Financial Statement Terms Flashcards
Revenue
The money received when a company/business delivers a good/service.
Present Value of Money
It is the current worth of a future cash flow given the current discount rate or the rate of return
Money today is worth more than money tomorrow
Net Present Value
Present Value of CF - Initial Investments
inflows - outflows
Intrinsic Value
Present value of future cash flows
Weighted Average Cost of Capital (WACC)
the “weighted opportunity cost” of investing, it has a number of discount rates for the different types of possible investment that could have been made elsewhere
Internal Rate of Return
Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. This represents the actual returns and it means that you break even on an investment
Costs of Goods Sold
“per unit” expenses of selling products/ services
Gross Profit
how much additional potential profit you could potentiall make on each sale (before other expenses)
Revenue - COGS = Gross Profit
Operating Expenses
Any expense you can’t link directly to individual units sold, so sales and marketing, salaries + wages paid, etc.
Operating Income (EBIT)
Gross Profit - Operating Expenses
“how much did we earn before non-core activities and interested earned/paid or taxes paid” = pre-tax income,
Operating Margin
Operating Income (EBIT) / Revenue - to see how much you actually earned and how much you end up spending from your revenue
Net Income (“Bottom Line”)
How much did the company really generate after paying taxes and expenses
Can serve as a close proxy to cash generated at the end
Accounts Receivable
Money/cash you have not yet received even after having delivered on the goods/services - waiting to get paid for providing something
Serves a line item under the assets sections on the balance sheet
Prepaid Expenses
Paying in advance for an expense that then has the cost spread out over a number of months even though the whole expense was paid up front
nothing gets recorded in the IS, but adjustments in CFS reflect prepaid expenses
considered as an asset because it’s already paid for and taxable income will fall b/c you spent that money
Accounts Payable
The delayed payment for goods/services
If AP goes UP, cash balance goes “UP” - you just haven’t paid the whole expense yet in cash, but you still add the AP to the net change in cash
Accrued Expenses
Like an accounts payable, but typically apply to expenses that are ongoing (weekly, monthly)
Deferred Revenue
When you get cash but can’t mark on IS until you deliver the products/services - has own line item of “deferred revenue” that gets tracked over time
As you deliver the service/good, DR falls and net income goes up to reflect that you have actually delivered
Inventory
Items that you want to sell as products/services as a part of your business model
Typically pay upfront from the seller, but since you haven’t sold any product after getting the inventory, can’t record on IS
(inventory then gets marked and attributed as an asset b/c contributes to COGS and reduces pre-tax income so you get taxed less in the future)
PP&E, CapEx
Tangible, physical assets that you purchase to last you years in your business model
Counts as an asset because helps save on income tax - the depreciation that occurs lowers the taxable income as you write into IS however, doesn’t reflect cash expense b/c paid for whole expense at once
Depreciation shows up on IS before EBIT, reducing overall net income
Debt
A liability when you borrow money as you run low on cash
Interest Expense
The interest amount paid on the debt - is tax-deductible on IS, overall lowers the net income and cash generated because have to repay debt over time
Listed as liability b/c causes cash to fall in the future
Principal Repayment
Repaying the original amount, not on IS but is recorded in the CFS in the “financing activity” section
Gains and Losses in Selling Assets
Losses - recorded in the iS, but not the principal amount investment, lowers pre-tax income and get a tax break
Gains - if you have gain, you will get taxed when recording on the IS on how much you’ve earned from the sale of the asset
Deferred Taxes
Accounting methods used to help reduce tax burdens through the writing of how PP&E will depreciate in the future to get tax breaks
Deferred Tax Liability
When you’re paying less on the tax schedule vs the book schedule ie, through the accounting tricks
Eventually, will have to end up paying the same amount, but b/c of the TV of money, paying less in the present is worth more than paying in the future
Dividends
Cash not used on the balance sheet that can be used to pay out to investors, typically done by a stable, mature company
Share Repurchases
The buying back of shares/stocks, typically done in public companies to regain more equity
Typically will have to pay a premium to even incentivize that sale process and gain back shares
Stock-Based Compensation
Stock issued to employees as a form of payment.
