Seeing the Big Picture®
Accounts Payable: The cash the company owes to vendors in payment for goods and services purchased on credit. The longer a business can legitimately postpone paying down its accounts payable, the more cash it conserves and can use longer for other purposes.
Accounts Receivable: The cash to be received from customers for the sale of goods and services on credit. Does not count as cash because you cannot spend payments yet to be received. If a business can collect its receivables faster, it increases its cash flow.
Accrual Accounting or Accrual Basis Accounting: Financial reporting method that requires revenues to be reported in the fiscal period in which they are earned, and expenses to be reported as they are incurred. Under the accrual concept, whether cash has been received or paid is irrelevant; revenue is booked at the time a sale is made, and associated expenses are recognized regardless of when cash is received or paid out. Also, certain non-cash charges (such as depreciation and amortization) are shown as expenses in accrual basis accounting, even though no cash is spent. It is the required standard for public companies. Contrast with Cash Accounting. See also Matching, Revenue Recognition.
Allowance for Bad Debts: Estimate of the dollar amount of accounts receivable that will not be collected, subtracted from total accounts receivable to calculate net (collectible) accounts in the current assets section of the Balance Sheet. Sometimes shown as a separate entry under current liabilities.
American Institute of Certified Public Accountants (AICPA): The independent professional association of accountants located in New York City, generally recognized as the authoritative body which licenses professionals for membership through rigorous education and examination. The designation CPA is limited to certified members of the AICPA and is required for many positions in public accounting firms and business organizations.
Amortization: The expense that is deducted periodically over the useful life of intangible assets and certain merger and acquisition and other large expenditures. Similar to depreciation, which is applied to tangible assets. The amount paid up front is written off (deducted on the P&L as an expense) over the useful life of the asset according to IRS rules and GAAP.
Annual Report: Refers to two distinctly different but related documents: (1) the formal Form 10-K report which public companies must file annually with the SEC disclosing all material financial data and other comprehensive performance information in a format required by the SEC; and (2) report companies make available to their stockholders annually concerning operations during the fiscal year just ended. The report is used for general communication, marketing, financial disclosure, and compliance with securities laws and related regulations. By law, public companies must make available their 10-K to all stockholders. Certain private companies (whose shares are not registered with the SEC) which meet certain size criteria are also required by the SEC to file periodic reports.
Asset: Any resource used by the company in business operations. Assets fall into several categories. Tangible and intangible assets owned by the company appear on the Balance Sheet. Assets rented or leased by the company are not shown on the Balance Sheet. Informally, employees, customers & relationships with other individuals or companies might be referred to as assets.
Asset Strength: The financial ability of a company to meet its debts and obligations, to make investments, and to withstand market down-turns or other business problems. Usually analyzed in relationship to company’s liquidity, the ratio of its debt to its assets, and its ability to generate cash flow.
Asset Utilization: How effectively and efficiently a company uses its assets to generate revenue and to save costs; the productivity gained from using an asset; the return on assets (ROA) received from using an asset. Measures include inventory turnover, cycle time, and return on investment.
Auditor: Generally, any individual or firm that carefully reviews the financial or operations performance of a business. Companies have internal auditors (usually accountants who are employees) and also retain outside or independent auditors. Specifically, an independent auditor is an outside certified public accounting (CPA) firm which is retained by a company to perform a formal audit on the books and records of the company and issue an auditor’s opinion.
Auditor’s Opinion: Report issued by an independent CPA firm at the conclusion of an audit. The report will state that based on the auditor’s examination, the financial statements are fair representations of the company’s financial position and earnings for the fiscal year according to generally accepted accounting principles (GAAP). An independent auditor is liable for civil and possible criminal penalties if their auditor’s opinion is shown to be fraudulent or negligent.
Basic Earnings Per Share: See Earnings Per Share.
Board of Directors: Group of people elected by the stockholders (shareholders or owners) at an annual meeting to govern, oversee and give overall direction to the company. Sometimes simply referred to as the board, they elect the CEO and appoint or recommend to the CEO other officers and officials of the company. Boards of directors are held to strict standards of conduct and ethics by laws such as Sarbanes Oxley and by regulations of the SEC.
