Financial Statement Definition

Question 1

The shares available with the shareholders of the company at the given point of time after excluding the shares which are bought back by the company. Outstanding shares differ from Authorised shares (issued shares) as authorized shares are the number of shares that a corporation is legally allowed to issue. In contrast, outstanding stocks are the ones already issued in the market.

Two Types: Basic Share Outstanding and Fully Diluted Share Outstanding

Answer 1

Shares Outstanding

Question 2

Fully diluted number takes into account basic shares plus things such as warrants, capital notes, and convertible stock.

Answer 2

Fully Diluted Share Outstanding

Question 3

A measurement of business value based on share price and number of shares outstanding

Answer 3

Market Capitalization

Question 4

A valuation metric alternative to traditional market capitalization that reflects the market value of an entire business. Like market cap, EV is a measure of what the market believes a company is worth.

EV is considered the theoretical purchase (“takeover”) price of a business because a purchaser would take on the company’s debt, while pocketing the company’s cash and gaining a right to all of the company’s future earnings.

Answer 4

Enterprise Value

Question 5

Gross profit is the difference between sales and the cost of goods sold. Revenues (aka Sales) less Cost of Goods Sold (COGS) is a company’s gross profit. For many companies, cost of goods sold is a substantial portion of expenses that a company will have.

Answer 5

Gross Profit

Question 6

Expenses that are incurred as a result of normal business activities.

Answer 6

Operating Expense

Question 7

Profit earned from a company’s core business operations. It is gross profit less all operating expenses.

Answer 7

Operating Income or Income Before Interest & Taxes (EBIT)

Question 8

EBT is the money retained internally by a company before deducting tax expenses. It is an accounting measure of a company’s operating and non-operating profits.

Answer 8

Income Before Income Tax (EBT)

Question 9

Net income is what remains of a company’s revenue after subtracting all costs. It is also referred to as net profit, earnings, or the bottom line. Net Income that is not paid out in dividends is added to retained earnings

Answer 9

Net Income

Question 10

The portion of consolidated profit or loss for the period, net of income taxes, which is attributable to the parent.

Answer 10

Net Income Attributable to Equity Holders of the Parent Company

Question 11

Earnings per share (EPS) the amount of income that “belongs” to each share of common stock.

The average number of shares outstanding (the denominator of the EPS formula) is usually calculated by averaging the number of shares at the beginning of the earning period and the number of shares at the end of the period.

Answer 11

Basic EPS

Question 12

Earnings per share (EPS) the amount of income that “belongs” to each share of all shareholder.

Answer 12

Diluted EPS

Question 13

Revenues from interest-bearing assets. A typical example would be interest earned by a bank on personal or commercial loans.

Answer 13

Interest Income

Question 14

When companies borrow money to expand or maintain their business operations, they must pay interest on the money that they borrow. The interest expense is the annual accrued amount of interest that the company paid (or sometimes will have to pay) to its creditors.

A higher interest expense means that the company is paying more to its debtors. In general, a company’s capital structure with a heavier debt focus will have higher interest expenses.

Answer 14

Interest Expense

Question 15

Depreciation occurs when an item experiences a loss of value. In accounting, depreciation is a noncash expense that reduces the value of an asset. Depreciation can occur as a result of age, general use, or obsolescence.

Answer 15

Depreciation

Question 16

An item on a company’s cash flow statement. Lists aggregate change in cash position resulting from operations. Includes the company’s cash inflows and outflows from the company’s core business operations.

Cash from Operations can be thought of as “how much did the firm generate in the day to day operations of the firm?”

Answer 16

Cashflow from Operations

Question 17

An item on a company’s cash flow statement. Lists aggregate change in cash position resulting from investing activities. Includes the company’s cash inflows and outflows from investments in financial markets and the sale of capital assets.

Answer 17

Cashflow from Investing

Question 18

An item on a company’s cash flow statement. Lists aggregate change in cash position resulting from financing activities. Includes the company’s cash inflows and outflows from issuing cash dividends, issuing and selling stock, and adding or changing loans.

Answer 18

Cashflow from Financing

Question 19

Cash and equivalents is cash or cash equivalents that a company possesses at any given time. Examples of cash equivalents are: money market accounts, treasury bills, and short term government bonds. Cash and cash equivalents are a business’ most liquid assets. Cash on hand results from a positive cash flow statement.

Answer 19

Net Increase (Decrease) in Cash & Cash Equivalents

Question 20

Account used to record sales made “on account”, meaning that the company has made a sale but has not collected payment. When company collects cash as payment, the corresponding account receivable is decreased.

