Financial Analysis and Valuation
Expert-defined terms from the Undergraduate Certificate in Financial Communication and Investor Relations course at Stanmore School of Business. Free to read, free to share, paired with a professional course.
Accounting Equation is a fundamental concept in financial analysis and va… #
Related terms include Balance Sheet, Assets, Liabilities, and Equity. The accounting equation is used to prepare the Balance Sheet, which provides a snapshot of a company's financial position at a specific point in time. For example, if a company has total assets of $100,000, total liabilities of $60,000, and total equity of $40,000, the accounting equation can be used to verify that the company's assets are equal to its liabilities plus equity.
Acid #
Test Ratio is a liquidity ratio that measures a company's ability to pay its short-term debts using its liquid assets, and is an important tool for investors and creditors to assess a company's financial health. Related terms include Current Ratio, Quick Ratio, and Liquidity Ratios. The acid-test ratio is calculated by dividing a company's liquid assets (such as cash, accounts receivable, and marketable securities) by its current liabilities. For example, if a company has liquid assets of $50,000 and current liabilities of $30,000, its acid-test ratio would be 1.67, indicating that the company has sufficient liquid assets to cover its short-term debts.
Amortization is the process of allocating the cost of an intangible asset… #
Related terms include Depreciation, Intangible Assets, and Useful Life. Amortization is used to match the cost of an intangible asset with the benefits it provides over its useful life. For example, if a company purchases a patent for $100,000 that has a useful life of 10 years, the company would amortize the cost of the patent over 10 years, resulting in an annual amortization expense of $10,000.
Annual Report is a comprehensive document that provides an overview of a… #
Related terms include Financial Statements, Management's Discussion and Analysis, and Auditor's Report. The annual report typically includes the company's financial statements, management's discussion and analysis, and auditor's report, as well as other information such as corporate governance and social responsibility. For example, a company's annual report may provide information on its revenue growth, profitability, and cash flow, as well as its strategy and outlook for the future.
Asset #
Based Lending is a type of lending that uses a company's assets as collateral to secure a loan, and is an important concept in financial analysis and valuation. Related terms include Collateral, Loan, and Interest Rate. Asset-based lending is often used by companies that have a high level of assets but may not have a strong credit history. For example, a company that owns a significant amount of real estate or equipment may use asset-based lending to secure a loan to finance its operations.
Asset Turnover is a ratio that measures a company's ability to generate s… #
Related terms include Sales, Assets, and Efficiency. The asset turnover ratio is calculated by dividing a company's sales by its total assets. For example, if a company has sales of $100,000 and total assets of $50,000, its asset turnover ratio would be 2, indicating that the company is generating $2 in sales for every $1 in assets.
Balance Sheet is a financial statement that provides a snapshot of a comp… #
Related terms include Assets, Liabilities, Equity, and Accounting Equation. The balance sheet is used to prepare the accounting equation, which states that a company's assets are equal to its liabilities plus equity. For example, if a company has total assets of $100,000, total liabilities of $60,000, and total equity of $40,000, the balance sheet can be used to verify that the company's assets are equal to its liabilities plus equity.
Bond is a type of debt security that represents a loan made by an investo… #
Related terms include Face Value, Interest Rate, and Maturity Date. Bonds are often used by companies to raise capital to finance their operations or to refinance existing debt. For example, a company may issue a bond with a face value of $1,000, an interest rate of 5%, and a maturity date of 10 years, which means that the company will pay the investor $50 in interest per year for 10 years and repay the face value of $1,000 at the end of the 10-year period.
Book Value is the value of a company's assets minus its liabilities, and… #
Related terms include Assets, Liabilities, and Equity. The book value of a company is often used as a benchmark to evaluate the company's financial performance and position. For example, if a company has total assets of $100,000 and total liabilities of $60,000, its book value would be $40,000, which represents the company's equity.