Book Value: Value at which an asset is carried on the company financial “books” and shown on the Balance Sheet. According to GAAP, an asset must be shown at the lesser of its original cost less depreciation, or its fair market value. The book value of a depreciable asset is the asset’s original cost minus accumulated depreciation. The book value of the overall company is shown as the shareholders’ equity. Book value is determined by accounting rules (GAAP) and not the true value in the open market.
Bond: Form of long-term debt, usually issued in $1,000 increments, with interest paid periodically (usually semiannually) and the principal repaid in 10 or more years.
Capital: Cash from loans or equity investment in a company. Cash gained from operations, or doing daily business selling products and services, is referred to as cash flow. Frequently refers to cash invested in a company or business venture. A venture capitalist supplies capital or cash for start-up or expanding businesses.
Capital Stock: See Common Stock.
Cash: Bills and coins in the register, petty cash, and cash in the bank (checking and savings accounts) and in other depository accounts. Also includes cash equivalents. Measured as a point in time.
Cash Accounting or Cash Basis Accounting: Financial reporting method that requires revenues to be reported when the cash is actually collected and expenses to be recognized when they are paid out. Only private companies can use cash accounting; public companies are required to report according to GAAP, which is based on accrual accounting.
Cash Equivalents: Money market instruments and other highly liquid investments easily converted into cash within 90 days without risk of significant discount. Stocks and bonds are considered as short-term investments, the next level of liquidity, because if sold quickly, the market might be down and a reduction in value might be suffered.
Cash Flow: (Operating Cash Flow, or Cash Flow from Operations, or Cash from Operations). Cash generated (received) from operations (core business activities), less the cash disbursed for expenses and other operational requirements, during a given time period, typically a quarter or fiscal year. (See Cash Generation.) Cash can also be generated from investing activities and financing activities. Shown on the Statement of Cash Flows.
Cash From Operations: See Cash Flow.
Cash Generation: The difference between the cash that flows into the business from operations and the cash that flows out of the business in a given time period (usually, quarter or year). Sometimes applied more broadly than cash flow from operations. Investing and financing activities, in addition to operations, can generate cash.
Cash Position: The amount of cash available at any given time; the amount and nature of cash and cash equivalents on the Balance Sheet. More broadly, might include current assets (assets convertible to cash within 12 months). Can also include the ability of a company to borrow or raise cash readily and rapidly, plus the company’s cash generation capability.
COGS: See Cost of Goods Sold.
Comprehensive Income: The sum of net income plus other items not included on the Income Statement because they have not yet been realized—such as an unrealized gain or loss from securities held for sale, or unrealized gains or losses from foreign currency transactions. These items are not part of reported net income, yet are important enough to be included in comprehensive income, giving the user a bigger, more comprehensive picture of the organization as a whole. Technically, comprehensive income is the net change in shareholders’ equity during a period from transactions and events that did not involve the company’s owners. It is reported on an additional financial statement called “Consolidated Statements of Comprehensive Income and Changes in Total Equity.
Consolidated Financial Statement: Combines all subsidiaries or affiliated qualifying businesses of a parent company into a single financial statement (such as Income Statement, Balance Sheet, or Statement of Cash Flows).
Contingency: Situation where a company stands to gain or lose in the future because of a current or past transaction or event. The amount of gain or loss will be determined by a subsequent transaction or event. The company might be required to set aside funds in a liability account to cover possible contingency costs.
Contingent Liability: Uncertain or disputed liability which depends on a possible event or situation to occur before becoming a firm and specific obligation. Usually considered as an improbable or unlikely liability to materialize in fact. Contingent liabilities are different for every type of business, and management makes provision for them by setting aside appropriate funds as reserves. Examples include types of guarantees or indemnifications the company makes, unfulfilled obligations under a contract, lawsuits or pending court cases, placed but unfilled purchase orders, unsettled disputes, etc. Contingent liabilities must be disclosed in the Notes to a Balance Sheet.
Cost: Frequently used interchangeably with expense but not exactly the same thing. A cost is what is paid for something; an expense is what a company can deduct from revenue on its Income Statement under accounting rules. A cost represents either (1) expenditure of cash, or (2) incurring an obligation. An expense is recognized when whatever was purchased is used up, consumed, or deducted as an expense according to the accounting methods of the company. See Expenses, Cost of Goods Sold, Overhead, Operating Expenses.