Answer 20

Accounts Receivable

Question 21

Inventories are raw materials, works in progress and finished goods that have not yet been sold. They are considered liquid assets because they can usually be easily converted to cash.

Answer 21

Inventories

Question 22

Total Current assets is the sum of all current assets. These are cash, cash equivalents, prepaid expenses, inventory, or any other assets expected to be converted into cash within the next year.

Answer 22

Total Current Assets

Question 23

The sum of all current and long-term assets held by a company. An asset is any item with economic value that is held by a company.

Answer 23

Total Assets

Question 24

Accounting terminology for money that a company owes to vendors for services or products that it purchased on credit. Accounts payable appear on the balance sheet as a current liability.

Answer 24

Accounts Payable

Question 25

Liabilities are obligations of a company arising from past transactions or events which are expected to reduce assets when they are settled.

Answer 25

Total Liabilities

Question 26

In accounting, this is approximated using the sum of the company’s common stock and preferred stock at the prices at which they were initially sold to the public during an offering.

Answer 26

Capital Stock

Question 27

Securities that represent equity ownership in a firm. Common stockholders are entitled to voting rights and a portion of the company’s success (through capital appreciation or dividends).

Answer 27

Common Stock

Question 28

Additional Paid-in Capital is the amount received from equity investors that is greater than the stock’s par value. Par value is usually set low so investors will record most of the amounts as additional paid-in-capital

Answer 28

Additional Paid-in Capital

Question 29

Equity securities that have priority over common stock. Preferred stockholders have a higher claim on assets and earnings and generally receive dividends before common stockholders.

Answer 29

Preferred Stock

Question 30

The net income that remains after paying dividends. It is reported on the balance sheet as the cumulative sum of each year’s retained earnings over the life of the business. Retained earnings can be used to pay debt and future dividends, or can be reinvested into business activities.

Answer 30

Retained Earnings

Question 31

Treasury stock, also known as treasury shares or reacquired stock, refers to previously outstanding stock that is bought back from stockholders by the issuing company. The result is that the total number of outstanding shares on the open market decreases.

Answer 31

Treasury Stock

Question 32

Shares outstanding refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock.”

Answer 32

Shares Outstanding

Question 33

A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. … Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently.

Answer 33

Non-controlling Interest or Minority Interest

Question 34

The difference between current assets and current liabilities. Illustrates the amount of liquid assets that a company has to build its business.

Working capital are funds used for operational liquidity. A firm often has day to day liquidity needs that require short term liquidity. Large quantities of working capital indicate potential to expand quickly.

The ideal position is to have more current assets than current liabilities and thus have a positive net working capital balance

Answer 34

Net Working Capital (broad)

Question 35

Operational capital of the company is referred to as its working capital. Such capital enables the organisation run its operations smoothly, forming the life-blood of the business.

Net Working Capital (NWC) is the difference between the debts owed to a company and the debts owed by it during the course of its operation. The debts owed to a company or the current assets include debtors, inventory, cash and prepaid expenses, and the debts owed by a company or current liabilities include creditors and outstanding expenses.

• A positive net working capital signifies that the company’s financial obligations are met and that it can invest in other operational requirements
• A negative networking capital implies that the company requires debt to meet its current liabilities

Answer 35

Net Working Capital (for FCF calculation)

Question 36

Capex (short for capital expenditures) are incurred when a business spends money to purchase fixed assets or to add value to an existing fixed asset. In accounting, a capital expenditures are added to an asset account, thus increasing the value of the asset.

Examples of capital expenditures include the purchase of a new manufacturing plant, investment in server farms for tech companies, or other purchases of assets expected to help the company earn profits in the future.

Answer 36

Capital Expenditure

Question 37

FCF represents the amount of cash generated by a business, after accounting for reinvestment in non-current capital assets by the company.

The cash flow available to all the company’s suppliers of capital after all operating expenses have been paid and necessary investment in working capital and fixed capital have been made.

Answer 37

Free Cash Flow to Firm (FCFF)

Question 38

A non-cash charge is a write-down or accounting expense that does not involve a cash payment. They can represent meaningful changes to a company’s financial standing, weighing on earnings without affecting short-term capital in any way. Depreciation, amortization, depletion, stock-based compensation, and asset impairments are common non-cash charges that reduce earnings but not cash flows.

Answer 38

Non-Cash Expense

Question 39

Net Operating Profit After Taxes are a company’s operating earnings after being adjusted for a tax rate. In simpler terms, it is a measure of profit if a company did not receive tax benefits from holding debt. For instance, if two companies were being compared, one with a significant amount of debt (and thus interest payments) and another company that no debt, NOPAT would be a useful to compare its after-tax cash flows.

