A few key performance ratios of a working capital management system are the
working capital ratio, inventory turnover and the collection ratio. Ratio
analysis will lead management to identify areas of focus such as inventory
management, cash management, accounts receivable and payable
management.
Ratio Analysis
A tool used by individuals to conduct a quantitative analysis of information in
a company's financial statements. Ratios are calculated from current year
numbers and are then compared to previous years, other companies, the
industry, or even the economy to judge the performance of the
company. Ratio analysis is predominately used by proponents of fundamental
analysis.
There are many ratios that can be calculated from the financial statements
pertaining to a company's performance, activity, financing and liquidity. Some
common ratios include the price-earnings ratio, debt-equity ratio, earnings
per share, asset turnover and working capital
Inventory Turnover
A ratio showing how many times a company's inventory is sold and replaced
over a period.
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Although the first calculation is more frequently used, COGS (cost of goods
sold) may be substituted because sales are recorded at market value, while
inventories are usually recorded at cost. Also, average inventory may be used
instead of the ending inventory level to minimize seasonal factors This ratio
should be compared against industry averages. A low turnover implies poor
sales and, therefore, excess inventory. A high ratio implies either strong sales
or ineffective buying.High inventory levels are unhealthy because they
represent an investment with a rate of return of zero. It also opens the
company up to trouble should prices begin to fall.
Capital Budgeting
The process of determining whether or not projects such as building a new
plant or investing in a long-term venture are worthwhile.
You can think of IRR as the rate of growth a project is expected to generate.
While the actual rate of return that a given project ends up generating will
often differ from its estimated IRR rate, a project with a substantially higher
IRR value than other available options would still provide a much better
chance of strong growth.
IRRs can also be compared against prevailing rates of return in the securities
market. If a firm can't find any projects with IRRs greater than the returns
that can be generated in the financial markets, it may simply choose to invest
its retained earnings into the market.
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companies are able to cut excess fat and provide products faster. This is done
by keeping tighter control of internal inventories, internal production,
distribution, sales and the inventories of the company's product purchasers.
Cash Flow
1. A revenue or expense stream that changes a cash account over a given
period. Cash in-flows usually arise from one of three activities -
financing, operations or investing - though they also occur as a result
of donations or gifts in the case of personal finance. Cash out-flows
result from expenses or investments. This holds true for both business
and personal finance.
Inventory
The raw materials, work-in-process goods and completely finished goods
that are considered to be the portion of a business's assets that are ready
or will be ready for selling. Inventory represents one of the most important
assets that most businesses possess, because the turnover of
inventory represents one of the primary sources of revenue generation and
subsequent earnings for the companies' shareholders/owners
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inventory isn't good either, because the business runs the risk of losing
out on potential sales and potential market share as well.
where :
S = Setup costs
D = Demand rate
P = Production cost
I = Interest rate (considered an opportunity cost, so the risk-free rate can
be used)
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Variable Cost
A cost that changes in proportion to a change in a company's activity or
business
A good example of variable cost is the fuel for an airline. This cost changes
with the number of flights and how long the trips are.
Fixed Cost
A cost that remains constant, regardless of any change in a company's
activity
A good example is a lease payment. If you are leasing a building at $2,000
per month, then you will pay that amount each month, no matter how well
or how poorly the business is doing
Capital Reserve
A type of account on a municipality's or company's balance sheet that is
reserved for long-term capital investment projects or any other large and
anticipated expense(s) that will be incurred in the future. This type of
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reserve fund is set aside to ensure that the company or municipality has
adequate funding to at least partially finance the project
Contributions to the capital reserve account can be made from government
subsidies, donated funds, or can be set aside from the firm's or
municipality's regular revenue-generating operations. Once recorded on
the reporting entity's balance sheet, these funds are only to be spent on
the capital expenditure projects for which they were initially
intended, excluding any unforeseen circumstances
Cost-Benefit Analysis
A process by which business decisions are analyzed. The benefits of a
given situation or business-related action are summed and then the costs
associated with taking that action are subtracted. Some consultants or
analysts also build the model to put a dollar value on intangible items,
such as the benefits and costs associated with living in a certain town.
Most analysts will also factor opportunity cost into such equations.