Cost of Goods Sold (COGS) or Cost of Sales: All direct or variable costs associated with selling products and services. All the costs to the company directly associated with producing or selling its products or services. A business that primarily renders services rather than sells products might not have a Cost of Goods Sold line on its Income Statement.
Credit Rating: The published ranking of a corporation within a grading system used by a rating agency (such as Standard & Poor’s, Moody’s, or Best’s) to evaluate the ability of a business to meet its financial obligations. Based on detailed analysis of a company’s financial history, condition and future prospects. Ratings scales differ according to the agency and include between 16 to 24 gradations. Generally AAA is highest and D is lowest.
Current Assets: Assets that are expected to be turned into cash within 12 months. Category includes accounts receivable, cash equivalents (short-term securities maturing in less than 90 days), inventory, marketable securities, prepaid expenses, and others.
Cycle Time: The total elapsed time to complete any process or related series of events, from beginning to completion. Cycle time is an indication of asset utilization.
Debenture: Long-term debt instrument not secured by any lien on a specific property.
Deferred Tax Liability: Liability created when income reported on the Income Statement is not yet taxable but will become so in the future. Tax is incurred but due to be paid beyond 12 months from the date of the Balance Sheet.
Depletion: Assignment of the historical cost of a natural resource to production periods as expense.
Depreciation: The incremental deduction as an expense on the Income Statement over multiple fiscal years of the original cost of certain categories of long-lived tangible assets (such as buildings or equipment). Periods over which an asset’s original cost may be deducted, and the rate of depreciation, are determined by IRS regulations and has little to do with physical deterioration or functional obsolescence.
Diluted Earnings Per Share: See Earnings Per Share.
Direct Costs: Costs directly associated with making or selling a product or service, such as the price of inventory purchased from a supplier, the cost of raw materials, piece-rate labor charges in a manufacturing setting, and sales commissions based on production, among many other categories.
Dividends or Cash Dividends: Distributions of Cash calculated from earnings to shareholders (owners) holding various classes of stock. Dividends to holders of preferred stock must be made prior to dividends paid to holders of common stock.
Earnings Per Share (EPS): Net income (earnings) less preferred stock dividends in a given period (usually quarterly or annually) divided by the total number of common stock shares outstanding (owned by investors). The past and expected future trends of a company’s EPS is the most watched indicator used by investors to evaluate a company’s prospects for growth. Basic earnings per share divides income after preferred dividends by the total number of shares of common voting stock outstanding. Diluted or fully diluted earnings per share includes the number of additional shares of common stock that would be outstanding if all exercisable options, warrants and debt convertible to common stock shares were exercised. Companies usually report both basic and diluted EPS. However, when financial reference is made simply to “earnings per share” or “EPS,” the meaning is usually diluted EPS.
Earnings Growth or EPS Growth: Increase year to year, or for one quarter in relation to the same quarter in the previous year, of profit or net income (net earnings), or of growth in Earnings per Share (EPS).
EBIT (Earnings Before Interest and Taxes): This measure is generally the same as the operating income figure: all revenues less all expenses except for the categories of interest and taxes. It excludes income from non-recurring activities or those not normal to daily operations.
Effective Gross Revenue: Total sales revenue less returns, rebates, or discounts. Provision for bad debts might be deducted to show effective gross revenue, or shown as a separate expense line. Used in real estate to mean total potential rental and other revenue less vacancies, bad debts, discounts and rebates.
Equity or Shareholder (Stockholder) Equity: A company’s total assets minus its total liabilities. Sometimes referred to as owner’s equity or book value. Represents the value “booked” on the Balance Sheet of the owners’ financial interests in the company.
Equity Ratio: The ratio of equity to the assets on a balance sheet. This ratio shows the relationship between the funds provided by shareholders and retained from earnings in the company (equity) and the assets of the company. A low ratio might indicate higher business risk, because there is relatively more debt in relationship to assets than if the equity ratio were lower. A higher ratio might indicated lower risk—just as a higher equity percentage in one’s home indicates lower risk—because shareholder equity does not have to be repaid and there is a lower level of liabilities (such as a home mortgage) which have to be met.
Expense: See Cost. Frequently used interchangeably with cost but not exactly the same. Expenses are incurred to generate revenue. The calculation of expense is applied differently in certain contexts based on accounting practices, widespread customary use, and business standards. For example, we refer frequently to cost of goods sold but might say operating expense more often than operating costs, which in general means the same thing. Expense is a calculation according to accounting rules (GAAP).
