Glossary of Terms

Current Ratio=current assets/current liabilities

The current ratio is a measure of a company’s capacity to pay back its current liabilities with its total current assets which include cash, accounts receivable and inventories. The higher the ratio the more liquid the company. 

Deferred consideration is the description of a payment, usually for the sale of shares or other assets that is paid in the future, hence it is deferred. Often on a business asset or share sale, a capital consideration is paid at the completion of the transaction but for a percentage of the full agreed amount and other amounts are paid over one or more years.

EBIT Margin = (operating earnings)/(sales)

An EBIT Margin is the operating earnings divided by operating sales. This margin reflects the true profitability and business cost of running the company, as it considers depreciation and amortisation, contrary to EBITDA. This is important because parts of a company's property, plant, and equipment will necessarily need to be substituted as they get used or broken down. Lower EBIT margins reflect lower profitability whilst higher ones reflect higher profitability. Comparing to industry averages allows one to determine if those margins are due to the competitive landscape or specific to the company and thus to assess how competitive the company is within its industry. 

Gross margin is a firm's net sales revenue less its cost of goods sold (COGs). That is, it is the sales revenue a company retains after factoring in the direct costs associated with producing the goods and services it sells. The higher the gross margin, the more capital a firm retains on each pound of sales, part of which is then used to pay other costs or satisfy debt obligations. The net sales figure on the other hand is gross revenue, minus the returns, allowances, and discounts.

Liquidity ratios are a class of financial metrics used to assess a debtor's ability to pay back current debt obligations without raising external capital. Liquidity ratios such as current ratio and quick ratio metrics  gauge a firm's margin of safety and ability to pay back debt. 

Current liabilities are most often contrasted with liquid assets to determine the firm’s ability to pay back short-term debts and obligations in an emergency situation. In fact, liquidity is the capacity to convert assets into cash rapidly and economically. 

One could examine these ratios from an internal point of view, assessing the change in those ratios through successive periods. Alternatively, one could examine them through an external point of view by comparing those ratios to its competitors ratios. However, the latter is less effective as different businesses may require different financing structures, especially whilst they’re at different stages, sizes, and geographical locations. 

Net Operating Profit After Tax. Often used in cashflow forecasts, this is the profit from operations excluding the effect of interest. As distinct from EBIT which is earnings before interest and tax.

Quick ratio: (C+MS+AR)/CL

MS = marketable securities

AR = accounts receivable

CL = current liabilities

C  =  cash & cash equivalents

Another way to express this is:

Quick ratio=(current assets-inventory-prepaid expenses)/current liabilities

The quick ratio measures the firm’s ability to satisfy its short-term obligations with its most liquid assets only, and thus excludes inventories from current assets. 

The turnover-per-employee ratio is calculated by taking the firm’s annual turnover divided by its total employees. It provides a general indication of how expensive it is to run the company and how efficient the company is. A higher turnover-per-employee ratio is indicative of a more efficient company that can operate with lower overhead costs, which translates into healthy profits. This ratio is especially effective in “People Businesses” such as banks, retailers, consultants, media groups and software companies. 

This ratio is more relevant to compare companies that are similar and or in similar industries. For instance, companies focused on selling and distributing goods will usually benefit from higher turnover-per-employee ratios than those that manufacture goods. This is because manufacturing is labour-intensive, whilst sales and marketing  

AI: Artificial Intelligence 

CAGR: Compound annual growth rate 

CEO: Chief Executive Officer

CFO: Chief Financial Officer

CTO: Chief Technical Officer

DCF: Discounted cash flow

DFCF: Discounted free cash flow

DR: Debt ratio

DSCR: Debt service coverage ratio

EBIT: Earnings before interest and tax

EBITDA: Earnings before interest, tax depreciation and amortisation 

EDI: Electronic data interchange 

EMI: Enterprise management incentive scheme 

EV: Enterprise value 

EQV: Equity value

FC: Financial Controller 

FD: Financial Director 

FTE: Full-time equivalent/employee 

GDPR: General Data Protection Regulation

GP: Gross profit 

LBO: Leveraged buy out

MA: Management accounts

M&A: Mergers and acquisitions

MBO: Management buy out

MBI: Management buy in

NPV: Net present value

NOPAT: Net Operating Profit After Tax

MI: Management information

ROI: Return on investment

ROE: Return on equity

ROCE: Return on capital employed

ROIC: Return on invested capital

SLA: Service level agreement 

TTM: Trailing twelve months 

USP: Unique selling point