price of the goods purchased for resale
a service company has no COGS but instead uses Cost of services provided which is primarily salaries
Current Assets
direct costs attributable to the production or purchase of goods sold by a company. It excludes indirect expenses such as distribution costs and sales force costs
for a retailer - COGS is the wholesale price of the goods purchased for resale
a service company has no COGS but instead uses Cost of services provided which is primarily salaries
Current Liabilities
companys debts or obligations due or payable within one year.
Current liabilities appear on the balance sheet
may include short-term debt, accounts payable, accrued liabilities, wages payable, taxes payable and other short-term debts
Current Ratio
liquidity ratio that measures a company's ability to meet short-term obligations.
Current Ratio = Current Assets/ Current Liabilities
higher current ratio represents more liquidity
Debt Service Coverage
ratio is a measure of a company's ability to cover the principle and interest payments required by its current debt
EBIT/(interest + principal payments)
or
EBITDA/)interest + principal payments)
Debt to Equity Ratio
* measure of a company's financial leverage i.e. its use of debt to finance the business.
* also called total liabilities/stockholders' equity and
total interest-bearing debt/stockholders' equity
*ratio indicates what proportions of equity and debt are being used to finance the company's assets.
*higher number means more leverage
Depreciation
method of allocating (expensing) the cost of a tangible fixed asset over its useful life
Discounted Cash flow Analysis
valuation method based on forecasted cash flows and their risk. CF analysis discounts estimated future cash flows using a discount rate that reflects both the riskiness of the cash flows and the choice of debt and equity (most often the weighted average cost of capital). The result is an estimate of the present value of the company or project which generates the cash flows.
DuPont Formula
performance measurement which breaks ROE into three components
1. Profitability (net profit margin)
2. Asset utilization (total asset turnover)
3. Financial leverage (assets/equity)
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Financial Leverage (Assets/Equity)
tells us much more about performance than just looking at ROE alone
Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA)
indicator of a company's operating performance.
frequently used as an approximation of operating cash flows and is popular as a comparables valuation metric
Earnings Before Tax (EBT) or Pre Tax Income
indicator of a company's operating performance calculated
as
EBT = Revenue - Expenses (excluding tax)
EBITDA Margin
measurement of a company's operating profitability
EBITDA Margin = EBITDA/Revenues
Because EBITDA excludes depreciation and amortization, the EBITDA margin can provide an investor with a cleaner view of a company's core profitability
Enterprise Value (EV)
measure of a company's total market value, including debt and equity.
EV = market capitalization (total stock market value) plus debt, minority interest and preferred shares, minus "excess" cash
Financial Leverage
1. the use of various financial instruments e.g., liabilities, to increase the potential return of an investment tot he owners
2. The amount of debt used to finance a firm's assets.
A firm with significantly more debt than equity is considered to be highly leveraged.
Financial Statements
records that outline the financial activities of a business, an individual or any other entity. Financial statements for businesses usually include: income statements, balance sheet, statement of casah flows, as well as footnotes explaining the details of these statements
Fixed Assets
long term tangible asset used in the generation of revenue
factories, vehicles, machinery, etc.
Fixed Assets Turnover
measures a company's ability to generate sales from its fixed-assets. A high fixed-asset turnover ratio shows that the company has been more effetive in using the investment in fixed assets to generate revenues.
The ratio of sales to fixed assets.
FAT = Net Sales/Net Property, Plant & Equipment