Extraordinary Item: After-tax gain or loss on an unusual transaction that is not expected to reoccur.
Financial Accounting Standards Board (FASB): Independent non-profit board of accountants responsible for establishing accounting principles and standards in the United States. The rules promulgated by the FASB are known as Generally Accepted Accounting Principles (GAAP), are recognized by the American Institute of Certified Public Accountants (AICPA), and are required by the SEC for all publicly traded companies to follow.
Financial Statements: Formal reports issued by a company to state the financial condition of the organization. The three most important are the Income Statement, the Balance Sheet, and the Statement of Cash Flows. Other related financial statements include the Statement of Comprehensive Income and Stockholders’ Equity. The standard rules governing the preparation of financial statements are established by the Financial Accounting Standards Board (FASB). The Securities and Exchange Commission (SEC) also sets certain reporting policies that publicly held companies must observe.
Financial Strength: The ability of a company, as reflected on its financial statements, to meet its financial obligations. The Balance Sheet shows a company’s liquidity and the relationship of liabilities to assets and equity. The Statement of Cash Flows indicates how much cash it is generating from operating activities and how much cash is being received from or used in financing and investing activities.
Financing Activities: One of three categories of activities (see Operations and Investing Activities) on a company’s Statement of Cash Flows which reports the sources of a company’s cash and how it is used (applications). Includes cash received from selling stock in the company through a secondary offering, or proceeds from borrowing; and the cash used to pay dividends or in buying back stock in the company.
Fiscal Year: The 12-month period selected by a company to report its annual performance on its financial statements and for tax purposes. Might or might not be the same as a calendar year. Some companies have a fiscal year ending in a month other than December for seasonal sales or other considerations.
Fiscal Period: Financial reporting period that may cover a year (fiscal year) or a quarter (fiscal quarter).
Fiscal Policy: Process, laws and regulations by which the U.S. Congress and Administration control the levels of taxation, borrowing, and spending for the national economy. Sometimes referred to as budgetary policy. Frequently used in contrast to monetary policy, which refers to the control exercised by the Federal Reserve over the supply and availability of money, and interest rates. See Monetary Policy.
Fixed Asset: Any long-term, tangible asset such as “Property, Plant and Equipment” as carried on the Balance Sheet. Not expected to be turned into cash within 12 months. Examples: Land, buildings, and machinery (also referred to as capital assets or long-term assets).
Free Cash Flow: The cash generated from a company’s normal (core) operations, minus capital expenditures. Some businesses deduct interest and dividends to calculate free cash flow. It represents the cash flow available after meeting the company’s infrastructure (capital expenditure) needs, which can then be used for obligations such as dividends and debt repayment, and for opportunities such as acquisitions and expansion. Considered by many financial experts to be a better indicator of a company’s health than net income or profit.
Full-Time Equivalent (FTE): The number of part-time and full-time employees or contract employees working for a company equated to full-time personnel. If a company has 1,000 full-time employees and 500 part-time employees working 20 hours per week (1/2 of a week), the company would have 1,250 FTEs.
General and Administrative Costs (G&A); also Sales, General and Administrative Costs (SG&A): Basic overhead. A term used on Income Statements to include the combined costs which are not associated directly with the individual production and sale of its products. Employee salaries, benefits, utilities, cost of plant and equipment, general transportation, marketing and advertising, and many other line items might be included in this category, depending upon the structure of a company’s financial statements.
Generally Accepted Accounting Principles (GAAP): Accounting profession’s collection of rules governing financial statement presentation and measurement. See Financial Accounting Standards Board (FASB).
Goodwill: The amount by which the purchase price paid for a company exceeds the value of its net tangible assets on its Balance Sheet. A company will buy another company for more than the value of its assets when the market value of the acquired company is greater than the net value of its assets as carried on its Balance Sheet. Frequently, the price required to buy the stock of an acquired company, which reflects it earnings growth potential over time, is greater than the net value of its assets show according to accounting rules. The assets of the purchased company are carried on the acquiring company’s Balance Sheet at their acquired value. The extra price paid for the company is shown on the acquiring company’s Balance Sheet as goodwill. Goodwill is cumulative (added for each new acquisition), and it is neither depreciated nor amortized. However, it can be written down or “impaired,” by auditors if the actual market value of the acquired company’s assets declines materially.
