70 Corporate Finance Key Terms
Welcome to our comprehensive guide on 70 key terms in corporate finance!
Whether you’re a seasoned professional or just starting out in the world of business, understanding these terms is crucial for making informed financial decisions.
What is Corporate Finance?
Before we dive into the terminology, let’s first define what corporate finance actually means. In simple terms, corporate finance is the financial management and decision-making process within a company. It involves analyzing, planning, and managing the use of funds to achieve the organization’s goals.
- Capital Structure – The way in which a company finances its operations and growth through a mix of equity, debt, and other securities.
- Leverage – The use of borrowed funds to increase the potential return on an investment.
- Debt Financing – Obtaining capital by borrowing money from individuals or institutions.
- Equity Financing – Obtaining capital by issuing shares of stock in a company.
- Initial Public Offering (IPO) – The process by which a privately owned company offers shares of its stock to the public for the first time.
- Mergers and Acquisitions (M&A) – The consolidation of companies through various financial transactions, such as mergers, acquisitions, or takeovers.
- Valuation – The process of determining the worth of a company or its assets.
- Discounted Cash Flow (DCF) – A method used to estimate the value of an investment based on its expected future cash flows.
- Internal Rate of Return (IRR) – The expected rate of return on an investment over its lifetime.
- Cost of Capital – The rate of return that must be earned on an investment to satisfy investors’ expectations.
- Weighted Average Cost of Capital (WACC) – A calculation of the cost of capital for a company based on its mix of equity and debt financing.
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- Cash Flow – The net amount of cash and cash-equivalents being transferred into and out of a business.
- Working Capital – The difference between current assets and current liabilities, used to measure a company’s short-term financial health.
- Financial Statement Analysis – The process of examining a company’s financial statements to evaluate its performance, profitability, liquidity, and solvency.
- Ratio Analysis – A method of analyzing a company’s financial statements by comparing different financial figures to uncover trends and insights.
- Earnings Per Share (EPS) – The portion of a company’s profit that is allocated to each outstanding share of common stock.
- Return on Investment (ROI) – A measure of profitability that indicates the percentage return an investor receives based on the amount invested.
- Return on Equity (ROE) – A measure of a company’s profitability that shows how much profit it generates with each dollar of shareholders’ equity.
- Return on Assets (ROA) – A measure of a company’s profitability that shows how efficient it is at using its assets to generate earnings.
- Dividend – A distribution of a company’s earnings to its shareholders.
- Dividend Yield – The annual dividend per share divided by the stock price, expressed as a percentage.
- Share Buyback – A program in which a company buys back its own shares from existing shareholders.
- Liquidity – The ability of a company to meet its short-term obligations with its current assets.
- Solvency – The ability of a company to meet its long-term financial obligations.
- Profitability – A measure of how efficiently a company generates profits from its operations.
- Operating Income – A company’s earnings from its primary business activities, excluding interest and taxes.
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- Net Income – The total profit or loss of a company after deducting all expenses, including taxes.
- EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company’s operating performance.
- Net Present Value (NPV) – A method used to evaluate an investment by calculating the present value of its expected future cash flows.
- Payback Period – The amount of time it takes for an investment to generate enough cash flow to recover its initial cost.
- Amortization – The process of spreading the cost of an intangible asset over its estimated useful life.
- Depreciation – The process of allocating the cost of a tangible asset over its estimated useful life.
- Interest – The cost of borrowing money, usually expressed as an annual percentage rate.
- Taxation – The process by which governments collect money from individuals and companies to fund public services and programs.
- Goodwill – An intangible asset that represents the value of a company’s reputation, customer base, and other intangible factors.
- Intangible Assets – Non-physical assets that have value but cannot be touched or seen, such as patents, trademarks, and copyrights.
- Tangible Assets – Physical assets with a measurable value, such as property, equipment, and inventory.
- Gearing Ratio – A measure of a company’s financial leverage, calculated by dividing its total debt by shareholders’ equity.
- Interest Coverage Ratio – A measure of a company’s ability to meet its interest payments on its debt.
- Debt-to-Equity Ratio – A measure of a company’s financial leverage, calculated by dividing its total liabilities by shareholders’ equity.
- Working Capital Ratio – A measure of a company’s liquidity, calculated by dividing its current assets by its current liabilities.
- Quick Ratio – An indicator of a company’s short-term financial health, calculated by dividing its liquid assets (such as cash and accounts receivable) by its short-term liabilities.
- Profit Margin – The percentage of sales that a company retains as profit after all expenses are paid.
- Gross Profit Margin – The difference between revenue and the cost of goods sold, expressed as a percentage.
- Operating Profit Margin – A measure of a company’s efficiency in generating profits from its operations, calculated by dividing operating income by revenue.
- Net Profit Margin – The percentage of sales that a company retains as profit after all expenses are paid, including taxes.
- Asset Turnover Ratio – A measure of a company’s efficiency in using its assets to generate revenue, calculated by dividing revenue by total assets.
- Inventory Turnover Ratio – A measure of how quickly a company sells and replaces its inventory, calculated by dividing cost of goods sold by average inventory.
- Creditors’ Turnover Ratio – A measure of how quickly a company pays off its trade creditors, calculated by dividing purchases by average accounts payable.
- Debt Collection Period – The amount of time it takes for a company to collect payment from its customers, usually expressed in days or months.
- Cash Flow – The movement of cash in and out of a company, consisting of operating, investing, and financing activities.
- Operating Cash Flow – The amount of cash generated by a company’s primary business activities.
- Investing Cash Flow – The amount of cash used for investments in assets such as property, equipment, and securities.
- Financing Cash Flow – The amount of cash raised through borrowing or equity financing activities.
- Free Cash Flow – The amount of cash a company generates after accounting for capital expenditures and working capital requirements.
- Cash Conversion Cycle (CCC) – A measure of how long it takes for a company to convert its investments in inventory and accounts receivable into cash through sales.
- Dividend Payout Ratio – The percentage of a company’s earnings that is paid out to shareholders as dividends.
- Price-to-Earnings (P/E) Ratio – A valuation ratio that compares a company’s stock price to its earnings per share.
- Price-to-Book (P/B) Ratio – A valuation ratio that compares a company’s stock price to its book value per share.
- Price-to-Sales (P/S) Ratio – A valuation ratio that compares a company’s stock price to its revenue per share.
- Price-to-Cash Flow (P/CF) Ratio – A valuation ratio that compares a company’s stock price to its cash flow per share.
- Earnings Per Share (EPS) – A company’s profit divided by the number of outstanding shares, used to measure profitability on a per-share basis.
- Return on Equity (ROE) – A measure of how efficiently a company generates profits from shareholders’ investments, calculated by dividing net income by shareholders’ equity.
- Return on Assets (ROA) – A measure of how efficiently a company uses its assets to generate profits, calculated by dividing net income by total assets.
- Return on Investment (ROI) – A measure of the return generated from an investment, expressed as a percentage.
- Dividend Yield – The percentage of a stock’s price that is paid out as dividends annually.
- Beta – A measure of a stock’s volatility compared to the overall market, used to evaluate risk.
- Alpha – A measure of how much an investment has outperformed or underperformed its benchmark index.
- Standard Deviation – A statistical measure of the dispersion of data points from the mean, used to measure risk.
- Volatility – A measure of how much the price of a security fluctuates over time.
Congratulations on completing this guide to 70 key terms in corporate finance! We hope that you found it informative and helpful in understanding the often complex world of corporate finance. By now, you should have a thorough understanding of terms such as capital structure, leverage, return on investment, and many others.