Hence, NOPAT is equivalent to the net profit for the companies having no debt and thus no interest expense.

Answer 39

NOPAT or Net Operating Profit After Tax

Question 40

A gross profit margin is the difference between sales and the cost of goods sold divided by revenue. This represents the percentage of each dollar of a company’s revenue available after accounting for cost of goods sold.

Answer 40

Gross Profit Margin

Question 41

Operating margin measures the proportion of revenue left over after paying the variable costs of production. It is an important indicator of efficiency and profitability.

Operating margins can be used to demonstrate management effectiveness in maintaining costs or increasing revenues.

Answer 41

Operating Margin

Question 42

Pretax Margin is the income of the company before taxes but after other expenses divided by revenue. This allows for better company comparisons when there is a difference in the amount of taxes that they pay.

Answer 42

Pretax Margin

Question 43

The net profit margin, or simply net margin, measures how much net income or profit is generated as a percentage of revenue. It is the ratio of net profits to revenues for a company or business segment. Net profit margin is typically expressed as a percentage but can also be represented in decimal form. The net profit margin illustrates how much of each dollar in revenue collected by a company translates into profit.

Answer 43

Net Profit Margin

Question 44

Free cash flow margin simply takes the FCF and compares it to a company’s sales (or revenue).

This is helpful in comparing the free cash situation of different companies on an apples-to-apples basis. By tying FCF to a percentage of sales, we can understand the margins profile and get context on how efficient a company is on a FCF basis.

Answer 44

Free Cash Flow Margin

Question 45

Return on Assets (ROA) shows the rate of return (after tax) being earned on all of the firm’s assets regardless of financing structure (debt vs. equity). It is a measure of how efficiently the company is using all stakeholders’ assets to earn returns.

Because ROA can differ significantly across firms, ROA is often used to compare a company over time or against companies that have similar financing structures.

Answer 45

Return on Asset

Question 46

Return on total assets (ROTA) is a ratio that measures a company’s earnings before interest and taxes (EBIT) relative to its total net assets.

The ratio is considered to be an indicator of how effectively a company is using its assets to generate earnings. EBIT is used instead of net profit to keep the metric focused on operating earnings without the influence of tax or financing differences when compared to similar companies.

Answer 46

Return on Total Asset

Question 47

Return on equity (ROE) measures the rate of return on the money invested by common stock owners and retained by the company thanks to previous profitable years. It demonstrates a company’s ability to generate profits from shareholders’ equity (also known as net assets or assets minus liabilities).

ROE shows how well a company uses investment funds to generate growth. Return on equity is useful for comparing the profitability of companies within a sector or industry.

Answer 47

Return on Equity (Generic)

Question 48

Return on equity (ROE) measures the rate of return on the money invested by common stock owners and retained by the company thanks to previous profitable years. It demonstrates a company’s ability to generate profits from shareholders’ equity (also known as net assets or assets minus liabilities).

ROE shows how well a company uses investment funds to generate growth. Return on equity is useful for comparing the profitability of companies within a sector or industry.

Answer 48

Return on Equity (Du Pont)

Question 49

The asset turnover ratio, also known as the total asset turnover ratio, measures the efficiency with which a company uses its assets to produce sales. The asset turnover ratio formula is equal to net sales divided by the total or average assets of a company. A company with a high asset turnover ratio operates more efficiently as compared to competitors with a lower ratio.

Answer 49

Asset Turnover

Question 50

The Equity multiplier
compares the total assets of the company with the shareholders’ equity of the firm. It is a financial leverage ratio which helps to find out how much assets of the firm is financed by the shareholders’ equity.

Answer 50

Equity Multiplier

Question 51

The term “return on capital employed” refers to the profitability ratio that is used by analysts to check how effectively an entity is able to use the capital employed in the business to generate profits during a certain period of time. In other words, the return on capital employed is a measure of how many dollars can be generated from each dollar of the capital employed. The capital employed includes both shareholders equity and debt liabilities.

Answer 51

Return on Capital Employed

Question 52

is a return on investment ratio that quantifies how much return a company has generated through the use of its capital structure. This ratio is different from return on common equity (ROCE), as the former quantifies the return a company has made on its common equity investment. The ROCE figure can be misleading, as it does not take into account a company’s use of debt. A company that employs a large amount of debt in its capital structure will have a high ROCE.

Answer 52

Return on Total Capital

Question 53

It’s sum of interest bearing liabilities and equity

Answer 53

Total Capital

Question 54

The dividend yield is the sum of a company’s annual dividends per share, divided by the current price per share. By investing in companies with stable and high dividend yields, investors can secure a relatively stable cash flow. However, dividend yields can be high when a company is facing financial trouble, and the company may cut the dividend in the near future.