Gross Margin: Sales minus direct costs (or Cost of Goods Sold, or cost of sales). Can be expressed in dollars or as a percent of sales. Margin and Profit mean basically the same thing. Gross Profit or Gross Profit Margin mean Sales Revenue less the direct Cost of Goods Sold or Cost of Sales. Net Margin, or Net Profit Margin, or Net Profit mean sales less all company expenses, including taxes, depreciation, interest, etc. Also known as Gross Profit Margin, Net Margin, Net Profit Margin. NOTE: Profit is usually referred to in dollars (as, “a $2,000,000 profit”), but margin is usually referred to as a percent of sales (as, “our margin was 6.5%” meaning for every $100 in sales revenue the company generated $6.50 in profit margin).
Gross Profit Margin: See Gross Margin.
Gross Revenue: See Revenue.
Growth: Any period-to-period increase (or decrease) in a metric. Usually shown as a percentage. In business, growth is usually measured by comparing a quarter of one fiscal year to the same quarter in the prior fiscal year, or by comparing one fiscal year against one or more prior years. Common growth metrics include revenue (sales), operating income, net income (profit), earnings per share (EPS), and assets.
Growth Company: A business for which sales revenue rises consistently and rapidly year to year, and the investment market anticipates continued increases in sales revenue. Wall Street also focuses on growth in earnings per share (EPS) as an indicator of a growth company.
Guidance or Outlook: The formal forecast issued by the officers of a company (usually the CEO or CFO) for its financial performance, especially the expected performance in revenue, earnings and earnings per share over the next fiscal period, usually a quarter or fiscal year. Analysts and investors pays close attention to earnings guidance and stock prices tend to rise and fall in large part based on how close a company comes to achieving, exceeding or falling short of its guidance or outlook.
Income (Net Income; Earnings; Net Earnings): Company profit as calculated at different levels. Unless specifically modified (as in, “our income before taxes”), income and earnings both mean the profit reflected on the bottom line of the Income Statement.
Income From Continuing Operations: Depending on the specific qualifier, the income earned either before or after tax from the portion of the business that is ongoing—meaning not including income or revenue from a part of the business that was sold or discontinued during a year, and which will not be part of operations in the future.
Income Statement: Also known as the "Profit and Loss (P&L)", "Statement of Operations", and "Statement of Earnings", the Income Statement is a financial statement that indicates how company revenue is transformed into net income. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. It also reflects trends of Revenues, Cost, & Profit over a three year period of time.
Inorganic Growth: Sales growth from acquiring existing businesses or merging with another company; also, growth by franchising or licensing products or brands, joint ventures or cross-marketing agreements.
Intangible Assets: Asset that does not have a physical existence but is intellectual property. Examples: patents, copyrights, trademarks and trade names, franchises, organization costs, and purchased goodwill.
Intellectual Property (IP): Proprietary information, know-how, work processes, trade secrets, documents, software, formulas, and intangible assets which are developed or purchased by, and are considered to be unique to, the business. For many businesses, preserving the sole right to use its IP is critical to its competitive success.
International Financial Reporting Standards (IFRS): The guidelines and rules set by the independent, privately funded International Accounting Standards Board (IASB) based in London, England. Its standards are either adhered to or permitted for use by over 100 nations. The objective is to enable international investors to compare the financial reports of companies from many countries on an “apples to apples” basis. The United States is represented on the IASB by the American Institute of Certified Public Accountants (AICPA), but U.S. companies are not required by the U.S. to comply with these standards. U.S. companies must comply with standards set by the SEC and the Financial Accounting Standards Board (FASB).
Inventory: The value of a company’s supply of on-hand finished or unfinished products, raw materials, merchandise, work in progress (manufacturing), which it ultimately intends to sell to generate revenue. Carried on the Balance Sheet and valued at the lower of actual cost of purchase or value added, or the current fair market value of the inventory. Usually considered as a liquid asset or a current asset because inventory can be sold within 90 days to one year and turned into cash.
Inventory Turnover: Indicated by a number, such as 12 times or 6.5 times, measures the number of times during a fiscal year that a company sells its average dollar cost value of inventory. Annual sales divided by the average sales cost carried in inventory. A rough inventory turnover estimate is to divide the sales revenue on the Income Statement by the inventory amount on the Balance Sheet at the end of the period.