Break #
Even Analysis is a technique used to determine the point at which a company's revenue equals its total fixed and variable costs, and is an important tool for investors and stakeholders to assess a company's financial performance. Related terms include Revenue, Fixed Costs, Variable Costs, and Profit. The break-even analysis is used to calculate the break-even point, which is the point at which a company's revenue equals its total costs. For example, if a company has fixed costs of $50,000 and variable costs of $20 per unit, and it sells its products for $30 per unit, the break-even analysis can be used to determine the number of units the company needs to sell to break even.
Capital Asset Pricing Model (CAPM) is a model that describes the relation… #
Related terms include Expected Return, Risk, and Beta. The CAPM is used to calculate the expected return on an investment based on its beta, which measures the investment's systematic risk. For example, if an investment has a beta of 1.2 and the expected return on the market is 10%, the CAPM can be used to calculate the expected return on the investment as 10% + (1.2 x (market return - risk-free rate)).
Cash Flow is the movement of money into or out of a company, and is an im… #
Related terms include Cash Flow Statement, Operating Cash Flow, Investing Cash Flow, and Financing Cash Flow. The cash flow statement is used to provide information about a company's inflows and outflows of cash over a specific period. For example, if a company has operating cash flow of $50,000, investing cash flow of -$20,000, and financing cash flow of $10,000, the cash flow statement can be used to determine the company's net change in cash over the period.
Cash Flow Statement is a financial statement that provides information ab… #
Related terms include Operating Cash Flow, Investing Cash Flow, Financing Cash Flow, and Net Change in Cash. The cash flow statement is used to calculate the net change in cash, which is the difference between the company's inflows and outflows of cash over the period. For example, if a company has operating cash flow of $50,000, investing cash flow of -$20,000, and financing cash flow of $10,000, the cash flow statement can be used to determine the company's net change in cash as $40,000.
Cost of Capital is the rate of return that a company must pay to its inve… #
Related terms include Weighted Average Cost of Capital (WACC), Debt, and Equity. The cost of capital is used to calculate the weighted average cost of capital (WACC), which is the average cost of a company's debt and equity. For example, if a company has a cost of debt of 5% and a cost of equity of 10%, and it has a debt-to-equity ratio of 1:1, the WACC can be calculated as (0.5 x 5%) + (0.5 x 10%) = 7.5%.
Cost of Goods Sold (COGS) is the direct cost of producing a company's pro… #
Related terms include Revenue, Gross Profit, and Operating Expenses. The COGS is used to calculate the gross profit, which is the difference between a company's revenue and its COGS. For example, if a company has revenue of $100,000 and COGS of $60,000, the gross profit would be $40,000, which represents the company's profit before operating expenses.
Current Ratio is a ratio that measures a company's ability to pay its sho… #
Related terms include Liquidity Ratios, Acid-Test Ratio, and Current Assets. The current ratio is calculated by dividing a company's current assets by its current liabilities. For example, if a company has current assets of $50,000 and current liabilities of $30,000, its current ratio would be 1.67, indicating that the company has sufficient current assets to cover its short-term debts.
Debt is a type of liability that represents a loan made by a lender to a… #
Related terms include Credit, Loan, and Interest Rate. Debt is often used by companies to raise capital to finance their operations or to refinance existing debt. For example, a company may issue a bond with a face value of $1,000, an interest rate of 5%, and a maturity date of 10 years, which means that the company will pay the lender $50 in interest per year for 10 years and repay the face value of $1,000 at the end of the 10-year period.
Depreciation is the process of allocating the cost of a tangible asset ov… #
Related terms include Amortization, Intangible Assets, and Useful Life. Depreciation is used to match the cost of a tangible asset with the benefits it provides over its useful life. For example, if a company purchases a piece of equipment for $10,000 that has a useful life of 5 years, the company would depreciate the cost of the equipment over 5 years, resulting in an annual depreciation expense of $2,000.
Dividend Yield is a ratio that measures the return on investment (ROI) of… #
Related terms include Dividend, Dividend Payout Ratio, and Stock Price. The dividend yield is calculated by dividing a company's annual dividend payment by its stock price. For example, if a company has an annual dividend payment of $1.00 and its stock price is $20.00, the dividend yield would be 5%, indicating that the company's stock provides a 5% return on investment based on its dividend payments.