Prior to erecting a new plant or taking on a new project, prudent managers
will conduct a cost-benefit analysis as a means of evaluating all of the
potential costs and revenues that may be generated if the project is
completed. The outcome of the analysis will determine whether the project
is financially feasible, or if another project should be pursued
Balance Sheet
A financial statement that summarizes a company's assets, liabilities
and shareholders' equity at a specific point in time. These three balance
sheet segments give investors an idea as to what the company owns
and owes, as well as the amount invested by the shareholders.
Each of the three segments of the balance sheet will have many accounts
within it that document the value of each. Accounts such as cash,
inventory and property are on the asset side of the balance sheet, while on
the liability side there are accounts such as accounts payable or long-term
debt. The exact accounts on a balance sheet will differ by company and by
industry, as there is no one set template that accurately accommodates for
the differences between different types of businesses.
It's called a balance sheet because the two sides balance out. This makes
sense: a company has to pay for all the things it has (assets) by either
borrowing money (liabilities) or getting it from shareholders (shareholders'
equity).
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Financial Asset
An asset that derives value because of a contractual claim. Stocks, bonds,
bank deposits, and the like are all examples of financial assets.
Unlike land and property--which are tangible, physical assets--financial
assets do not necessarily have physical worth.
Asset
1. A resource having economic value that an individual, corporation or
country owns or controls with the expectation that it will provide future
benefit.
Contingent Asset
An asset in which the possibility of an economic benefit depends solely
upon future events that can't be controlled by the company. Due to the
uncertainty of the future events, these assets are not placed on the
balance sheet. However, they can be found in the company's financial
statement notes
These assets, which are often simply rights to a future potential claim, are
based on past events. An example might be a potential settlement from
a lawsuit. The company does not have enough certainty to place the
settlement value on the balance sheet, so it can only talk about the
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Liability
A company's legal debts or obligations that arise during the course of
business operations. These are settled over time through the transfer of
economic benefits including money, goods or services.
Recorded on the balance sheet (right side), liabilities include loans,
accounts payable, mortgages, deferred revenues and accrued
expenses. Liabilities are a vital aspect of a company's operations because
they are used to finance operations and pay for large expansions. They can
also make transactions between businesses more efficient. For
example, the outstanding money that a company owes to its suppliers
would be considered a liability.
Outside of accounting and finance this term simply refers to any money or
service that is currently owed to another party. One form of liability, for
example, would be the property taxes that a homeowner owes to the
municipal government.
Current liabilities are debts payable within one year, while long-term
liabilities are debts payable over a longer period.
Income Statement
A financial statement that measures a company's financial performance
over a specific accounting period. Financial performance is assessed by
giving a summary of how the business incurred its revenues and expenses
- due to both operating and non-operating activities. It also shows the net
profit or loss incurred over a specific accounting period, typically over a
fiscal quarter or year.
Also known as the "profit and loss statement" or "statement of revenue and
expense".
The income statement is the one of the three major financial statements,
the other two being the balance sheet and the statement of cash flows. The
income statement is divided into two parts: the operating and non-
operating sections.
The portion of the income statement that deals with operating items is
interesting to investors and analysts alike because this section discloses
information about revenues and expenses that are a direct result of the
regular business operations. For example, if a business creates sports
equipment, then the operating items section would talk about the
revenues and expenses involved with the production of sports equipment.
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Tangible Asset
An asset that has a physical form such as machinery, buildings and land
This is the opposite of an intangible asset such as a patent or trademark.
Whether an asset is tangible or intangible isn't inherently good or bad. For
example, a well-known brand name can be very valuable to a company. On
the other hand, if you produce a product solely for a trademark, at some
point you need to have "real" physical assets to produce it.
Profit
The same as net income: total earnings less expenses
In other words, profit is the money a business makes after accounting for
all the expenses. Profit is the goal of every company.
Loan
When a lender gives money or property to a borrower, and the borrower
agrees to return the property or repay the borrowed money, along with
interest, at a predetermined date in the future
Borrowing money to buy a new car is a loan, as is borrowing money for
home improvements
Profitability Ratios
A class of financial metrics that are used to assess a business's ability to
generate earnings as compared to its expenses and other relevant costs
incurred during a specific period of time. For most of these ratios, having a
higher value relative to a competitor's ratio or the same ratio from a
previous period is indicative that the company is doing well
Some examples of profitability ratios are profit margin, return on assets
and return on equity. It is important to note that a little bit of background
knowledge is necessary in order to make relevant comparisons when
analyzing these ratios.