Non-cash expense, tax0deductible on the IS because payments to employees are internal expenses (like wage), goes before EBIT reducing operating income, boosts cash generated b/c add into CFS as a non-cash charge
Net income down, cash generated up
Write Off of Sellers’ Equity
How much of the original old company had prior to the M&A activity
Goodwill
Premium paid above company’s equity when acquiring it - not readily ID on a BS typically marked as future synergies
Impairments and Write-Downs
The re-evaluation of the value of acquired company to see much it’s actually worth, reflect in goodwill going down as well if PP&E are not useful
Assets
Items that will result (directly or indirectly) in additional cash generated int he future
Includes - accounts receivable, inventory, prepaid expenses, cash , investments, PP&E, goodwill
Liability
items that will result in less cash in the future
Includes - accounts payable, accrued expenses, deferred revenue, debt, deferred tax liability
Common Stock + Additional Paid in Capital (APIC)
Stock issued to others to fund the business, typically issued to outside investors or even to employees
APIC = (Issue Price - Par Value) x Basic Shares Outstanding
Retained Earnings
Money that gets saved up and not used that can be invested back into the company
Treasury Stock
Any shares/stocks repurchased that the company has undertaken
Accumulated Other Comprehensive Income (AOCI)
To capture the miscellaneous items in the financial statements - FX Rates, unrealized gains and losses, hedging gains and losses, actuarial adjustments to pension plans, etc
Working Capital
Assets - Liabilities
Typically want to measure the change in WC when doing valuation or financial modeling - checks to see whether assets or liabilities are increasing at a faster rate
If neg - assets + more than liabilities and this means company is spending more money more quickly on assets
If pos - liabilities + more than assets, probably means borrowing and getting cash infusion upfront
Free Cash Flows
Cash Flows from Operation - CapEx
Only captures the essential core items to the business - allows for more possibilities to spend and invest (gives options on what to do with cash)
Typically used in valuation models like DCF analysis and LBO models
Gross Margin
How much potential profits a company/business can make after it has sold the product and paid COGS for that product (higher GM = BETTER)
EBIT
Operating income, before one-time, non-recurring items on the IS
Rough proxy for Free CF because includes depreciation and the after effects of CapEx
EBITDA
Taking EBIT, adding depreciation and amortization from the CFS - no CapEx reflection in this income
Return on Assets
net income / average assets over a period
“how much in assets is it necessary to have in order to generate this amount of net income”
Return on Equity
net income / shareholders’ equity
“how much capital do we need to generate this amount of net income”
Return of Invested Capital
Net Operating Profit After Taxes (NOPAT) = EBIT*(1-Total Rev)
Just taxing operating income, what would profits be for this company?
“how much debt + equity do you need in order to generate each dollar of NOPAT” - typically, the higher the better because then you don’t need as much capital to grow
Invested Capital
Equity + Debt + Debt-like items (long and short term)
Represents capital used by the company
Leverage Ratio
Total Debt / EBITDA
tells you how much debt a company has relative to its ability to repay the debt over time
Net Debt to EBITDA Ratio
Net Debt / EBITDA
Taking out cash and other liquid investments from total debt because you can use those items to repay outstanding debt
Interest Coverage Ratio
EBITDA / Net Interest expense
How easily a company can repay interest on its debt, the higher the better b/c better able to pay debt off
CapEx as % of Revenue
Used to compare different businesses in the same industry and see which are spending the most or least on long-term investments for future growth
Depreciation as % of Revenue
How much Cap Ex spending has changed over time
Depreciation as % of CapEx
How has CapEx spending (and depreciation policies/how they account for dep.) changed over time?
Is the company replenishing its assets over time faster than?
If capex as % > dep as % = PP&E growing
If capex as % < dep as % = PP&E shrinking
Dividend Payout Ratio
Dividends / Net Income
How much on net income can be returned to shareholders
Asset Turnover Ratio
Total Rev / Average Assets
How dependent is a business on its assets to generate sales - the higher the number the less asset dependency
Current Ratio
Assets /Liabilities
Can pay off current liability with current assets/ need more than just the number to tell something
Operatations Working Capital
As business grows, does the company need to spend more cash to fund the growth or does it have excess cash on had?
Inventory Turnover
COGS / average inventory over period
How many times a business actually sells its inventory balance - can take the #, divide by 365 = average # of days inventory is outstanding before it gets sold
Receivable Turnover
Revenue / average accounts receivable
How quickly is the business collecting cash from its customers
Payables Turnover
Total Operations Expenses (or COGS) / Average Accounts Payable (+ accrued expenses)
depends on the company and the industry it’s in
Equity Value
what EVERYTHING is worth to ONLY common shareholders
Calculate by taking the shares outstanding and multiplying by the price per share and then adding them all up
For Restricted Stock Units (RSUs), Performance Shares, or Stock Appreciation Rights (SARs) unless their prices are above strike prices, apply straight addition. If above strike prices, use Treasury Stock Method.
Enterprise Value
what CORE BUSINESS OPERATIONS is worth to ALL investors
EV = equity value + debt + pref. stock + non-controlling interest - cash + investments
Depreciation
Accounting method to allocate the cost of a tangible asset over its useful life for accounting and tax purposes.
Even though it gets tracked in CFS as a non-cash expense, it gets written into the IS because it is seen as a business expense. It then lowers the taxable income and thus helps save on tax expenses even after paying the full amount for the asset.
When a company purchases a factory, or equipment, or anything else classified as CapEx, it will be useful for years to come. So the company has to allocate that cost over time and record a portion of it on the Income Statement for each year the asset is in use.
Can’t write off the whole expense at once because of tax laws and company would be receiving too much of a benefit.
Diluted Share Count
Fully diluted shares are the total number of shares that would be outstanding if all possible sources of conversion, such as convertible bonds and stock options, are exercised.