Efficient Market Hypothesis (EMH) is a theory that states that financial… #
Related terms include Random Walk Theory, Market Efficiency, and Anomalies. The EMH is used to explain the behavior of financial markets and to predict the performance of investments. For example, if a company announces a significant increase in earnings, the EMH would suggest that the company's stock price would immediately reflect this new information, making it impossible to achieve abnormal returns by trading on this information.
Enterprise Value (EV) is a measure of a company's total value, including… #
Related terms include Market Capitalization, Debt, and Cash. The EV is used to calculate the total value of a company, including its debt and equity. For example, if a company has a market capitalization of $100 million, debt of $50 million, and cash of $20 million, its EV would be $130 million, which represents the company's total value.
Equity is a type of ownership interest in a company, and is an important… #
Related terms include Stock, Shares, and Ownership. Equity is often used by companies to raise capital to finance their operations or to refinance existing debt. For example, a company may issue stock to raise capital, which represents ownership interests in the company.
Financial Analysis is the process of evaluating a company's financial per… #
Related terms include Financial Statements, Ratio Analysis, and Financial Modeling. Financial analysis is used to calculate various ratios and metrics, such as the current ratio, debt-to-equity ratio, and return on equity, to evaluate a company's financial performance and position. For example, if a company has a current ratio of 1.5 and a debt-to-equity ratio of 0.5, financial analysis can be used to determine that the company has a strong liquidity position and a moderate level of debt.
Financial Leverage is the use of debt to finance a company's operations o… #
Related terms include Debt, Equity, and Return on Equity. Financial leverage is used to increase a company's return on equity by using debt to finance its operations or investments. For example, if a company has a return on equity of 10% and it uses debt to finance its operations, it may be able to increase its return on equity to 15% by using financial leverage.
Financial Modeling is the process of creating a mathematical model of a c… #
Related terms include Financial Analysis, Forecasting, and Sensitivity Analysis. Financial modeling is used to forecast a company's future financial performance and position, and to evaluate the impact of different scenarios on the company's financial performance. For example, if a company is considering a significant investment in a new project, financial modeling can be used to forecast the project's potential returns and to evaluate the impact of different scenarios on the company's financial performance.
Financial Ratio is a metric that is used to evaluate a company's financia… #
Related terms include Financial Analysis, Ratio Analysis, and Financial Modeling. Financial ratios are used to calculate various metrics, such as the current ratio, debt-to-equity ratio, and return on equity, to evaluate a company's financial performance and position. For example, if a company has a current ratio of 1.5 and a debt-to-equity ratio of 0.5, financial ratios can be used to determine that the company has a strong liquidity position and a moderate level of debt.
Financial Statement is a document that provides information about a compa… #
Related terms include Balance Sheet, Income Statement, and Cash Flow Statement. Financial statements are used to provide information about a company's financial performance and position, and to calculate various ratios and metrics to evaluate the company's financial performance and position. For example, if a company has a balance sheet that shows total assets of $100,000 and total liabilities of $60,000, the financial statement can be used to determine the company's equity as $40,000.
Forecasting is the process of predicting a company's future financial per… #
Related terms include Financial Modeling, Financial Analysis, and Sensitivity Analysis. Forecasting is used to predict a company's future financial performance and position, and to evaluate the impact of different scenarios on the company's financial performance. For example, if a company is considering a significant investment in a new project, forecasting can be used to predict the project's potential returns and to evaluate the impact of different scenarios on the company's financial performance.
Free Cash Flow (FCF) is a measure of a company's ability to generate cash… #
Related terms include Cash Flow, Operating Cash Flow, and Capital Expenditures. The FCF is used to calculate a company's ability to generate cash from its operations, and to evaluate the company's financial performance and position. For example, if a company has operating cash flow of $50,000 and capital expenditures of $20,000, the FCF would be $30,000, which represents the company's ability to generate cash from its operations.
