Glossary
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Corporate finance has its fair share of acronyms and strange terms and we always try to minimise the use of technical jargon. Our glossary will help you understand some of the language you may see or hear when dealing with us.
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A
Acquisition
An acquisition is when one company purchases most or all of another company's shares to gain control of that company. Purchasing more than 50% of a target firm's stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s other shareholders. Acquisitions, which are very common in business, may occur with the target company's approval, or in spite of its disapproval. With approval, there is often a no-shop clause during the process.
Learn moreAcid-Test Ratio
The acid-test, or quick ratio, compares a company's most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt. The acid-test ratio disregards current assets that are difficult to liquidate quickly such as inventory. The acid-test ratio may not give a reliable picture of a firm's financial condition if the company has accounts receivable that take longer than usual to collect or current liabilities that are due but have no immediate payment needed.
Learn moreAsset
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it's manufacturing equipment or a patent.
Learn moreAcid-Test Ratio
The acid-test, or quick ratio, compares a company's most short-term assets to its most short-term liabilities to see if a company has enough cash to pay its immediate liabilities, such as short-term debt. The acid-test ratio disregards current assets that are difficult to liquidate quickly such as inventory. The acid-test ratio may not give a reliable picture of a firm's financial condition if the company has accounts receivable that take longer than usual to collect or current liabilities that are due but have no immediate payment needed.
Learn moreAlternative Lender
Alternative lending is a form of financing that provides funds to businesses and individuals without having to go through a traditional bank.
Learn moreAsset Turnover Ratio
The asset turnover ratio measures the value of a company's sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue. The higher the asset turnover ratio, the more efficient a company is at generating revenue from its assets. Conversely, if a company has a low asset turnover ratio, it indicates it is not efficiently using its assets to generate sales.
Learn moreAnnuity
An annuity is a financial product that pays out a fixed stream of payments to an individual, and these financial products are primarily used as an income stream for retirees. Annuities are contracts issued and distributed (or sold) by financial institutions, which invest funds from individuals. They help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.
Learn moreAssets Under Management (AUM)
Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients. Assets under management definitions and formulas vary by company.
Learn moreAngel Investor
An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small start-ups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur's family and friends. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.
Learn moreB
Balance Sheet
A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. The balance sheet is used alongside other important financial statements such as the income statement and statement of cash flows in conducting fundamental analysis or calculating financial ratios.
Learn moreBuy-Side
A business involved in buy-side activities will purchase stocks, bonds, and other financial products based on the needs and strategy of their company's or client's portfolio.
Learn moreBalanced Scorecard
The term balanced scorecard (BSC) refers to a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes. Used to measure and provide feedback to organizations, balanced scorecards are common among companies in the United States, the United Kingdom, Japan, and Europe. Data collection is crucial to providing quantitative results as managers and executives gather and interpret the information. Company personnel can use this information to make better decisions for the future of their organizations.
Learn moreBankruptcy
Bankruptcy is a legal proceeding involving a person or business that is unable to repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor's assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
Learn moreC
Contribution Margin
The contribution margin can be stated on a gross or per-unit basis. It represents the incremental money generated for each product/unit sold after deducting the variable portion of the firm's costs.
Learn moreCost of Capital
Cost of capital represents the return a company needs in order to take on a capital project, such as purchasing new equipment or constructing a new building. Cost of capital typically encompasses the cost of both equity and debt, weighted according to the company's preferred or existing capital structure, known as the weighted average cost of capital (WACC).
Learn moreCost of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the compensation the market demands in exchange for owning the asset and bearing the risk of ownership.
Learn moreContingent Liability
A contingent liability is a potential liability that may occur in the future, such as pending lawsuits or honouring product warranties. If the liability is likely to occur and the amount can be reasonably estimated, the liability should be recorded in the accounting records of a firm.
Learn moreCost of Debt
The cost of debt is the rate a company pays on its debt, such as bonds and loans. The key difference between the cost of debt and the after-tax cost of debt is the fact that interest expense is tax-deductible. Cost of debt is one part of a company’s capital structure, with the other being the cost of equity. Calculating the cost of debt involves finding the average interest paid on all of a company’s debts.
Learn moreCAGR (Compound Annual Growth Rate)
Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.
Learn moreCash Free Debt Free
Cash free, debt free by its simplest definition means that when a buyer purchases a company and its assets, it is on the basis that the seller will pay off all debt and extract all excess cash prior to completion of the transaction.
