Words Used In Corporate Finance

Take a quick look at the financial pages of
any major newspaper. You'll see all sorts of terms and phrases
that have a very specific meaning to those who work in the world
of corporate finance. For others, however, these terms can seem
confusing – or even intimidating!
This Mind Tools "Words" page is designed to help you navigate your
way through the language of finance. We provide a quick-reference
glossary of many words and phrases commonly used when discussing
publicly traded companies.
This "Words" page covers the following terms:
Financial Analysis Terms

Acid-test ratio/quick ratio
Break-even (BE)
Cost accounting
Current ratio
Gearing ratio/financial leverage
Insolvent
Management accounting
Net present value (NPV)
Opportunity cost
Present value (PV)
Ratio analysis
Return on investment (ROI)
Zero-based budgeting (ZBB)

General Corporate Finance Terms

Bond
Common stock
Debt financing
Dividends
Equity financing
GAAP (generally accepted accounting principles/practices)
IPO (initial public offering)
Mergers and acquisitions (M&A)
P/E (price to earnings) ratio
Preferred stock
Retained earnings
Yield

Financial Analysis Terms
Acid-test ratio/quick ratio/liquid ratio
"Quick assets" divided by current liabilities. This is a test of a
company's solvency/financial strength, or ability to pay its
debts. Quick assets are cash, accounts receivable, or easily
liquidated assets; they do not include inventory. Current liabilities are debts that must be paid in the next year.
Break-even (BE)
The point in time at which total revenues received equal total costs so far. In
many projects, an investment is needed at the start of the
project, with profits received in a stream once this investment
has been made. Break even occurs when profits received are equal
to the investment made. Calculating the projected break even point in a project is
usually the minimum standard for determining whether or not to
continue with it, or make an investment.
Cost accounting
The tracking and analyzing of costs associated with operations.
The results are used internally within an organization for a range
of purposes including estimating and constructing budgets, and
other financial forecasts.
Current ratio
Current assets divided by current liabilities. This shows the
organization's ability to repay short-term creditors, and it
indicates solvency/financial strength. Current assets include
cash, accounts receivable, inventory, marketable securities,
prepaid expenses, and so on. (See also the acid-test .)
Gearing ratio/financial leverage
The ratio of equity capital to borrowed capital or debt financing.
Companies with higher proportions of equity are usually considered
financially stronger.
Insolvent
When an organization is unable to pay due debts.
Management accounting
Preparation and tracking of the accounting statements and
financial data that a company's management use to make efficient
business decisions, often during a business year. These statements
are not intended for use outside the company or for tax
reporting.
Net present value (NPV)
The difference between the present value (in today's money) of an
investment's costs, and the present value of the cash flows that
will be derived from it in the future. This is the net
contribution or profitability of an investment or project, and
it's a useful measure of the worth of a project or investment.

Opportunity cost
The benefits you miss out on by not investing in a particular
opportunity or project, because you're investing in another
project. The term opportunity cost can be used to refer to
non-financial benefits as well.
Present value (PV)
The value of future income in today's money. This considers the
"time value of money". For instance, the present value of $500,000
received a year from now is less than $500,000, because you could
invest the money today and start earning interest immediately. To
determine what future revenue is worth today, divide it by 1+the
percentage interest rate you'd get from the bank for the period, raised to the power of the number of years ahead that you'll receive the money.
Ratio analysis
A ratio is the result of dividing one number by another. Ratio
analysis involves comparing financial figures from different years, or
between different line items of a company's financial statements.
Common ratios used in financial analysis include the current ratio and the quick ratio .
Return on investment (ROI)
Net income from an investment divided by the cost of that
investment. ROI, or simply "return," measures the efficiency or
profitability of an investment. It can also measure the overall
profits generated by a company – to show operational efficiency
and the effectiveness of management.
Zero-based budgeting (ZBB)
A method of preparing a budget in which you start from the
beginning and evaluate each item separately, assuming that you
have no pre-approved funds left over from the previous period.
Therefore, you justify and prioritize your needs using revenue and
expense projections. This is different from traditional budgeting,
in which you assume that past revenue and expenses will continue,
and you uplift each line item by a certain percentage.
General Corporate Finance Terms
Bond
A security in which the holder lends money to the issuing company,
instead of owning stock in the company. The company then owes the
bondholder the principal (amount borrowed) plus interest that will
be paid at a later date that's fixed at the time the bond is taken
out. This interest can be fixed or variable, and it's paid on the
maturity date.
Common stock
Stock, or ownership, in a company. The owner receives voting
rights and earns a portion of the company's profits, either
through dividends and/or an increase in the price per share.
Common stockholder dividends are not guaranteed and can vary
according to profitability. If a company is liquidated or goes
bankrupt, common stockholders are paid after creditors,
bondholders, and preferred stockholders, sometimes meaning that
they receive nothing at all. Common stock is a US term equivalent
to ordinary shares in the UK.
Debt financing
When money to fund operations or invest in capital assets is
raised through loans from banks or other creditors. In exchange
for the loan, the organization agrees to repay the principal
(borrowed amount) plus interest.
Dividends
The distribution of earnings paid to owners of a corporation's
stocks.
Equity financing
When money to fund operations or invest in capital assets is
raised by selling a share of ownership of the business to outside
investors. In public companies, equity is in the form of stock.
GAAP (Generally Accepted Accounting Principles)
A predetermined set of guidelines for preparing financial
statements. These standard practices allow you to compare the
financial statements of one company with others. North America and
the UK use GAAP (albeit different versions). International
companies often use International Financial Reporting Standards (IFRS),
and IFRS also includes International Accounting Standards (IAS).
Other countries may follow their own sets of accounting practices
and standards.
IPO (Initial Public Offering)
When a private company first sells shares to the public ("goes
public"). Companies use IPOs as a way to gain funds for operation
and expansion. The alternative is to borrow money, increasing debt
financing.
Mergers and acquisitions (M&A)
When the operations, assets and liabilities of one company are
combined and managed with another company. In a merger, the shares
of both companies are usually exchanged for shares in the merged company, and the names of both
organizations can be joined together (Royal Dutch Shell is a good
example). In an acquisition, one company buys another company, and
the purchased company's name often disappears, or is simply used
as a brand name by the acquirer for a product or service line.
P/E (price to earnings) ratio
Market price per share divided by annual earnings per share.
Investors use this common ratio to determine whether they should
purchase shares in a company. Oftern, investors want a high return
– i.e. a low P/E – on their investments. Where people are buying
stock at a high P/E, it implies that they're expecting much higher
profits in the future than they're getting now.
Preferred stock
Stock, or ownership, in a company. Preferred stockholders typically receive
fixed dividend payments and usually have no voting rights.
However, if a company is liquidated or goes bankrupt, preferred
stockholders are paid before common stockholders, but after
bondholders and other creditors.
Retained earnings
The portion of earnings that's reinvested in the company rather
than paid out in dividends to stockholders.
Yield
The annual rate of return on an investment, usually given as a
percentage of the money originally invested.