Income Statement cumulative statement consisting of :

Total Revenue - what we sold MINUS Cost of Goods Sold - what we spent for the sold goods MINUS

General Overhead Expenses - encompass three general kinds of costs: those for indirect materials, indirect labor, and all other miscellaneous production expenses such as taxes, insurance, depreciation, supplies, utilities, and repairs. EQUALS

Operating Income Income from companys operations MINUS

Taxes Interest EQUALS

Net Income final income after all categories have been deducted; if it is positive it is Net Profit, if negative Net Loss goes into Retained Earning

Balance Sheet - A financial statement that summarizes a company's

assets, liabilities and shareholders' equity at a specific point in time snap shot! Follows the following formula:
Assets = Liabilities + Equity

Assets what we own Liabilities what we owe Equity - A stock or any other security representing an ownership interest. On a
company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity".

Debt what we spent to acquire assets/what we owe to

lenders=creditors/investors; loans, due-payments, etc.

Lender = Creditor lends funds to the debtor, creates liability for them.
They have a legal right to get paid what they loan plus interest.

Investor Invests in the company, usually by acquiring a share of the

company. They put their trust into the business and hope to get repaid if the company does well, but compared to creditor, they cannot be 100% sure to get their money back.

Debtor client getting a loan Interest (singular noun!) - The fee charged by a lender to a borrower for
the use of borrowed money, usually expressed as an annual percentage of the principal; it is also the income from financial investments (if we lend money, we get interest; if we borrow money, we pay interest); TAX DEDUCTABLE

Dividends A taxable payment declared by a company's board of

directors and given to its shareholders out of the company's current or retained earnings; not obligatory (comparing to interest); NOT TAX DEDUCTABLE

Bond - investor loans money to an entity (corporate or governmental) that

borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Coupon - the bond interest rate fixed at issuance current - the bond interest rate as a percentage of the current price of the bond yield to maturity - an estimate of what an investor will receive if the bond is held to its maturity date

Stock=Share - A type of security that signifies ownership in a

corporation and represents a claim on part of the corporation's assets and earnings.

Common Stock - entitles the owner to vote at shareholders' meetings and to receive dividends. Preffered Stock - generally does not have voting rights, but has a higher claim on assets and earnings than the common shares BUT receive dividends before common s. and have priority in the case of bankruptcy (is liquidated). Authorized Shares - The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. This

figure is usually listed in the capital accounts section of the balance sheet. Can be changed only by the vote of all the shareholders.

Issued Shares - The number of authorized shares that is sold to and held by the shareholders of a company, regardless of whether they are insiders, institutional investors or the general public. Treasury Stock - The portion of shares that a company keeps in their own treasury. Treasury stock may have come from a repurchase or buyback from shareholders; or it may have never been issued to the public in the first place. These shares don't pay dividends, have no voting rights, and should not be included in shares outstanding calculations Shares Outstanding = (Issued Treasury Stock) - Stock currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public. Stock Option - A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date

Earnings per share EPS Dilluted earning per share - stock options, convertible preferred shares,
etc. all serve to increasing the number of shares outstanding Dilluted earning per share is ALWAYS LOWER than normal EPS, because the the profit is divided by a larger number

Initial Public Offering = IPO - The first sale of stock by a private

company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.

Private Company - A company whose ownership is private. As a result, it

does not need to meet the strict Securities and Exchange Commission filing requirements of public companies. They might anyhow issue shares, but those are not traded on international exchanges and are not issued by the IPO

Public Company - A company that has issued securities through an initial

public offering (IPO) and is traded on at least one stock exchange or in the over the counter market. It is possible to determine the entire value of the company by daily tradings.

Public vs. Private: Public companies have inherent advantages over private
companies, including the ability to sell future equity stakes and increased access to the debt markets. With these advantages, however, comes increased regulatory scrutiny and less control for majority owners and company founders.

Basis Point The relationship between percentage changes and basis points

can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point. So, a bond whose yield increases from 5% to 5.5% is said to increase

by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points.

Yield - The income return on an investment.

RATIOS

Liquidity Ratio: Current Ratio = Current Assets/Current Liabilities

Mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

Quick Ratio = (Current Assets Inventory)/Current Liabilities

An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company. More conservative than the current ratio, because it excludes inventory from current assets (Inventory is excluded because some companies have difficulty turning their inventory into cash). In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's shortterm financial strength.

Cash Ratio = (Cash + Marketable Securities)/Current Liabilities

Is most commonly used as a measure of company liquidity. It can therefore determine if, and how quickly, the company can repay its short-term debt. A strong cash ratio is useful to creditors when deciding how much debt, if any, they would be willing to extend to the asking party. (Examples of marketable securities include commercial paper, banker's acceptances, Treasury bills and other money market instruments) Basically, it tells how much of our liabilities can we cover with our most liquid assets (cash and MS which can be quickly transformed into cash)

Financial Leverage Ratios: 1.Debt Ratio = Total Debt/Total Assets

Indicates what proportion of debt a company has relative to its assets. It gives an idea of the leverage of the company telling us how much debt we have per unit of assets. The higher the ratio, the greater risk will be associated with the firm's operation. In addition, high debt to assets ratio may

indicate low borrowing capacity of a firm, which in turn will lower the firm's financial flexibility. When >1 more debt than assets, <1 more assets than debt

2.Debt-toEquity Ratio = Total Debt/Total Equity

A measure of a company's financial leverage. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.