Investing Activities: One of three categories of activities (see Operations and Financing Activities) on a company’s Statement of Cash Flows which reports the sources of a company’s cash and how it is used (applications). Includes cash used to buy assets, and cash received from selling assets, such as securities, buildings, equipment, intangible assets such as spectrum for a wireless provider, or the acquisition or sale of a business unit.
Liability: Any debt or other legal financial obligation that binds the company for payment; amounts owed to non-owners. Includes accounts payable, mortgage loans, loans from banks or other sources, bonds issued, taxes, wages payable, and more.
Liquidity: How quickly and easily a company’s assets can be turned into cash. Frequently evaluated in relationship to liabilities. A company with large balances of cash and cash equivalents, with inventories that are sold rapidly, and with dependable collection of its accounts receivable, would be considered very liquid if these short-term assets substantially exceeded its short-term liabilities. An illiquid company would be the reverse: primarily long-term or fixed assets, or a significant amount of current liabilities in relationship to its current assets.
Margin: The difference between sales price and costs, expressed as a percent of sales revenue. Can also be expressed in dollars but usually margin means percent of revenue. The types of expenses deducted determine which margin is calculated: Gross or Net. Gross Margin deducts Costs of Goods Sold; Net Profit Margin deducts COGS and all other expenses.
Market Capitalization: Frequently referred as “market cap.” The total market value of a public company as measured by the current price of its stock multiplied by the number of shares of stock outstanding.
Market Share: The proportion/percent of annual sales a company or product line receives in relation to the estimated total annual sales for that product line or industry. Can be analyzed by geographic region and other demographic breakdowns. Can be represented by total unit sales rather than dollar volume.
Matching: Principle that tells the accountant when to record a production cost as expense, and when to recognize revenue. Costs directly associated with producing a certain revenue will be expensed in the same period that the revenue is recorded. Costs that benefit more than one period are expensed over the periods benefited.
Materiality: An item is material if it can influence a decision made by a user of the financial statements. When an item is material, it must be accounted for within the measurement and reporting principles known as Generally Accepted Accounting Principles (GAAP).
Metric: A financial measure by which a business or other organization determines its success. The specific figures associated with the metric include the target goal to be achieved and the actual performance figures in relationship to the goal. Common metrics include revenue, profit, gross margin, and EPS growth.
Monetary Policy: Process and regulations by which the Federal Reserve controls the supply and availability of money, and the level of interest rates, in the U.S. economy. Frequently used in contrast to fiscal policy, which refers to government establishment of borrowing, spending and taxation levels. (See Fiscal Policy.)
NASDAQ: The National Association of Securities Dealers Automated Quotation system. It is widely considered to be the most technologically advanced of all the United States stock exchanges.
Net Asset Value (NAV): For an individual asset, is equal to its value minus any debt directly associated with it. For assets overall, total tangible assets (not including goodwill, for example) less all liabilities.
Net Earnings: See Net Income.
Net Income: Total of all reported revenues, gains, expenses, and losses for a fiscal period. Often referred to as a company’s bottom line, this is what is left over after all expenses have been subtracted from revenues. Same as Profit. Not the same as Cash Flow.
Net Margin: See Margin.
Net Sales: See Revenue.
Net Revenue (Net Sales Revenue; Net Sales; Effective Gross Revenue): Deducts from gross revenue any product returns, sales that fall through, discounts, and any payments returned to the customer. Financial statements usually mean net revenue when referring to revenues or sales.
Non-Current Liability: Any debt of the business that is not expected to be paid for at least one year from the date of the Balance Sheet.
Non-Recurring Activity: Usually reflected on the Income Statement, a transaction or series of transactions that are outside the normal scope of business activity and not a part on ongoing core operations.
Operations or Operating Activities: The core business activities of a company, those which relate to the production, sale and support of its primary products and services. In contrast to other support functions such as Investing Activities and Financing Activities. One of three categories of activities (see Financing Activities and Investing Activities) on a company’s Statement of Cash Flows which reports the sources of a company’s cash and how it is used.
Operating Cash Flow: The amount of cash generated from Operating Activities (in contrast to Investing Activities or Financing Activities) as reported on the Statement of Cash Flows. Many executives and analysts consider Operating Cash Flow to be even more important than Profit or Income.
