Dictionary

Ask - This is the quoted ask, or the lowest price an investor will accept to sell a stock. Practically speaking, this is the quoted offer at which an investor can buy shares of stock; also called the offer price.

Asset - Any possession that has value in an exchange.

Asset-based financing - Methods of financing in which lenders and equity investors look principally to thecash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Balance sheet - Also called the statement of financial condition, it is a summary of the assets, liabilities, and owners' equity.

Bid price - This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically speaking, this is the available price at which an investor can sell shares of stock. Related: Ask, offer.

Bridge financing - Interim financing of one sort or another used to solidify a position until more permanent financing is arranged.

Business cycle - Repetitive cycles of economic expansion and recession.

Business risk - The risk that the cash flow of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet its operating expenses.

Capital - Money invested in a firm.

Capital structure - The makeup of the liabilities and stockholders' equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities.

Cash - The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.

Cash cycle - In general, the time between cash disbursement and cash collection. In net working capital management, it can be thought of as the operating cycle less the accounts payable payment period.

Cash flow - In investments, it represents earnings before depreciation, amortization and non-cash charges. Sometimes called cash earnings. Cash flow from operations (called funds from operations ) by real estate and other investment trusts is important because it indicates the ability to pay dividends.

Credit risk - The risk that an issuer of debt securities or a borrower may default on his obligations, or that the payment may not be made on a negotiable instrument. Related: Default risk.

Credit scoring - A statistical technique wherein several financial characteristics are combined to form a single score to represent a customer's creditworthiness.

Depreciation - A non-cash expense that provides a source of free cash flow. Amount allocated during the period to amortize the cost of acquiring Long term assets over the useful life of the assets.

Discounted cash flow (DCF) - Future cash flows multiplied by discount factors to obtain present values.

Earnings - Net income for the company during the period.

Earnings Before Interest and Tax (EBIT) - A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and non-operating profit before the deduction of interest and income taxes.

Economies of scale - The decrease in the marginal cost of production as a plant's scale of operations increases.

Economies of scope - Scope economies exist whenever the same investment can support multiple profitable activities less expensively in combination than separately.

Employee stock ownership plan (ESOP) - A company contributes to a trust fund that buys stock on behalf of employees.

Equity - Represents ownership interest in a firm. Also the residual dollar value of a futures trading account, assuming its liquidation at the going market price.

Ethics - Standards of conduct or moral judgment.

Expected return - The return expected on a risky asset based on a probability distribution for the possible rates of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate) plus a risk premium (the difference between the historic market return, based upon a well diversified index such as the S&P500 and historic U.S. Treasury bond) multiplied by the assets beta.

Expected return on investment - The return one can expect to earn on an investment. See: capital asset pricing model.

Fair market price - Amount at which an asset would change hands between two parties, both having knowledge of the relevant facts. Also referred to as market price.

Financial risk - The risk that the cash flow of an issuer will not be adequate to meet its financial obligations. Also referred to as the additional risk that a firm's stockholder bears when the firm utilizes debt and equity.

Financing decisions - Decisions concerning the liabilities and stockholders' equity side of the firm's balance sheet, such as the decision to issue bonds.

Firm - Refers to an order to buy or sell that can be executed without confirmation for some fixed period. Also, a synonym for company.

Five Cs of credit - Five characteristics that are used to form a judgment about a customer's creditworthiness: character, capacity, capital, collateral, and conditions.

Fixed asset - Long-lived property owned by a firm that is used by a firm in the production of its income. Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents, trademarks, and customer recognition.

Free cash flows - Cash not required for operations or for reinvestment. Often defined as earnings before interest (often obtained from operating income line on the income statement) less capital expenditures less the change in working capital.

General partnership - A partnership in which all partners are general partners.

Generally Accepted Accounting Principals (GAAP) - A technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.

Goodwill - Excess of the purchase price over the fair market value of the net assets acquired under purchase accounting.

Growth phase - A phase of development in which a company experiences rapid earnings growth as it produces new products and expands market share.