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Mortgage
A debt instrument that is secured by the collateral of specified real estate
property and that the borrower is obliged to pay back with
a predetermined set of payments. Mortgages are used by individuals and
businesses to make large purchases of real estate without paying the
entire value of the purchase up front.
Opportunity Cost
1. The cost of an alternative that must be forgone in order to pursue a
certain action. Put another way, the benefits you could have received by
taking an alternative action.
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The balance sheet, income statement and statement of cash flows are the
most important financial statements produced by a company. While each
is important in its own right, they are meant to be analyzed together.
Economics
A social science that studies how individuals, governments, firms and
nations make choices on allocating scarce resources to satisfy their
unlimited wants. Economics can generally be broken down into
macroeconomics, which concentrates on the behavior of the aggregate
economy, and microeconomics, which focuses on individual consumers.
On the other hand, Keynesian economists believe that markets react very
slowly to changes in equilibrium (especial to changes in prices) and that
active government intervention is sometimes the best method to get the
economy back into equilibrium
Annual Report
1. An annual publication that public corporations must provide to
shareholders to describe their operations and financial
conditions. The front part of the report often contains an
impressive combination of graphics, photos and an accompanying
narrative, all of which chronicle the company's activities over the
past year. The back part of the report contains detailed financial
and operational information.
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1. It was not until legislation was enacted after the stock market
crash in 1929 that the annual report became a regular
component of corporate financial reporting. Typically, an annual
report will contain the following sections:
-Financial Highlights
-Letter to the Shareholders
-Narrative Text, Graphics and
Photos
-Management's Discussion and
Analysis
-Financial Statements
-Notes to Financial Statements
-Auditor's Report
-Summary Financial Data
-Corporate Information
Premium
Fundamental Analysis
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Intrinsic Value
Book Value
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Depreciation
Share Capital
For example, suppose ABC Inc. raised $2 billion from its initial
public offering. Over the next year, the total value of its shares
increases to $5 billion. In this case, the value of the share capital
is still only $2 billion because ABC Inc. had received only $2
billion from the sale of its securities to the investing public.
Shares
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Stock
Sensex
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Shareholder
Market Capitalization
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Nifty 50
The nifty-50 stocks got their notoriety in the bull markets of the
1960s and early 1970s. They became known as "one-decision"
stocks because investors were told they could buy and hold
forever.
General Ledger
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The ledger uses two columns: one records debits, the other has
offsetting credits
Bond
The indebted entity (issuer) issues a bond that states the interest
rate (coupon) that will be paid and when the loaned funds (bond
principal) are to be returned (maturity date). Interest on bonds is
usually paid every six months (semi-annually). The main
categories of bonds are corporate bonds, municipal bonds,
and U.S. Treasury bonds, notes and bills, which are collectively
referred to as simply "Treasuries."
Trial Balance
Stagflation
Stagflation occurs when the economy isn't growing but prices are,
which is not a good situation for a country to be in. This
happened to a great extent during the 1970s, when world oil
prices rose dramatically, fueling sharp inflation in developed
countries. For these countries, including the U.S., stagnation
increased the inflationary effects.
Zero-Coupon Bond
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Discount
The condition of the price of a bond that is lower than par. The
discount equals the difference between the price paid for a
security and the security's par value.
Business
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Entrepreneur
Retail Banking
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Bank
Capital
Security
Derivative
Derivatives are generally used to hedge risk, but can also be used
for speculative purposes. For example, a European investor
purchasing shares of an American company off of an American
exchange (using American dollars to do so) would be exposed to
exchange-rate risk while holding that stock. To hedge this risk,
the investor could purchase currency futures to lock in a
specified exchange rate for the future stock sale and currency
conversion back into euros.
Portfolio Management
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Equity
There are widely differing views on what the term means. Some
financial institutions include bank deposits, mutual funds and
institutional money in their calculations. Others limit it to funds
under discretionary management where the client delegates
responsibility to the company
Participatory Notes
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Broker
Dividend
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Dalal Street
The term "Dalal Street" is used in the same way as "Wall Street"
in the U.S., referring to the country's major stock exchanges and
overall financial system. These terms are often seen in the
financial media.
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The IMF plays three major roles in the global monetary system.