If it is low get more shareholders more permanent capital higher chance to repay creditors creditors Profitability Ratios Gross Profit Margin = (Sales COGS)/Sales
A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. Eg. If gross margin is 50% it means that for every 1 $ that the company earns it really has only 0.5 $ at the end of the day.

Return on Assets = ROA = Net Income/Total Assets

Also, how much income does 1 unit of asset generate. An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment.

Basically means did we select out assets correctly?! Return on Equity = ROE = Net Income/Shareholders Equity
Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have

invested. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. If we are highly leveraged higher If we are highly capitalized lower Varies from industry/cycle/economic situation

Earnings per share = EPS = Net Income/# of shares outstanding

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company.

Price Earnings Ratio = P/E = Market Price of Share of Stock/EPS

Consequence of every $ that the company earns per share does the market price go UP, DOWN OR NEUTRAL.

A valuation ratio of a company's current share price compared to its pershare earnings. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E.

Book Value per Share = (Total Asset Total Liabilities)/# Shares Outstanding = Shareholder Equity/# Shares Out.
A financial measure that represents a per share assessment of the minimum value of a company's equity. While book value of equity per share is one factor that investors can use to determine whether a stock is undervalued, this metric should not be used by itself as it only presents a very limited view of the firm's situation. BVPS provides a snap shot of a firm's current situation, but considerations of the firm's future are not included.

Dividend Yield = Cash Dividend Per Share/Market Price of Share Stock

Shows how much a company pays out in dividends each year relative to its share price. Dividend yield is a way to measure how much cash flow you

are getting for each dollar invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Example: If two companies both pay annual dividends of $1 per share, but ABC company's stock is trading at $20 while XYZ company's stock is trading at $40, then ABC has a dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other factors are equivalent, an investor looking to supplement his or her income would likely prefer ABC's stock over that of XYZ.

Market Capitalization = Market Cap = Market Price per Share x # of Shares Outstanding
The total $ market value of all of a company's outstanding shares. In investing used to determine the companys size (as opposed to revenues & assets). The stocks of large, medium and small companies are referred to as large-cap, mid-cap, and small-cap, respectively. Large Cap: $10 billion plus and include the companies with the largest market capitalization. Mid Cap: $2 billion to $10 billion Small Cap: Less than $2 billion !!!SHOULD NOT BE CONFUSED WITH COMPANYS CAPITALIZATION (=financial statement term that refers to the sum of a company's shareholders' equity plus long-term debt)

Financial accounting promotes exchange of resources (information = financial statement) Solvency=Liquidity in Near Term of Assets - Liabilities Liabilities = Debt = Negative Future Cash Flows

Measurement over Period of Time = Income Statement Measurement AT a POINT in Time = Balance Sheet=Snapshot What is the difference between Liquidity and Solvency?

Using financial accounting: Managers making investment decisions Investor valuing stocks Bankers assesing the risk

GAAP-Generally Accepted Accounting Principals US/UK/European Financial Statements: US: CC, MSFT, G, Yahoo UK: BP Germany: Daimler

Manufacturing, financial (banking), energy (oil),

Fiscal vs Calendar

Book Value

Capital Budgeting

Cash vs Accrual

Cash Flow

Costs Fixed/Variable, Volume

Depreciation

Goodwill Intellectual Property

PP&E

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) An indicator of a company's financial performance which is calculated as follows:

EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next. EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector - even when it isn't warranted. A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be

significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA. EBITDA has many flaws as a measurement tool and is actually quite different from cash flow, critics say. EBITDA, which stands for "earnings before interest, taxes, depreciation and amortization," is viewed as a fraud by some critics. When thinking about cash flow, earnings and sales; removing interest, taxes, depreciation and amortization is excessive. EBITDA, can accurately measure cash flow if a company spends no money on debt interest or equipment purchases. More often, it's used as an accounting gimmick to dress up a company's financial picture to make it look rosier than it really is and deflect investor attention away from bad news, according to a report from Moody's Investors Service in New York. While cash flowthe amount of cash left after money comes into and goes out of an organization during a certain time periodcan't be gussied up to look like Cinderella at the ball, EBITDA is easy to manipulate by using "creative" accounting techniques for revenue, expenses and asset write-downs, according to the report "Putting EBITDA Into Perspective: The 10 Critical Failings of EBITDA as a Principal Determinant of Cash Flow". Corporate filings with the Securities and Exchange Commission often include terse warnings that EBITDA doesn't mean net income, doesn't measure liquidity and isn't part of the Generally Accepted Accounting Principles. EBITDA "creates the appearance of stronger interest coverage and lower financial leverage," says Pamela Stumpp, senior vice president of corporate finance at Moody's and lead author of the report, which was released last July. "Earnings are not cash but merely reflect the difference between revenues and expenses, which are accounting constructs. Thus, it is important to scrutinize revenue recognition policies, especially for capital-intensive start-ups." Where It Works EBITDA is inappropriate for many industries because it ignores their unique attributes, according to Moody's. It's a poor measure of cash flow for companies undergoing a great deal of technological change or for firms that have short-lived assets (those lasting, say, three to five years) and need to keep upgrading their equipment to stay up-to-date. But it can be a valid measurement tool for organizations whose capitalintensive equipment lasts at least 20 years. Top 10 Critical Failings Of EBITDA 1. EBITDA ignores changes in working capital and overstates cash flow in periods of working capital growth. 2. It can be a misleading measure of liquidity (quick access to cash).

