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Balance Sheet


Anything on a company's books considered as having a positive monetary value. Assets include all things like holdings of obvious market value (cash, real estate), (inventory, aging equipment), and other quantities (pre-paid expenses,goodwil) considered an asset by accounting conventions but possibly having no market value at all.

Book value

Per-share value of shareholders' equity excluding goodwil andother intangible assets.

Cash flow

Cash flow is essentially the movement of money into and out of your business; it's the cycle of cash inflows and cash outflows that determine your business' solvency. Cash flow analysis is the study of the cycle of your business' cash inflows and outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.

Compound Annual Growth Rate - CAGR

The year-over-year growth rate of an investment over a specified period of time. The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

Debt-to-Equity Ratio

A company's debt divided by its equity . This ratio is used as a relative measure of debt, but it isn't always useful since equity is a complicated number. It's sometimes better just to look at a company's total debt per share, which you can either look up or calculate since Debt per share = eps/ roe x Debt/Equity:


Method to account for assets whose value is considered to decrease over time. The total amount that assets have depreciated by during a reporting period is shown on the cash flow statement , and also makes up part of the expenses shown on the income statement . The amount that assets have depreciated to by the end date of the period is shown on the balance sheet.


Earnings Before Interest and Taxes; intended to be a measure of the amount of cash generated by a company's operation.


Earnings Before Interest, Taxes, Depreciation, and Amortization; intended to be a measure of the amount of cash generated by a company's operations (but leaving out the costs of financing and taxes - the "I" and the "T"). The danger with EBITDA is that if the "D" and "A" represent a "using up" of an asset that wil have to be replaced in the future, then they really are operations-related expenses, making EBITDA too liberal a number.


Economic Value Added, a measure of the superiority of the return a company is able to realize on invested capital above the baseline return expected by the investment community. The formula is EVA = NOPAT - ( C x Kc) where C is the amount of capital a company plans to invest in a project, and Kcis the cost of capital, i.e. the return rate expected by investors. Positive EVA means the project will add value for shareholders; negative EVA means they would be better off if management just gave them the money as a dividend.

EVA is analogous toearnings; but where earnings expenses debt financing only, the C x Kcterm in EVA is expensing the cost of all capital, equity as well as debt. Equity

The portion of a company's assets that the shareholders own, as opposed to what they've borrowed: equal to total asset minus liabilities. Also called "owners' equity" or "shareholders' equity".


An obligation to pay. These include accounts payable, and bond and bank debt. Liabilities are shown on the balance sheet Note that a liability is not necessarily an evil thing for a company. Technically it's just an asset that they have temporary control over but don't own. If it's a useful asset and if the cost of "borrowing" it is cheap, then a liability can be a positive thing.

One example:
if a retailer sells a gift certificate, they have to show a liability for the value of the merchandise they will be obligated to hand over when the giftee shows up to redeem it; but in the meantime they already have the cash the gifter paid, and they can use it any way they want -- this liability is really an interest-free loan.

Operating Expenses

Expenses associated with running a business but not considered directly applicable to the current line of goods and services being sold. These include Sales and Marketing, R & D, and General and Administrative costs (including the salaries of people working in these areas).

Operating Income

Operating Income is the pre-tax, pre-interest profit from the company's operation Operating profit margin Ratio of operating income to sales revenue.

P/E Ratio

The ratio of a stock price to its company's annual earning per share.

Return on Assets

Earning divided by total assets This number tells you "what the company can do with what it's got", ie how many dollars of profits they can achieve for each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Capital-intensive industries (like railroads and nuclear power plants) will yield a low return on assets, since they have to own such expensive assets to do business. (And if they have to pay a lot to maintain these assets, that will cut into the ROA even more, since the maintenance costs will decrease their earnings). Shoestring operations (software companies, job placement firms) wil have a high ROA: their required assets are minimal.

Return on Equity

Earning divided by equity The idea is that this tells you the number of dollars of profits the company can earn for each dollar of shareholders' equity; but return on asset is probably a better number to look at. (After all, their profitability is a function of all assets they control, not just of the equity portion of assets. Note that ROE is bigger than ROA, since equity is a subset of assets).
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