Learn moreCapital
The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth. The four major types of capital include working capital, debt, equity, and trading capital. Trading capital is used by brokerages and other financial institutions.
Learn moreCOGS (Cost of Goods Sold)
Cost of goods sold (COGS) includes all of the costs and expenses directly related to the production of goods. COGS excludes indirect costs such as overhead and sales & marketing. COGS is deducted from revenues (sales) in order to calculate gross profit and gross margin. Higher COGS results in lower margins.
Learn moreCorporate Finance
Corporate finance is the division of finance that deals with how corporations deal with funding sources, capital structuring, and investment decisions. Corporate finance is primarily concerned with maximizing shareholder value through long and short-term financial planning and the implementation of various strategies. Corporate finance activities range from capital investment decisions to investment banking.
Learn moreCash Flow Statement
A cash flow statement provides data regarding all cash inflows a company receives from its ongoing operations and external investment sources. The cash flow statement includes cash made by the business through operations, investment, and financing—the sum of which is called net cash flow.
Learn moreCommercial Due Diligence
Commercial due diligence is instituted by a prospective buyer to gauge a company's commercial attractiveness. Commercial due diligence services typically provide insight on market demand, commercial position, revenue, and competitive dynamics.
Learn moreClearinghouse
A clearinghouse is a designated intermediary between a buyer and seller in a financial market. The clearinghouse validates and finalises the transaction, ensuring that both the buyer and the seller honour their contractual obligations.
Learn moreChurn Rate
The churn rate measures a company's loss in subscribers for a given period of time. Churn rates can be applied to subscription-based businesses as well to the number of employees that leave a firm.
Learn moreCost of Revenue
Cost of revenue is the total cost of manufacturing and delivering a product or service to consumers.
Learn moreD
Debt Ratio
The debt ratio measures the amount of leverage used by a company in terms of total debt to total assets. A debt ratio greater than 1.0 (100%) tells you that a company has more debt than assets. Meanwhile, a debt ratio less than 100% indicates that a company has more assets than debt.
Learn moreDeferred Payment
A temporary postponement of the payment of an outstanding bill or debt, usually involving repayment by instalments.
Learn moreDCF (Discounted Cash Flow)
Discounted cash flow (DCF) helps determine the value of an investment based on its future cash flows.
Learn moreDays Payable Outstanding
Days payable outstanding (DPO) computes the average number of days a company needs to pay its bills and obligations. Companies that have a high DPO can delay making payments and use the available cash for short-term investments and to increase their working capital and free cash flow. However, higher values of DPO, though desirable, may not always be a positive for the business as it may signal a cash shortfall and inability to pay.
Learn moreE
Enterprise Value – EV
Enterprise value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization.
Learn moreEBITDA
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company's overall financial performance and is used as an alternative to net income in some circumstances. EBITDA, however, can be misleading because it strips out the cost of capital investments like property, plant, and equipment.
Learn moreEBIT
EBIT (earnings before interest and taxes) is a company's net income before income tax expense and interest expenses are deducted.
Learn moreF
Financial Distress
Financial distress is a condition in which a company or individual cannot generate sufficient revenues or income, making it unable to meet or pay its financial obligations.
Learn moreFacility
Facilities are financial assistance programs offered by banks and lending institutions to help companies. A facility is essentially another name for a loan taken out by a company.
Learn moreFree Cash Flow
Free cash flow (FCF) represents the cash available for the company to repay creditors or pay dividends and interest to investors.
Learn moreG
Gross Margin
Gross margin is a company's net sales revenue minus its cost of goods sold (COGS).
Learn moreGap Analysis
A gap analysis is how an organization examines its current performance with its target performance.
Learn moreH
Hard Asset
A hard asset is a tangible or physical item or resource that an individual or company owns.
Learn moreI
Impaired Asset
An impaired asset is an asset that has a market value less than the value listed on the company's balance sheet.
Learn moreJ
Junior Debt
Junior debt refers to bonds or other debts that have been issued with lower priority than senior debt.
Learn moreK
KPI (Key Performance Indicators)
Key performance indicators (KPIs) measure a company's success versus a set of targets, objectives, or industry peers.
Learn moreL
LBO (Leveraged Buyout)
A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition.
Learn moreM
Mezzanine Debt
Mezzanine debt bridges the gap between debt and equity financing and is one of the highest-risk forms of debt.
Learn moreMBO (Management Buyout)
A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business they manage.