3. It doesnt consider the amount of required reinvestmentespecially for companies with short-lived assets, whether its cable equipment or trucks. 4. It says nothing about the quality of earnings. 5. Its an inadequate stand-alone measure for a companys acquisition multiples. 6. It ignores distinctions in the quality of cash flow resulting from differing accounting policies not all revenues are cash. 7. Its not a common denominator for cross-border accounting conventions. 8. It offers limited protection when used in indenture covenants. 9. It can drift from the realm of reality. 10. Its not well-suited for the analysis of many industries because it ignores their unique attributes. Enterprise value Enterprise value (EV), attempts to measure the value of a company's business rather than the company. It answers the question "what would it cost to buy this business free of its debt and other liabilities?" EV is calculated by adding together: the market capitalisation of the company 2. the value of its debt financing (bonds and bank loans, not items such as trade creditors) 3. the value of other liabilities such as a deficit in the company pension fund
1.

and subtracting the value of liquid assets such as cash and investments. The calculation is made more complex where there are minority stakes in associates and subsidiaries: see EV/EBITDA. These adjustments also apply to other valuation measures using EV such as EV/EBIT and EV/EBITA. EV/EBITDA EV/EBITDA is one of the most widely used valuation ratios. It is: EV EBITDA The main advantage of EV/EBITDA over the PE ratio ratio is that it is unaffected by a company's capital structure. It compares the value of a business, free of debt, to earnings before interest. If a business has debt, then a buyer of that business (which is what a potential shareholder is) clearly needs to take account of that in valuing the business. EV includes the cost of paying off debt. EBITDA measures profits before interest and before the non-cash costs of depreciation and amortisation. EV/EBITDA is harder to calculate than PE. It does not take into account the cost of assets or the effects of tax. As it is used to look at the value of the business in EV terms it does not break this value down into the value of the debt and the value of the equity.

As EV/EBITDA is generally used to value shares it is assumed that debt (such as bonds) that has a verifiable market value is worth its market value. Other debt may be assumed to be worth its book value (the amount shown in the accounts). Alternatively, it is valued in line with the company's traded debt (for example, with the same risk premium as the most similar traded debt). Equity can then be assumed to be worth EV less the value of the debt. The first advantage of EV/EBITDA is that it is not affected by the capital structure of a company, in accordance with capital structure irrelevance. This is something that it shares with EV/EBIT and EV/EBITA Consider what happens if a company issues shares and uses the money it raises to pay off its debt. This usually means that the EPS falls and the PE looks higher (i.e. the shares look more expensive). The EV/EBITDA should be unchanged. What the "before" and "after" cases here show is that it allows fair comparison of companies with different capital structures. EV/EBITDA also strips out the effect of depreciation and amortisation. These are non-cash items, and it is ultimately cash flows that matter to investors. When using EV/EBITDA it is important to ensure that both the EV and the EBITDA used are calculated for the same business. If a company has subsidiaries that are not fully owned, the P & L shows the full amount of profits from but is adjusted lower down by subtracting minority interests. So the EBITDA calculated by starting from company's operating profits will be the EBITDA for the group, not the company. There are two common ways of adjusting for this:

Adjust the EV by adding the value of the shares of subsidiaries not owned by the company. The end result is an EV/EBITDA for the group. This becomes complicated if there are a lot of subsidiaries. Include only the proportion of EBITDA in a subsidiary that belongs to the company. So if the company has a 75% stake in a subsidiary, only include 75% of the subsidiary's EBITDA in your calculation. This is simple for companies (such as many telecoms companies) that disclose proportionate EBITDA. Otherwise, it can become difficult if the subsidiaries' results are not separately available. It also needs the corresponding adjustment to EV. In the example above, only 75% of the subsidiary's debt would be included in the group EV.

Given these complications, a sum of parts valuation may be considered as an alternative for complex groups. EV/EBITDA could still be used to value each individual part of the group. EV/EBITDA is usually inappropriate for comparisons of companies in different industries, as their capital expenditure requirements are different. Ideally one would substitute EBITDA minus maintenance capex (capital expenditure required if the business does not expand) for EBITDA. This is difficult. Alternatively, depreciation could be used as an inaccurate but easy proxy for maintenance capex which would mean using EV/EBITA As with PE it is common to look at EV/EBITDA using forecast profits rather than historical, and similar terminology is then used.