Finance Terms Flashcards
Asset
Def: something which holds value over time. An asset is something with economic value, which the holder of the assets will provide some future benefit and produce positive cash flow
Financial Assets
Def: a tangible liquid asset which derives value due to a contractual claim of some underlying physical asset. Financial assets don’t necessarily have physical worth. Since they don’t have value until converted to cash, the value can fluctuate.
Real Assets
Def: physical or tangible assets which have value because of their unique properties, land, commodities, buildings, machines are examples
Security
Def: a document which represents a claim to revenue earned by a real underlying asset; whether stock, bonds, or bank loans, securities are essentially one party (the investor) loaning money to a borrower (organization, government)
Capital Goods
Def: a type of real asset that is involved in producing finished goods (factories, land, machines)
Capital Gains Taxes
Def: taxes which are paid on shares of stock sold in a given tax year. If shares are sold within 1 ur. Of purchasing them, the tax rate you pay on them depends on you income tax rate. If you wait for more than a year you will end up paying much less.
Income Statement
Def: presents information on how much a company makes in revenue and how much it pays in expenses
Net income
Def: the money left over after expenses, depreciation, etc. This vale is an accounting concept which is not equivalent to cash on hand
Statement of cash flows
Def: shows investors how much cash is coming into a company and how much is going out
Depreciation/Amortization
Def: the accounting for wear and tear on real assets the company holds
Current Ratio
Def: current assets / current liabilities (current means payable or due within 12 months)
Quick Ratio
Def: cash + securities + accts. receivable / total current liabilities
Operating Margin
Def: EBIT / total sales; this tells us how many cents of each dollar of revenue is profit
ROA
Def: net income / total assets; this measures how much money you would earn as an investor who purchased an equivalent ratio of stocks to bonds that the firm holds; this is determined by the leverage ratio. For a firm that as a LR of 6.67 you would need to hold $5.67 of bonds for every $1 dollar of shares. Keep in mind that these are accounting measures and and include non-cash accounting concepts such as amortization.
The ROA is supposed to give one an idea of how well management is able to utilize their asset base to create income. Note: not all industries have the same average ROA. Capital-intensive business tend to have low ROA’s.
Method of Comparables
Def: a method of measuring the value of different securities based on some common value driver (some characteristic they both share which should affect both securities in the same way).
P/E ratio
Def: a ratio that allows investors to compare the value of stocks relative to their peers; those with higher P/E’s are “popular,” meaning that investors believe these stocks have good long term prospects; thus, justifying the higher price above earnings per share
Fundamental Models
Def: based on principles that any investment price is dependent on cash it will pay you; cash paid now is worth more than cash in paid in the future