Operating Expenses or Operating Cost: A company’s overhead costs, such as salaries, rents, travel, marketing, advertising, utilities, professional fees, property taxes, etc. These are indirect or fixed costs incurred by a business, in contrast to the direct costs or Cost of Goods Sold directly applicable to producing the goods and services sold.
Operating Income: Revenue generated from core operations less the Cost of Goods Sold, overhead, and other costs associated with conducting normal business activities. Operating Income, in contrast to “bottom line” net income, represents how profitable the normal core operations of a business are before non-recurring or special income generated from any number of other sources, usually before taxes.
Organic Growth: Sales growth from internal expansion, opening new offices, plants, stores owned by the parent company; hiring and training new employees; developing and marketing new products, all owned by the business.
Outsourcing: Placing a business process, activity or service (such as component manufacturing, accounting functions, or call center operations) under contract with an independent party rather than performing the function directly with in-house staff.
Overhead: See Operating Expenses. General term to mean all the costs of running a business that are not associated with the specific production of individual products or services.
Parent Company: Company that owns more than 50% of the voting stock of another company.
Partner: In general usage, one or more individuals or entities that have a close working relationship. Business partners may or may not draft a written Partnership Agreement or other legally binding contract. Supplies and buyers, and employees of the same firm, frequently refer to themselves as partners. As a legal term, a partner involves a specific legal relationship outlined by contract and by contract law.
Preferred Stock: Class of stock that is preferred over common stock as to dividend distribution or asset distribution in liquidation. Preferred shareholders generally do not have the right to vote for the board of directors.
Price/Earnings Ratio (P/E ratio): Also known as the P/E multiple, this is the latest closing stock price divided by the last 12 months’ (or four quarters’) earnings per share, or by the expected earnings of the current fiscal year. Future P/E ratio uses the next four quarters estimated earnings.
Price/Earnings to Growth (PEG) Ratio: A valuation metric comparing the Price-to-Earnings ratio of a company to its projected annual Earnings Per Share growth. The PEG ratio is used to determine a stock’s value while taking the company’s earnings growth into account, and is considered to provide a more complete picture than the P/E Ratio. The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. PEG = P/E ratio ÷ Annual EPS Growth.
Private Company: Any business enterprise or organization whose ownership interests are not registered with the SEC.
Private Sector: The segment of our national economy comprised of businesses or organizations which are not affiliated with governmental agencies. Includes commercial public and private businesses and certain non-for-profit organizations, trade and professional associations.
Property, Plant and Equipment: Long-lived productive assets, such as Land, buildings, machinery, and furniture and fixtures.
Public Company: A business organization whose ownership interests (shares or stock) are registered with the Securities and Exchange Commission (SEC) and traded for public purchase on at least one of many securities exchanges (such as the New York Stock Exchange, NASDAQ or Over the Counter (OTC)).
Public Sector: The segment of our national economy that includes entities or organizations which are not in business to earn profits but to serve the public interest. Includes all governmental agencies at the local, state and federal levels in all three branches of government: executive, legislative and judicial. Can also include certain non-for-profit organizations, and community organizations depending upon their purpose and organizational structure.
Receivable: Any claim a company has against others that is expected to be settled in cash. When customers or clients purchase a product or service and receive credit to pay later, an account receivable is created. Receivables are either trade accounts (customers’ accounts & notes receivable) or non-trade accounts (tax refunds, employee advances, dividends).
Results of Discontinued Operations: After-tax gain or loss from a segment of the business that management intends to sell, or has sold or discontinued.
Return on Assets (ROA): A financial measure of a company’s profitability, shown as a percent (ratio). Calculated by dividing Net Income (or Net Earnings) for the most recent fiscal year, or the last four quarters, by the total assets on the Balance Sheet at the end of the period. Indicates how much profit per dollar of assets is being earned by the company.
Return on Investment (ROI): The return received from a financial investment of any type. Usually calculated as a percent: The return in dollars for the last 12 months, or most recent fiscal year, or the next 12 months, divided by the amount of investment made.