Gross Profit is the difference between a company's revenue and its cost o… #
Related terms include Revenue, COGS, and Operating Expenses. The gross profit is used to calculate a company's profit before operating expenses, and to evaluate the company's financial performance and position. For example, if a company has revenue of $100,000 and COGS of $60,000, the gross profit would be $40,000, which represents the company's profit before operating expenses.
Income Statement is a financial statement that provides information about… #
Related terms include Revenue, Expenses, and Net Income. The income statement is used to calculate a company's net income, which is the difference between the company's revenues and expenses. For example, if a company has revenue of $100,000 and expenses of $80,000, the net income would be $20,000, which represents the company's profit.
Internal Rate of Return (IRR) is a metric that is used to evaluate the re… #
Related terms include Net Present Value (NPV), Return on Investment (ROI), and Payback Period. The IRR is used to calculate the return on investment of a project or investment, and to evaluate the project's or investment's financial performance and position. For example, if a company is considering a significant investment in a new project, the IRR can be used to evaluate the project's potential returns and to determine whether the project is a good investment.
Inventory Turnover is a ratio that measures a company's ability to sell a… #
Related terms include Inventory, Cost of Goods Sold (COGS), and Sales. The inventory turnover ratio is calculated by dividing a company's COGS by its inventory. For example, if a company has COGS of $100,000 and inventory of $50,000, the inventory turnover ratio would be 2, indicating that the company sells and replaces its inventory twice per year.
Investing Cash Flow is a type of cash flow that is used to invest in a co… #
Related terms include Cash Flow, Operating Cash Flow, and Financing Cash Flow. Investing cash flow is used to invest in a company's operations or to purchase assets, and to evaluate the company's financial performance and position. For example, if a company has investing cash flow of -$20,000, it means that the company has invested $20,000 in its operations or has purchased assets.
Leverage is the use of debt to finance a company's operations or investme… #
Related terms include Debt, Equity, and Return on Equity. Leverage is used to increase a company's return on equity by using debt to finance its operations or investments. For example, if a company has a return on equity of 10% and it uses debt to finance its operations, it may be able to increase its return on equity to 15% by using leverage.
Liquidity is a company's ability to pay its short #
term debts using its liquid assets, and is an important concept in financial analysis and valuation. Related terms include Current Ratio, Acid-Test Ratio, and Liquidity Ratios. Liquidity is used to evaluate a company's ability to pay its short-term debts, and to determine the company's financial health. For example, if a company has a current ratio of 1.5 and an acid-test ratio of 1.2, it means that the company has sufficient liquid assets to pay its short-term debts.
Net Income is the difference between a company's revenues and expenses, a… #
Related terms include Revenue, Expenses, and Income Statement. Net income is used to calculate a company's profit, and to evaluate the company's financial performance and position. For example, if a company has revenue of $100,000 and expenses of $80,000, the net income would be $20,000, which represents the company's profit.
Net Present Value (NPV) is a metric that is used to evaluate the return o… #
Related terms include Internal Rate of Return (IRR), Return on Investment (ROI), and Payback Period. The NPV is used to calculate the return on investment of a project or investment, and to evaluate the project's or investment's financial performance and position. For example, if a company is considering a significant investment in a new project, the NPV can be used to evaluate the project's potential returns and to determine whether the project is a good investment.
Operating Cash Flow is a type of cash flow that is used to operate a comp… #
Related terms include Cash Flow, Investing Cash Flow, and Financing Cash Flow. Operating cash flow is used to operate a company's business, and to evaluate the company's financial performance and position. For example, if a company has operating cash flow of $50,000, it means that the company has generated $50,000 in cash from its operations.
Operating Expenses are the costs associated with operating a company's bu… #
Related terms include Revenue, Gross Profit, and Net Income. Operating expenses are used to calculate a company's net income, and to evaluate the company's financial performance and position. For example, if a company has revenue of $100,000, gross profit of $40,000, and operating expenses of $30,000, the net income would be $10,000, which represents the company's profit.