Hubris - An arrogance due to excessive pride and an insolence toward others.

Human capital - The unique capabilities and expertise of individuals.

Income statement (statement of operations) - A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

Inflation - The rate at which the general level of prices for goods and services is rising.

Insolvency risk - The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.

Intangible asset - A legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual property, patents, copyrights, and trademarks are examples of intangible assets.

Interest payments - Contractual debt payments based on the coupon rate of interest and the principal amount.

Internal rate of return - Dollar-weighted rate of return. Discount rate at which net present value (NPV) investment is zero. The rate at which a bond's future cash flows, discounted back to today, equals its price.

Intrinsic value of a firm - The present value of a firm's expected future net cash flows discounted by the required rate of return.

Inventory - For companies: Raw materials, items available for sale or in the process of being made ready for sale. They can be individually valued by several different means, including cost or current market value, and collectively by FIFO, LIFO or other techniques. The lower value of alternatives is usually used to preclude overstating earnings and assets. For security firms: securities bought and held by a broker or dealer for resale.

Merger - Acquisition in which all assets and liabilities are absorbed by the buyer. (2) More generally, any combination of two companies.

Net book value - The current book value of an asset or liability; that is, its original book value net of any accounting adjustments such as depreciation.

Net income - The company's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses.

Non-Disclosure - is a legal contract between at least two parties that outlines confidential materials or knowledge the parties wish to share with one another for certain purposes, but wish to restrict access to. It is a contract through which the parties agree not to disclose information covered by the agreement. An NDA creates a confidential relationship between the parties to protect any type of confidential and proprietary information or a trade secret. As such, an NDA protects non-public business information.

NDAs are commonly signed when two companies or individuals are considering doing business and need to understand the processes used in each others business for the purpose of evaluating the potential business relationship. NDAs can be "mutual", meaning both parties are restricted in their use of the materials provided, or they can restrict the use of material by a single party.

Note - Debt instruments with initial maturities greater than one year and less than 10 years.

Note agreement - A contract for privately placed debt.

Offer - Indicates a willingness to sell at a given price. Related: bid.

Operating risk - The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk.

Opportunity cost of capital - Expected return that is foregone by investing in a project rather than in comparable financial securities.

Paper - Money market instruments, commercial paper and other.

Profit margin - Indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percentage.

Prospectus - Formal written document to sell securities that describes the plan for a proposed business enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision. Prospectuses are used by mutual funds to describe the fund objectives, risks and other essential information.

Return on assets (ROA) - Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).

Return on equity (ROE) - Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity (adjusted for stock splits). Result is shown as a percentage. Investors use ROE as a measure of how a company is using its money. ROE may be decomposed into return on assets (ROA) multiplied by financial leverage (total assets/total equity).

Return on investment (ROI) - Generally, book income as a proportion of net book value.

Return on total assets - The ratio of earnings available to common stockholders to total assets.

Risk - Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset.

Sales forecast - A key input to a firm's financial planning process. External sales forecasts are based on historical experience, statistical analysis, and consideration of various macroeconomic factors.

SBIC - Small Business Investment Company.

Seller Discretionary Cash Flow (SDC) - The pre-tax earnings of the business before non-cash expenses, one owner's compensation, interest expense or income, as well as one-time and non-business related income and expense items. If there are additional owners working in the business, their compensation needs to be adjusted to market rates.

Seller Financing - Funding a purchase by a seller's loan to the buyer, the buyer takes full title to the property when the loan is fully repaid.

Stock - Ownership of a corporation which is represented by shares which represent a piece of the corporation's assets and earnings.

Sustainable growth rate - Maximum rate of growth a firm can sustain without increasing financial leverage.

Time value of money - The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received.

Weighted average cost of capital - Expected return on a portfolio of all the firm's securities. Used as a hurdle rate for capital investment.

Working capital - Defined as the difference in current assets and current liabilities (excluding short-term debt). Current assets may or may not include cash and cash equivalents, depending on the company.