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Cost of sales / Accounts payable (either the ending balance or average Resources owned and employed by an organization which confer future
balance). This ratio measures how effective management is in paying its economic benefits.
suppliers.
ASSET TURNOVER RATIO
ACCOUNTS RECEIVABLE DAYS RATIO Sales / Total assets. This ratio shows how effective the company is in
generating sales from its assets.
Accounts receivable / Sales x 365. Average number of days a firm takes
to collect payments on goods sold.
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Financial analysis glossary
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Financial analysis glossary
COGS CREDITORS
Cost of goods sold. See accounts payable.
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Financial analysis glossary
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Financial analysis glossary
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Financial analysis glossary
INVENTORY
LEVERAGE RATIOS
Inventory normally refers to items held for resale and may include raw
Ratios that analyze a company’s solvency or the level of its debt
materials, work in progress and finished goods.
financing relative to its equity financing. An example of a leverage ratio is
Total debt / Total shareholders’ equity.
INVENTORY DAYS RATIO
Inventories / COGS x 365. Average number of days goods remain in LIABILITIES
inventory before being sold.
Money owed, or other financial obligations to other organizations
Liabilities and individuals.
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Financial analysis glossary
MATERIAL COST RATIO The profits retained by an organization after all expenses including
interest expenses, taxes and dividends. The retained profits / earnings
Materials / Sales. Cost of goods sold is made up of labour, materials, and
for a given year are reinvested in the business (hopefully making the
direct costs. This margin shows the proportion of materials that goes to organization grow, and increasing the value of its shares) and are added
make up each dollar of sales.
to ‘retained earnings’ in the balance sheet (which represent all retained
profits accumulated over an organization’s entire life to date which have
MODEL STRUCTURE been reinvested in the business).
The framework around which a financial model is built.
NET INCOME
NET ASSET RATIO See net earnings.
Sales / Net assets. This ratio takes into account the financing of assets,
and measures management’s efficiency in relation to the use of assets. NET PROFIT MARGIN
Net income / Sales. This margin shows how much is earned for every
NET ASSETS dollar of sales revenue.
Total assets less total liabilities.
NON-CURRENT ASSETS
NET BOOK VALUE Assets that are not expected to be converted into cash within 12
Net book value typically refers to property plant and equipment (PP&E). months of the balance sheet date.
The net book value of PP&E is calculated by taking the total gross cost of
PP&E and deducting total accumulated depreciation / amortization. OPERATING ACTIVITIES
Synonyms: earnings before interest and income taxes (EBIT), profit
before interest and income taxes (PBIT)
Cash inflows and outflows relating to a company’s operations. Examples
includes receiving payments from customers, paying salaries, etc.
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Financial analysis glossary
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Financial analysis glossary
PROCESSING RESERVES
The translation of financial model inputs or assumptions into financial Reserves are part of shareholders’ equity. Reserves are subdivided
model outputs. into revenue reserves (e.g. retained earnings), which are available to
be distributed to the shareholders by way of dividends, and capital
reserves (e.g. contributed surplus), which for various reasons are not
PROPERTY, PLANT AND EQUIPMENT (PP&E)
distributable as dividends.
Non-current fixed or capital assets such as buildings, computers, land,
and vehicles.
RETAINED EARNINGS (BALANCE SHEET)
Synonyms: P&L reserve, Retained earnings reserve
PROPERTY, PLANT AND EQUIPMENT (PP&E) TURNOVER RATIO
Retained earnings in the balance sheet represent all retained profits
Sales / Property, Plant & Equipment. This ratio measures the sales a accumulated over an organization’s entire life to date which have been
company is able to generate from capital assets. reinvested in the business. As the retained earnings ultimately belong to
shareholders, they are included as part of shareholders’ equity.
QUICK RATIO
Current assets - Inventory / Current liabilities. This ratio provides a more RETAINED EARNINGS (INCOME STATEMENT)
prudent measure of short-term liquidity recognizing the inventory can See net earnings.
not always be readily converted into cash.
REVENUE
RESEARCH AND DEVELOPMENT COST RATIO Synonyms: sales, sales revenue, turnover
Research and development costs / Sales. This margin shows how much Revenue includes both cash sales and credit sales of goods and
the company invests in developing the next generation of products or services, but does not include the sale of fixed assets.
services for each dollar of sales.
SALES
RESEARCH AND DEVELOPMENT EXPENSES
See revenue.
These expenses are directly attributable to researching and developing
new or improved products or systems.
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Financial analysis glossary
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Financial analysis glossary
TURNOVER RATIO
Ratios that measure an assets’ activity or efficiency in generating
revenues or cash. Total assets / Sales.
WORKING CAPITAL
Working capital is normally defined as money tied up in the day to day
operations of an organization. It is approximately equal to current assets
less current liabilities. However, many analysts will define working capital
more explicitly as inventory and accounts receivable less accounts
payable (and exclude other current assets / liabilities such as cash and
non-trade receivables and payables).
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