The Fund surveys and monitors economic and financial
developments, lends funds to countries with balance-of-payment
difficulties, and provides technical assistance and training for
countries requesting it
Balance Of Payments (BOP)
Dumping
2. A slang term for selling a stock with little regard for price.
Quota
Tariff
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Interbank Rate
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Money Market
CDs of less than $100,000 are called "small CDs"; CDs for more
than $100,000 are called "large CDs" or "jumbo CDs". Almost all
large CDs, as well as some small CDs, are negotiable.
Commercial Paper
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Hypothecation
Pledged Asset
Capital Appreciation
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Capital Gain
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GDP = C + G + I + NX
where:
Inflation
The rate at which the general level of prices for goods and
services is rising, and, subsequently, purchasing power is falling.
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The direct relationship between oil and inflation was evident in the
1970s, when the cost of oil rose from a nominal price of $3 before the
1973 oil crisis to around $40 during the 1979 oil crisis. This
helped cause the consumer price index (CPI), a key measure of inflation,
to more than double from 41.20 in early 1972 to 86.30 by the end of
1980. Let's put this into perspective: while it had previously taken 24
years (1947-1971) for the CPI to double, during the 1970s it took about
eight years.
For more information, see our Inflation tutorial and The Consumer Price
Index: A Friend To Investors.
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Portfolio
Diversification
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Mutual Fund
Prospectus
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In the case of mutual funds, which, apart from their initial share
offering, continuously offer shares for sale to the public, the
prospectus used is a final prospectus. A fund prospectus
contains details on its objectives, investment strategies, risks,
performance, distribution policy, fees and expenses, and fund
management.
Beta
Alpha
1. Alpha is one of five technical risk ratios; the others are beta,
standard deviation, R-squared, and the Sharpe ratio. These are
all statistical measurements used in modern portfolio theory
(MPT). All of these indicators are intended to help investors
determine the risk-reward profile of a mutual fund. Simply
stated, alpha is often considered to represent the value that a
portfolio manager adds to or subtracts from a fund's return.
Standard Deviation
Volatility
value of 1.1 has historically moved 110% for every 100% move in
the benchmark, based on price level. Conversely, a stock with a
beta of .9 has historically moved 90% for every 100% move in the
underlying index.
Hedge
Investors use this strategy when they are unsure of what the
market will do. A perfect hedge reduces your risk to nothing
(except for the cost of the hedge).
Index
The Standard & Poor's 500 is one of the world's best known
indexes, and is the most commonly used benchmark for the
stock market. Other prominent indexes include the DJ Wilshire
5000 (total stock market), the MSCI EAFE (foreign stocks in
Europe, Australasia, Far East) and the Lehman Brothers
Aggregate Bond Index (total bond market).
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Savings Account
Bank
One of the most widely known ETFs is called the SPDR (Spider),
which tracks the S&P 500 index and trades under the symbol
SPY.
Equities
Shares of stock in a company. Because they represent a proportional
share in the business, they are "equitable claims" on the business itself.
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Gilt Funds
Index Fund
Liquidity
A measure of how quickly a stock can be sold at a fair price and converted to
cash. Illiquid stocks are stocks that don't trade in high volume. Thus, having
too many shares of a stock that doesn't trade frequently would make for a
position that cannot necessarily be sold.
This is the rate of interest at which banks borrow funds from other banks, in
marketable size, in the Mumbai interbank market.
Option
A call option is a contract in which a seller gives a buyer the right, but not the
obligation, to buy the optioned shares of a company at a set price (the strike
price) for a certain period of time. If the stock fails to exceed the strike price
before the expiration date, the option expires worthless. A put option is a
contract that gives the buyer the right, but not the obligation, to sell the stock
underlying the contract at a predetermined price (the strike price). The seller
(or writer) of the put option is obligated to buy the stock at the strike price.
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Preferred Stock
Risk Tolerance
The basic principle that money can earn interest, and so something that is
worth Rs. 1 today will be worth more in the future if invested. This is also
referred to as future value
Total Return
Tracking Error
Trustee
Cyclical Stock
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related) to the performance of the economy as a whole. Paper, steel, and the
automotive stocks are thought to be cyclical because their earnings tend to be
hurt when the economy slows and are strong when the economy turns up.
Food and drug stocks, on the other hand, are not considered "cyclicals," as
consumers pretty much need to eat and care for their health regardless of the
performance of the economy.
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