Financial Analysis Glossary

ACCOUNTS PAYABLE DAYS RATIO

Accounts payable / COGS x 365. Average number of days a firm takes to pay for items purchased.

ACCOUNTS PAYABLE TURNOVER

Cost of sales / Accounts payable (either the ending balance or average balance). This ratio measures how effective management is in paying its suppliers.

ACCOUNTS RECEIVABLE DAYS RATIO

Accounts receivable / Sales x 365. Average number of days a firm takes to collect payments on goods sold.

ACCOUNTS RECEIVABLE TURNOVER

Sales / Accounts receivable (either the ending balance, or average balance). This ratio measures how effective the company’s credit policies are.

ASSET TURNOVER RATIO

Sales / Total assets. This ratio shows how effective the company is in generating sales from its assets.

CAPITAL ASSET

Assets such as property, plant and equipment employed to generate income.

COVERAGE RATIOS

Ratios that analyze a company’s liquidity or its ability to “cover” its financial debt obligations. An example of a coverage ratio is EBITDA / Interest expense.

DIRECT COSTS

Direct costs are those that are directly attributable to the product or service provided by the organization. They are included in cost of goods sold.

DEBT FINANCING

Raising money for a business through loans or by issuing bonds.

EBIT

Earnings before interest and taxes. See operating profit.

EBIT MARGIN

EBIT / Sales.

EBITDA

Earnings before interest, taxation, depreciation, and amortization.

EQUITY FINANCING

The money acquired from the business owners themselves or from other investors.

FINANCIAL COVENANTS

The promises made by the borrowing firm in a loan agreement to adhere to certain limits in the firm’s operations.

FINANCIAL MODEL

A mathematical model describing the interrelationships among various financial variables. Typically financial models are broken down into inputs, processing, and outputs.

INPUTS

Financial model assumptions that are used to drive model outputs.

INTEREST COVER RATIO

EBITDA / Interest expense. This solvency ratio shows how much income is available to service debt costs.

INVENTORY DAYS RATIO

Inventories / COGS x 365. Average number of days goods remain in inventory before being sold.

INVENTORY TURNOVER RATIO

Cost of goods sold / Inventory (either the ending balance, or average inventory balance). This ratio illustrates how a company manages its inventory.

LEVERAGE RATIOS

Ratios that analyze a company’s solvency or the level of its debt financing relative to its equity financing. An example of a leverage ratio is Total debt / Total shareholders’ equity.

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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