Finance glossary

The amount shareholders paid for their shares above the nominal par value printed on them.

A score worked out from the financial statements that estimates how likely a company is to get into serious financial trouble.

The three bands the Altman score is read in, which say how close the company looks to serious financial trouble.

How much sales the company produces from each unit of assets it owns, so how hard the assets are working.

A test that everything the company owns equals what it owes plus what belongs to its owners, which has to hold in every year.

A snapshot, on one date, of what the company owns and what it owes.

A hundredth of a percentage point, so 100 bps is 1 percentage point.

Money spent on assets the company will use for years, such as equipment, buildings and software built in house.

The mix of debt and equity a company uses to pay for its assets.

Cash flow lines that a company's report shows but that do not come from a balance sheet or income statement line, so the model needs a rule from you to forecast them.

Shows the cash that really came in and went out during the year, which can be different from the profit.

The line that makes cash on the cash flow statement equal cash on the balance sheet.

The cash flow statement totals for cash spent on or received from long lived assets (investing) and from lenders and owners (financing).

A rule that uses spare cash at the end of the year to repay debt early.

A test that the cash the cash flow statement ends each year with is the same cash shown on the balance sheet.

The middle figure between the two valuation methods, shown as the headline answer.

Listed businesses similar enough that the market's pricing of them says something about yours.

The steady yearly growth rate that would take a number from where it starts to where it ends.

The interest rate the company pays on its borrowings.

The yearly return a shareholder expects for owning this company rather than something safer.

The direct cost of making or buying what the company sold, such as materials and the labor to produce it.

How many days, on average, a product sits in stock before it is sold.

How many days, on average, the company takes to pay its suppliers.

How many days, on average, customers take to pay you after a sale.

The order in which lenders get repaid if cash runs short. Senior debt is repaid first.

One separate loan or slice of a company's debt, with its own amount, interest rate and repayment terms.

Taxes owed or saved because the tax rules and the accounting rules count some items in different years.

The yearly accounting charge that spreads the cost of an asset over its useful life.

When more shares exist than are counted today, such as from options, each share owns a smaller slice of the company.

Values a business as the cash it is expected to produce in future, restated as what that cash is worth today.

Cash the company pays to its owners out of its profit.

Splits the return the owners earn into three parts: how much profit each sale makes, how well the assets are used and how much debt is used.

Operating profit: what the business earns from operations, before interest and tax.

Earnings before interest, tax, depreciation and amortisation: operating profit with the non-cash accounting charges added back.

How much of every 100 of sales is left as EBITDA, the operating profit before depreciation and amortization.

The share of its profit before tax that the company actually pays in income tax.

A scheme letting employees buy company shares, usually at a discount.

What the operating business is worth, regardless of how it happens to be financed.

How many units of assets the company holds for each unit of its owners' money, which shows how much it leans on borrowing.

The extra yearly return investors demand for holding shares instead of government bonds.

What is left for the shareholders once the company's debts are settled out of enterprise value.

The other way to set the terminal value: assume you sell the business in the final year at a multiple of its earnings that year.

A chart stacking the value ranges each method produces, so you can see where they agree and where they do not.

The educated guesses behind a forecast, such as how fast sales grow, how much costs take and how much to spend on equipment.

How many of the lines on your three statements already have a forecast method or a schedule behind them.

The long yearly report that a company listed in the United States files with its market regulator.

The share of EBITDA that ends up as free cash the company could actually take out.

The share of sales left after paying the direct cost of what was sold.

What one share is worth. We take the enterprise value, subtract the debt, add the cash, and divide by the number of shares.

Shows how much the company sold, what it spent and how much profit was left over in each year.

Valuable things a company owns that you cannot touch, such as software, patents, brands and customer lists.

How many times the operating profit covers the interest the company has to pay.

The cost of borrowing: what the company pays its lenders for the use of their money.

What the company earns from keeping its cash in the bank or in short term investments.

Buying a company using mostly borrowed money, with the company's own cash flow repaying the debt.

How much this company's value moves when the whole market moves.

The part of a loan the company must pay back on a fixed schedule, whatever its cash position.

Discounting each year's cash as if it arrived in the middle of the year rather than all on the last day.

Total borrowings minus the cash the company already holds.

How many years of EBITDA it would take to pay off the net debt.

What is left of the company's sales after all costs, interest and taxes. It is also called profit or earnings.

How much of every 100 of sales is left as profit after all costs, interest and tax.

Past losses a company can set against future profits so it pays less tax for a while.

What the business earns from its operations after paying the tax on that profit, ignoring how it is financed.

The cash tied up in running the business day to day: what customers owe you and what you hold in stock, less what you owe suppliers.

The company raises cash by selling new shares to investors.

The part of a subsidiary that belongs to other owners, not to this company's shareholders.

The costs of running the business day to day, other than the direct cost of what is sold.

Extra money the company chooses to pay on a loan early, beyond what the schedule requires.

The share of a year's profit that the company pays out as dividends.

One way to set the terminal value: assume the final year's cash flow keeps growing at a steady rate forever.

Real sales of similar companies in the past, used to see what buyers actually paid.

What a sum of money you will receive in the future is worth today.

The long lasting physical things a company owns and uses, such as buildings, machines and vehicles.

Cash the company holds but cannot freely spend, for example money set aside under a loan agreement or a legal deposit.

The profit the company has kept over its life instead of paying it out to the owners.

The profit the company earns in a year as a share of the money its owners have put in.

A credit line the company can borrow from and repay again and again, up to a limit.

The return on a government bond of similar length, used as the floor that every other return is measured against.

The same valuation run three times: with hopeful assumptions, with expected ones and with cautious ones.

The everyday costs of running the company that are not tied to making the product, such as office salaries, marketing and rent.

A grid showing how the answer changes when you move the two assumptions it depends on most, usually the discount rate and the terminal assumption.

The company uses its cash to buy its own shares back from the owners who want to sell.

One-off gains or costs that are not part of normal operations, such as restructuring or a lawsuit settlement.

The right, given to employees, to buy company shares later at a price fixed today.

Pay given to employees as shares rather than cash.

The rate at which cash flow is assumed to grow forever after the forecast ends.

The value of everything the business earns after the last year you forecast in detail.

Shares the company has bought back from the market and now holds itself.

A way of counting share options in the share count: assume they are exercised and the money raised is used to buy back shares.

The cash the business itself throws off in a year, before anything is paid to lenders or shareholders.

The number of years an asset is expected to keep being useful to the company.

The yearly return the company's lenders and shareholders together expect, used as the rate that discounts future cash back to today.

The lowest and highest price the company's shares traded at over the last year.