Answer 54

Dividend Yield

Question 55

Earnings yield is earnings per share from the previous four quarters divided by the share price. It is the reciprocal of the P/E ratio. The earnings yield is quoted as a percentage, which illustrates the percentage of each dollar invested that was earned by the company during the past twelve months.

The earnings yield can be used to compare the earnings of a stock, sector or the whole market against bond yields. Generally, the earnings yields of equities are higher than the yield of risk-free treasury bonds

Answer 55

Earning’s Yield

Question 56

The receivable turnover ratio quantifies a company’s ability to collect liabilities/debts. It helps investors gauge the efficiency of a company’s collection and credit policies.

A high ratio value indicates an efficient and effective credit policy, and a low ratio indicates a debt collection problem.

The way to read the receivables turnover ratio is as follows. Assume that a company has a receivables turnover ratio of 10. We say that “the company turns over its receivables 10 times during the year.” In other words, on average the company collects its outstanding receivables 10 times per year.

Answer 56

Receivables Turnover

Question 57

The inventory turnover ratio measures the speed at which inventory moves through a company. In general, a high inventory turnover ratio indicates efficiency.

Inventory turnover can be thought of like this : How many times have we changed inventory during the course of the year? An inventory turnover of nine means that the company has gone through and sold all its inventory nine times during the period.

High inventory turnover means the company has likely 1) Sold a lot of product and 2) Been efficient with selling product. High inventory turnovers are generally positive signs of management.

Answer 57

Inventory Turnover

Question 58

Fixed asset turnover are the amount of company revenues over its fixed assets. A fixed asset turnover of nine means that a company’s fixed assets are generating nine times more revenue than the value of the fixed assets.

If Microsoft has a fixed asset turnover of nine, and the value of its fixed assets were eight billion, we would assume Microsoft’s revenues to be 72 billion dollars.

Higher fixed asset turnovers illustrate a company’s ability to generate more sales based off of fixed assets. While this ratio is often used in evaluating capital intensive companies, for companies that produce service-related goods, this ratio holds less significance.

Answer 58

Fixed Asset Turnover

Question 59

Working Capital Turnover is a turnover ratio to review revenues over working capital. A working capital of five would mean that a company is generating five times its revenue per dollar of working capital.

This ratio answers the question - How much of revenues are generated per dollar of working capital? High turnover ratios can mean that the firm is using working capital effectively, whereas low turnover ratios could indicate that the firm is not using working capital as effectively.

Answer 59

Working Capital Turnover

Question 60

The current ratio measures a company’s ability to pay short-term debts and other current liabilities (financial obligations lasting less than one year) by comparing current assets to current liabilities. The ratio illustrates a company’s ability to remain solvent.

A current ratio of one means that book value of current assets is exactly the same as book value of current liabilities. In general, investors look for a company with a current ratio of 2:1, meaning current assets twice as large as current liabilities. A current ratio less than one indicates the company might have problems meeting short-term financial obligations. If the ratio is too high, the company may not be efficiently using its current assets or short term financing facilities.

Answer 60

Current Ratio

Question 61

The Quick (aka acid) Ratio is used as a solvency metric to determine a firm’s ability to pay down current liabilities with its cash, short term equivalents, and accounts receivables. This ratio was nicknamed quick to describe the “quick assets” needed to pay down any current liabilities.

Firms with high quick ratios often indicate the firm is solvent and able to pay current liabilities quickly.
Firms with low quick ratios may mean that the firm is potentially having solvency issues.

Other similar solvency ratios include :
Cash Ratio - Measures the amount of cash that can be used to pay liabilities (stricter)
Current Ratio - Measures the amount of current assets over current liabilities (more lenient).

Answer 61

Quick Ratio

Question 62

Cash Ratio is the amount of cash and short term equivalents a company has over current liabilities. The cash ratio is an effective and quick way to determine if a company could have potential short-term liquidity issues. If the cash ratio is under(over) 1, this implies that the company won’t(will) have enough cash on hand to pay off current liabilities.

Answer 62

Cash Ratio

Question 63

A ratio measuring the amount of income generated and available to pay down debt before covering interest, taxes, depreciation, and amortization expenses. Debt/EBITDA measures a company’s ability to pay off its incurred debt. A high ratio result could indicate a company has a too-heavy debt load.

Answer 63

Debt to EBITDA Ratio

Question 64

A key metric to determine the credit worthiness of a business. Essentially, the number represents how many times during the last 12 months’ EBIT or Annual (earnings before interest and taxes) would have covered the past 12 months or annual interest expenses.