Learn moreMerger
A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity.
Learn moreN
Non-Operating Asset
Non-operating assets are assets that are not considered to be part of a company's core operations.
Learn moreNegotiable Instrument
A negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee.
Learn moreO
Overleveraged
A company is said to be overleveraged when it has too much debt, impeding its ability to make principal and interest payments and to cover operating expenses.
Learn moreOut-of-Pocket Expenses
An out-of-pocket expense is a payment you make with your own money even if you are reimbursed later.
Learn moreOverhead Ratio
An overhead ratio is a measurement of the operating costs of doing business compared to the company's income.
Learn moreP
PIK (Payment In Kind)
Payment-in-kind (PIK) is the use of a good or service as payment or compensation instead of cash.
Learn morePrivate Equity
Private equity is an alternative form of private financing in which funds and investors directly invest in companies or engage in buyouts of such companies.
Learn morePrice/Earnings Ratio
The price-earnings ratio (P/E ratio) relates a company's share price to its earnings per share. A high P/E ratio could mean that a company's stock is over-valued, or else that investors are expecting high growth rates in the future.
Learn morePayout Ratio
The payout ratio, also known as the dividend payout ratio, shows the percentage of a company's earnings paid out as dividends to shareholders.
Learn moreR
Revolving Loan Facility
A revolving loan facility provides loans to borrowers with a great deal of flexibility in terms of repayments and re-borrowing.
Learn moreRestructuring
Restructuring is when a company makes significant changes to its financial or operational structure, typically while under financial duress.
Learn moreS
Solvency Ratio
A solvency ratio examines a firm's ability to meet its long-term debts and obligations.
Learn moreSPA (Sale and Purchase Agreement)
A sales and purchase agreement (SPA) is a binding legal contract that obligates a buyer to buy and a seller to sell a product or service.
Learn moreSeed Funding
Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises.
Learn moreSkin in the Game
Skin in the game refers to owners, executives, or principals having a significant stake in the shares of the company they manage.
Learn moreSubprime Loan
A subprime loan is a type of loan offered at a rate above prime to individuals who do not qualify for prime-rate loans.
Learn moreSenior Debt
Senior debt is debt and obligations which are prioritized for repayment in the case of bankruptcy. Senior debt has the highest priority and therefore the lowest risk. Thus, this type of debt typically carries or offers lower interest rates.
Learn moreT
Teaser
A teaser is a document circulated to potential buyers of a company that may be offered for sale in the future. The document is intended to generate interest in the business.
Learn moreTangible Asset
A tangible asset is an asset that has a finite monetary value and usually a physical form.
Learn moreTombstone
A tombstone is a written advertisement that gives investors basic details about an upcoming public offering.
Learn moreTCO (Total Cost of Ownership)
The total cost of ownership (TCO) is the purchase price of an asset plus the costs of operation.
Learn moreTax Covenant
A tax covenant forms part of the transaction documents in respect of a sale of all the shares in a company.
Learn moreTTM (Trailing 12 Months)
Trailing 12 months (TTM) is a term used to describe the past 12 consecutive months of a company’s performance data, that’s used for reporting financial figures.
Learn moreU
Unitranche
Unitranche debt is a hybrid model combining different loans into one, with an interest rate for the borrower that sits in between the highest and lowest rate on the individual loans.
V
Value Driver
A value driver is defined as something within your business that may cause an eventual buyer to increase the amount that they are willing to pay for it.
Learn moreValue Drag
A value drag is defined as something within your business that may cause an eventual buyer to reduce the amount that they are willing to pay for it.
Learn moreValuation
Valuation is the analytical process of determining the current (or projected) worth of an asset or a company.
Learn moreVenture Capital
Venture capital financing is funding provided to companies and entrepreneurs. It can be provided at different stages of their evolution, although it often involves early and seed round funding.
Learn moreVIMBO (Vendor Initiated Management Buy Out)
A vendor initiated management buyout (VIMBO) is a virtually identical process to a management buyout (MBO) with one key difference; the vendor (selling company) is the one making the approach to the management team rather than the other way around.
Learn moreW
Working Capital
Working capital is the difference between a company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.
Learn moreX
Y
Yield
Yield is a return measure for an investment over a set period of time, expressed as a percentage.
YOY (Year-Over-Year)
Year-over-year (YOY) is a method of evaluating two or more measured events to compare the results at one period with those of a comparable period on an annualized basis.
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