Financial Terms: #A-E

10-Q:

A quarterly unaudited financial report filed by firms that have securities listed with the SEC. The 10-Q is a less detailed, more frequently filed version of the 10-K.

10-K:

An annual report of a firm's operations filed with the SEC. Compared with the typical annual report sent to stockholders, a 10-K is much less physically attractive; however, it contains many more detailed operating and financial statistics, including information on legal proceedings and management compensation. A firm's stockholders may obtain a free copy of the 10-K by writing to the corporate treasurer.

Accounting:

Practice and body of knowledge concerned primarily with methods for recording transactions, keeping financial records, performing internal audits, reporting and analyzing financial information the management and advising on taxation matters.

Accrual Accounting:

A system of accounting that recognizes revenue and matches it with the expenses that generated that revenue. Unlike other systems of accounting, which recognize revenue and expenses in the order in which they are received, the accrual accounting convention ignores the function of time and only considers what expenses generate what revenues, even if payments have not actually been made. Companies with inventories are required to use the accrual method for tax purposes.

Acquisition:

The purchase of an asset such as a plant, a division, or even an entire company. For example, the Walt Disney Company made a major acquisition in 1996 when it purchased Capital Cities/ABC, Inc., in order to extend its reach in the entertainment industry.

Amortization:

1. The paying off of debt in regular installments over a period of time. 2. The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.

Assets:

In accounting, anything of value that a person or firm buys. Assets can be physical, such as real estate or stocks, a claim on debts, such as accounts receivable or liens, or a right, such as a patent. Of crucial importance to assets is their relative liquidity, or the ease with which they can be converted to cash. Liquid assets are often thought to be more useful than illiquid assets.

Balance Sheet:

The financial statement of a business or institution that lists the assets, debts, and owners' investment as of a specific date. Assets are ordered according to how soon they will be converted into cash, and debts according to how soon they must be paid. Because balance sheets do not list items at their current monetary value, they may greatly overstate or understate the real value of certain corporate assets and liabilities.

Blue-Chip Companies:

Used in the context of general equities. Large and creditworthy company. Company renowned for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends. Gilt-edged security.

Book Value Pershare:

Common stockholders' equity determined on a per-share basis. Book value per share is calculated by subtracting liabilities and the par value of any outstanding preferred stock from assets and dividing the remainder by the number of outstanding shares of stock.

Bottom Line:

(or net income) Income after all expenses and taxes have been deducted. Net income, the most frequently viewed figure in a firm's financial statements, is used in calculating various profitability and stock performance measures including price-earnings ratio, return on equity, earnings per share, and many others.

Capital Gains:

In real estate and investments, the difference between the purchase price and the sale price when the sale price is more. That is, when an investor buys a security or real estate and sells it for a higher price, he/she incurs a capital gain. Capital gains in the United States are taxed at a lower rate than other income if the asset is held for longer than one year. One may use capital losses to offset capital gains to minimize one's liability for capital gains taxes; indeed, some investors do so deliberately.

Capital Structure:

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities.

Capitalization Ratio:

Also called financial leverage ratios, these ratios compare debt to total capitalization and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be interpreted only in the context of the stability of industry and company earnings and cash flow.

Cash Cow:

A business or a segment of a business that produces significantly more cash than it consumes. As an example, a firm may sell a product that requires minimal advertising and promotional expenditures but continues to generate revenues year after year. Firms sometimes use cash cows to provide cash for financing other segments of their business.

Cash Conversion Cycles:

The time required for a business to turn purchases into cash receipts from customers. A short cycle allows a business to quickly acquire cash that can be used for additional purchases or debt repayment.

CFO Assistance:

Controller Assistance:

Convertible Preferred Shares:

Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date.

Costs of Goods Sold:

The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin.

Costs Benefits Analysis:

A process by which business decisions are analyzed. The benefits of a given situation or business-related action are summed and then the costs associated with taking that action are subtracted. Some consultants or analysts also build the model to put a dollar value on intangible items, such as the benefits and costs associated with living in a certain town. Most analysts will also factor opportunity cost into such equations.

Coverage Ratio:

A measure of a corporation's ability to meet a certain type of expense. In general, a high coverage ratio indicates a better ability to meet the expense in question.

Creditor:

An entity (person or institution) that extends credit by giving another entity permission to borrow money if it is paid back at a later date. Creditors can be classified as either "personal" or "real". Those people who loan money to friends or family are personal creditors. Real creditors (i.e. a bank or finance company) have legal contracts with the borrower granting the lender the right to claim any of the debtor's real assets (e.g. real estate or car) if he or she fails to pay back the loan.

Current Asset:

Accounts receivables, inventory, work in process, cash, etc., that are constantly flowing in and out of a firm in the normal course of its business, as cash is converted into goods and then back into cash. In accounting, any asset expected to last or be in use for less than one year is considered a current asset. Also called circulating asset.

Current Ratio:

A liquidity ratio that measures a company's ability to pay short-term obligations.

Debt:

An amount of money borrowed by one party from another. Many corporations/individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.

Debt Ratio:

The proportion of a firm's total assets that are being financed with borrowed funds. The debt ratio is calculated by dividing total long-term and short-term liabilities by total assets. Assets and liabilities are found on a company's balance sheet. For example, a firm with assets of $1,000,000 and $150,000 in short-term debts and $300,000 in long-term debts has a debt ratio of $450,000/$1,000,000 or 45%. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk.

Debt to Equity Ratio:

In risk analysis, a way to determine a company's leverage. The ratio is calculated by taking the company's long-term debt and dividing it by its common stock. Put graphically: Debt-to-equity ratio = Long-term debt / Common stock

Depreciation:

1. In accounting, an expense recorded to allocate a tangible asset's cost over its useful life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing reported earnings. 2. A decrease in the value of a particular currency relative to other currencies.

Diluted Earnings Per Share:

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

Dividend Payout Ratio:

In fundamental analysis, the opposite of the plowback ratio. That is, the dividend payout ratio is a company's dividends paid to shareholders expressed as a percentage of total earnings. A higher ratio indicates that a company pays more in dividends and thus reinvests less of its earnings into the company. Whether or not this is desirable depends on the rate of growth; investors tend to prefer a higher payout ratio in a slow-growing company and a lower one in a fast-growing company.

Dividend Yield:

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.

Dividends:

A share of a company's net profits distributed by the company to a class of its stockholders. The dividend is paid in a fixed amount for each share of stock held. Although most companies make quarterly payments in cash (checks), dividends also may be in the form of property, scrip, or stock. Unlike interest on a debt, dividends must be voted on by the company's directors before each payment.

Earnings Before Interest and Tax:

An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as "operating earnings", "operating profit" and "operating income", as you can re-arrange the formula to be calculated as follows: EBIT = Revenue - Operating Expenses

Earnings Per Share:

A company's profit divided by its number of common outstanding shares. If a company earning $2 million in one year had 2 million common shares of stock outstanding, its EPS would be $1 per share. In calculating EPS, the company often uses a weighted average of shares outstanding over the reporting term. The one-year (historical or trailing) EPS growth rate is calculated as the percentage change in earnings per share. The prospective EPS growth rate is calculated as the percentage change in this year's earnings and the consensus forecast earnings for next year.

Enterprise Value:

A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is calculated as market cap. plus debt, minority interest and preferred shares, minus total cash and cash equivalents.