This ratio works well when looking at manufacturing businesses, utilities, and certain service businesses. It should be used with care when analyzing financial service companies because their business models borrow differently from traditional manufacturing and service businesses.

Answer 64

Interest Coverage Ratio

Question 65

The cash flow-to-debt ratio is the ratio of a company’s cash flow from operations to its total debt. This ratio is a type of coverage ratio and can be used to determine how long it would take a company to repay its debt if it devoted all of its cash flow to debt repayment. Cash flow is used rather than earnings because cash flow provides a better estimate of a company’s ability to pay its obligations.

Answer 65

Cashflow to Debt Ratio

Question 66

Also known as dividend cover, is a financial metric that measures the number of times that a company can pay dividends to its shareholders. The dividend coverage ratio is the ratio of the company’s net income divided by the dividend paid to shareholders.

Answer 66

Cash Dividend Coverage Ratio

Question 67

Leverage ratio indicating the relative proportion of shareholders’ equity and debt used to finance a company’s assets. A low debt to equity ratio indicates lower risk, because debt holders have less claims on the company’s assets. A debt to equity ratio of 5 means that debt holders have a 5 times more claim on assets than equity holders.

Answer 67

Debt to Equity Ratio

Question 68

Total-debt-to-total-assets is a leverage ratio that defines the total amount of debt relative to assets owned by a company. Using this metric, analysts can compare one company’s leverage with that of other companies in the same industry. This information can reflect how financially stable a company is. The higher the ratio, the higher the degree of leverage (DoL) and, consequently, the higher the risk of investing in that company.

Answer 68

Total Debt to Total Asset Ratio

Question 69

The price to earnings ratio (PE Ratio) is the measure of the share price relative to the annual net income earned by the firm per share. PE ratio shows current investor demand for a company share. A high PE ratio generally indicates increased demand because investors anticipate earnings growth in the future. The PE ratio has units of years, which can be interpreted as the number of years of earnings to pay back purchase price.

PE ratio is often referred to as the “multiple” because it demonstrates how much an investor is willing to pay for one dollar of earnings. PE Ratios are sometimes calculated using estimations of next year’s earnings per share in the denominator. When this happens, it is usually noted.

Answer 69

Price to Earnings Ratio

Question 70

The PEG ratio (Price/Earnings To Growth ratio) illustrates the relationship between stock price, earning per share, and the company’s growth rate. The PEG ratio consists of the PE ratio divided by the company’s growth rate. Using just the PE ratio makes high-growth companies look overvalued relative to others. By dividing the PE ratio by the earnings growth rate, the PEG ratio allows investors to accurately compare companies with different PE ratios and growth rates.

A company with a PEG ratio below 1 is considered undervalued. A company with a PEG ratio around 1 is considered fairly valued. A company with a PEG ratio greater than 1 is considered overvalued.

Answer 70

PEG Ratio

Question 71

The dividend yield is the sum of a company’s annual dividends per share, divided by the current price per share. By investing in companies with stable and high dividend yields, investors can secure a relatively stable cash flow. However, dividend yields can be high when a company is facing financial trouble, and the company may cut the dividend in the near future.

Answer 71

Dividend Yield

Question 72

The payout ratio is the percentage of net income that a company pays out as dividends to common shareholders.

A payout ratio of 10% means for every dollar in Net Income, 10% is being paid out as a dividend. For instance, if Microsoft earns $50 million in net income and the payout ratio is 25%, Microsoft will offer $12.5 million to all its common shareholders.

Companies with low payout ratios:

• High growth companies often have low payout ratios; they use the money to invest in other projects.
• Companies that do not have positive cash flow or positive earnings.

Companies with high payout ratios:

• Value-orientated companies
• Where the board and management may own stock and pay dividends to themselves (cynical view)
• Where management is favorable to shareholders
• Companies that have a consistent dividend stock policy
• Companies that do not have any investment projects that are worth pursuing.

Answer 72

Payout Ratio

Question 73

The EV/EBITDA ratio is a popular metric used as a valuation tool to compare the value of a company, debt included, to the company’s cash earnings less non-cash expenses. It’s ideal for analysts and investors looking to compare companies within the same industry.

The enterprise-value-to-EBITDA ratio is calculated by dividing EV by EBITDA or earnings before interest, taxes, depreciation, and amortization. Typically, EV/EBITDA values below 10 are seen as healthy. However, the comparison of relative values among companies within the same industry is the best way for investors to determine companies with the healthiest EV/EBITDA within a specific sector.

Answer 73

EV to EBITDA Ratio