Revenue (Total Revenue, Gross Revenue, Sales Revenue, Sales, Gross Sales Revenue): Amount of money the company generates from selling its products and services during a particular time period. However, a company might distinguish its sales revenues from revenues from other sources, such as major investments. Gross revenue or total revenue might therefore include not only product and service sales, but also revenue from other sources or from other activities not part of core operations. Usually sales or revenues means the same as net sales or net revenues. Revenue figures will usually be net of discounts, rebates, promotions, or returns. Net or effective revenue indicates these deductions specifically.
Revenue Recognition: According to accrual accounting and GAAP, revenue is reported in the fiscal period in which the sale is made (or the service is provided) regardless of whether cash is collected from the customer or the customer still owes for the merchandise or service received.
Sales, Total Sales, Sales Revenue: See Revenue.
Sales, General and Administrative Costs (SG&A): See General and Administrative Costs.
Securities and Exchange Commission (SEC): Federal agency created to administer the Securities Acts of 1933 and 1934. Although most accounting standards and concepts originate with the FASB, the SEC has final authority as to the accounting and reporting principals used in published annual reports and financial statements.
Shareholders’ Equity: See Stockholders’ Equity.
Stakeholder: Any party (individual, business or organization), which is directly impacted by a company. Includes owners, shareholders, customers, employees, distributors, suppliers, the community, etc.
Statement of Cash Flows: Statement that reports how much cash the company received and disbursed during the fiscal period, resulting in changes that are recorded on the Balance Sheet, either providing or using cash.
Statement of Financial Condition/Position: Alternative name for Balance Sheet.
Stock: Shares of ownership interests (equity interests, represented by stock certificates) in a corporation, issued to the owners. Basic types of stock include common stock and preferred stock. The number of shares of stock a person owns represents the proportionate share an owner has in the net value of the company. If the business sold its assets and paid off its liabilities, the equity remaining would be owned by the stockholders in proportion to number of shares owned. Other business forms, such as limited liability companies (LLCs) or partnerships use other legal instruments to evidence ownership rather than stock.
Stockholder: An owner of a corporation whose ownership interest is represented by shares of stock.
Stock Option: In the stock market, the right but not the obligation to buy or sell a security. Corporate options to purchase the company’s stock might be granted to executives or managers as part of a compensation package to obtain their services.
Subsidiary or Subsidiary Company: Company in which more than 50% of the voting stock is owned by another company.
Tangible Assets: A physical resource used by a company in its business. Tangible assets owned by a company are carried on its Balance Sheet. Examples: buildings, equipment, land, vehicles, office furnishings. A company might also lease or rent such assets, which would then not be shown on its Balance Sheet.
Treasury Stock: Stock repurchased by a corporation from other shareholders & held in reserve, ultimately to be either retired or resold to the public. Treasury stock is not included in calculating Earnings Per Share (EPS), has no voting rights, and receives no dividends.
Unearned Revenues: Current liability created by collecting from customers before they receive the merchandise or services for which they are paying.
Useful Life: The period of time as determined by accounting rules for which an asset is expected to have value. The purchase price of an asset is expensed or written off (depreciated for tangible assets or amortized for intangible assets), over the period of its useful life.
Variable Costs: The same thing as Direct Costs. Direct Costs generally are associated with the production or sale of individual units. The term Variable Costs indicates that the combined direct costs for the entire company or product line will go up or down—will vary—with the overall sales volume.
Volume: The amount of sales, costs, product use, inventory sales, or similar measure per time period (usually a month, quarter or year).
Wall Street: Refers generally to the U.S. Financial and Investment Markets. Specific reference is to the address of the trading floor of the New York Stock Exchange (NYSE) located at 11 Wall Street in New York City. Because New York City is acknowledged as the financial capital of the United States due to the location of so many financial institutions, Wall Street as the location of the NYSE has come to symbolize the entire U.S. Financial and Investment Marketplace.
Warrant: A type of option; a security entitling the holder to buy a specified amount of stock at a specified future date and price, usually one higher than current market price. Warrants can be privately issued and restricted to the bearer, or can be traded as securities whose price reflects the value of the underlying stock.
Working Capital: How much cash the company has to operate its business on a daily basis. It is a measure of its operating liquidity. Basically, it is the difference between a company’s Current Assets and its Current Liabilities. A “Working Capital” loan means borrowing the cash necessary to fund daily operations—paying the bills, salaries, rent, etc.—in contrast to a loan for capital expenditures to buy identifiable assets, or to purchase a business, or to make other investments.