Payback Period is a metric that is used to evaluate the return on investm… #
Related terms include Internal Rate of Return (IRR), Net Present Value (NPV), and Return on Investment (ROI). The payback period is used to calculate the time it takes for a project or investment to generate a return on investment, and to evaluate the project's or investment's financial performance and position. For example, if a company is considering a significant investment in a new project, the payback period can be used to evaluate the project's potential returns and to determine whether the project is a good investment.
Price #
to-Earnings (P/E) Ratio is a ratio that measures a company's stock price relative to its earnings per share, and is an important tool for investors and stakeholders to assess a company's financial health. Related terms include Stock Price, Earnings per Share, and Market Capitalization. The P/E ratio is used to evaluate a company's stock price, and to determine whether the stock is overvalued or undervalued. For example, if a company has a stock price of $20.00 and earnings per share of $1.00, the P/E ratio would be 20, indicating that the company's stock price is 20 times its earnings per share.
Return on Assets (ROA) is a metric that measures a company's return on in… #
Related terms include Return on Equity (ROE), Return on Sales (ROS), and Asset Turnover. The ROA is used to calculate a company's return on investment, and to evaluate the company's financial performance and position. For example, if a company has net income of $20,000 and total assets of $100,000, the ROA would be 20%, indicating that the company has generated a 20% return on its assets.
Return on Equity (ROE) is a metric that measures a company's return on in… #
Related terms include Return on Assets (ROA), Return on Sales (ROS), and Leverage. The ROE is used to calculate a company's return on investment, and to evaluate the company's financial performance and position. For example, if a company has net income of $20,000 and total equity of $50,000, the ROE would be 40%, indicating that the company has generated a 40% return on its equity.
Return on Sales (ROS) is a metric that measures a company's return on inv… #
Related terms include Return on Assets (ROA), Return on Equity (ROE), and Gross Margin. The ROS is used to calculate a company's return on investment, and to evaluate the company's financial performance and position. For example, if a company has net income of $20,000 and sales of $100,000, the ROS would be 20%, indicating that the company has generated a 20% return on its sales.
Risk is the possibility that a company's actual financial performance may… #
Related terms include Uncertainty, Volatility, and Beta. Risk is used to evaluate a company's financial performance and position, and to determine the company's expected return on investment. For example, if a company has a high level of risk, it may be expected to generate a higher return on investment to compensate for the risk.
Stock Price is the value of a company's stock, and is an important concep… #
Related terms include Market Capitalization, Shares Outstanding, and Earnings per Share. Stock price is used to evaluate a company's financial performance and position, and to determine the company's expected return on investment. For example, if a company has a stock price of $20.00 and earnings per share of $1.00, the price-to-earnings ratio would be 20, indicating that the company's stock price is 20 times its earnings per share.
Time Value of Money is the concept that a dollar today is worth more than… #
Related terms include Present Value, Future Value, and Discount Rate. The time value of money is used to evaluate a company's financial performance and position, and to determine the company's expected return on investment. For example, if a company has a choice between receiving $100 today or $100 in one year, the time value of money would suggest that the company should choose to receive the $100 today, because the $100 received today can be invested to earn a return over the next year.
Valuation is the process of determining a company's value, and is an impo… #
Related terms include Financial Analysis, Financial Modeling, and Market Capitalization. Valuation is used to determine a company's value, and to evaluate the company's financial performance and position. For example, if a company has a market capitalization of $200 million and a price-to-earnings ratio of 20, the valuation would suggest that the company's stock price is reasonable, because the company's earnings per share are consistent with the market capitalization and price-to-earnings ratio.
Weighted Average Cost of Capital (WACC) is a metric that is used to evalu… #
Related terms include Cost of Capital, Debt, and Equity. The WACC is used to calculate a company's cost of capital, and to evaluate the company's financial performance and position. For example, if a company has a cost of debt of 5% and a cost of equity of 10%, and it has a debt-to-equity ratio of 1:1, the WACC can be calculated as (0.5 x 5%) + (0.5 x 10%) = 7.5%, indicating that the company's cost of capital is 7.5%.