This number of shares is important for a company’s earnings per share (EPS) calculation, because using fully diluted shares increases the number of shares used in the EPS calculation and reduces the dollars earned per share of common stock.
Increases a company’s equity value
Treasury Stock Method
Used for options and warrants.
Holders have to pay the company to get the share. When the share price goes above strike price, company will buy back those issued share at the market share price.
“If Converted” Method
Used for convertible bonds, performance shares, etc
No payment made to company for the shares, either everything gets converted to shares / not depending on whether the share price hits above the bonds/performance share strike price
Performance Shares
Shares that turn into normal shares if the market share price hits a certain price
Convertible Bonds
Mix between normal debt and equity, no interest expense because depending on the price of shares, the bonds can turn into normal shares (when the share price hits the “conversion price”)
Allows the company to issue debt security that can turn into equity
If share price is not high enough, the bonds will be counted as debt. If converted, the bonds are converted to shares through looking at conversion price and the conversion ratio to get how a bond = # of shares
Straight Up Addition
Used for restricted stock (those that are not already included in the common share count, but MAY become available in the future)
Options and Warrants
Stock-based compensation often given to employees to incentivize, like paying employees without paying up-front cash, but rather have them become invested in the company’s performance.
A warrant is a security that gives the holder the right, but not the obligation, to buy a common share directly from the company at a fixed price for a pre-defined time period. A call option (or “call”) also gives the holder the right, without the obligation, to buy a common share at a set price for a defined time period
Differences between Options and Warrants
Issuer: Warrants are issued by a specific company, while exchange-traded options are issued by an options exchange
Maturity: Warrants usually have longer maturity periods than options. While warrants generally expire in one to two years, and can sometimes have maturities well in excess of five years, call options have maturities ranging from a few weeks or months to about a year or two
Warrants cause dilution because company is obligated to issue NEW stock when a warrant is exercised, unlike a call option, which is a derivative instrument on an existing common share of the company. However, dilution with stock options occurs upon exercising because previous to exercising, no one owns these shares. Both are calculated with the same Treasury Stock Method
Restricted Stock Units (RSUs)
A restricted stock unit is compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time.
Performance Shares / Stock Appreciation Rights (SARs)
Holders will have the chance to get new shares if the stock price reaches a certain level and then will be treated more or less as an option (so uses the Treasury Stock Method to calculate dilution)
Net Operating Losses (NOLs)
When a company reports losses (expenses outweigh their revenues and get a negative taxable income), the company gets “credit” that it can then use to offset positive pre-tax income in the future
Roughly equal to NPV of annual tax savings, but will/might be different than what’s reported on the BS, so need to subtract from EV b/c non-core asset
Capital Leases
Debt used to fund a company’s PPE assets, these show up on the BS, recording when it pays interest payments, principal payments and depreciation
EV Based Multiples
EV/EBITDA EV/EBIT EV/Revenue EV/Unlevered Free Cash Flow EV/NOPAT
Equity Value Based Multiples
Equity Value/Net Income (also Price/Earnings per Share)
Equity Value/Book Value
PEG Ratio - (Price/Earnings Multiple)/Growth Rates in Earnings
Equity Value/Lever Free Cash Flow
Equity Value/FCF
NOPAT
Net Operating Profit After Taxes = EBIT * (1 - Tax Rate)
NOPAT is earnings before interest and taxes (EBIT) adjusted for the impact of taxes.
Excludes net interest expense, so is used with EV
Unlevered FCF
NOPAT + Non-Cash Adjustments and Changes in WC from CFS - CapEx
Excludes interest expenses and ALL debt/issuances/repayments (how much potential money the company has before making payments)
Unlevered free cash flow (UFCF) is a company’s cash flow before taking interest payments into account. Unlevered free cash flow shows how much cash is available to the firm before taking financial obligations into account.
Invested Capital
Total Equity + LT/ST Debt + Debt-Like Items (Capital used by the company) - Liabilities from Discontinued Businesses
Gives total amount of capital funding the whole business, subtracting what will go away eventually (the liabilities)
Want to see the whole market value of company relative to how much capital it has raised from ALL investors, check for efficient use of capital in a company
Book Value
Shareholders’ Equity (Total Assets - Total Liabilities)
The amount that would be returned to shareholders if all the company’s assets were liquidated and all its debts repaid.
Book value is also the net asset value of a company, calculated as total assets minus intangible assets (patents, goodwill) and liabilities.
Levered FCF
Net Income + Non-Cash Adjustments and Changes in WC from CFS - CapEx - Mandatory Debt Payments
Shows how much FCF a company has after making MANDATORY debt payments and includes interest expenses
PEG Ratio
Want to adjust for different growth rates by divide P/E multiple by the historical and forward growth rate in net income
Typically want a ratio below 1 b/c multiple is lower relative to the growth rate.
Correlated with growth in PE multiples beyond what the growth in net income would suggest
