GLOSSARY

Accrual Accounting
A basic principle of accounting that requires revenues to be recorded when earned and expenses recorded when incurred, regardless of the timing of cash payments.
Agility
The ability to observe, recognize, and respond to changes in the environment.
Amortization
A periodic charge to earnings to reduce the book value of intangible assets, including goodwill.
Analytics
The discovery, collection, interpretation, and communication of meaningful patterns and trends in data.
Asset
Any tangible or intangible item or claim owned by a firm.
Asset Turnover
A measure of how efficiently assets are being used to generate revenue, computed by dividing sales by total assets.
Backlog
The level of open (i.e. not shipped) customer orders at a point in time.
Balance Sheet
One of the three primary financial statements, providing a schedule of assets, liabilities, and owner equity.
Benchmarking
A process of comparing processes, performance, and valuation of one company to another company or group of companies.
Beta
The risk associated with a specific investment or security estimated by the correlation of price movements in an individual stock to a broad market index.
Book Value
The value of an asset on the balance sheet, reflecting original cost less any accumulated depreciation.
Breakeven
The level of a particular assumption (e.g. sales) that results in a measure, such as NPV or income, equaling zero.
Business Model
A financial representation of a firm's strategy and operating practices, usually expressed as a percentage of each income statement line item (e.g. SG&A) to sales.
Business Outlook
A preferred term to describe a forecast, generally inferring a broader business perspective than simply a financial projection.
Capital Asset
A tangible asset of a firm, such as real estate and machinery.
Capital Effectiveness
A key driver of value, representing the firm's ability to manage and control capital levels in the business, computed as sales divided by net fixed assets.
Capital Intensity
A measure of the level of capital requirements for a business, which varies significantly across industries.
Capital Structure
The mix of capital sources for a company, including debt and equity.
Cash Flow Statement
One of the three primary financial statements, providing a reconciliation of accounting income to cash flow.
Common Stock Equivalent
An instrument such as stock options and convertible bonds that can be converted into common stock under certain conditions.
Comparables
A method used to value a company that involves selecting similar public companies to compare valuation measures such as the price‐earnings (P/E) ratio.
Compound Annual Growth Rate (CAGR)
A multiyear measure of growth that reflects compounding.
Control Premium
The premium over market value required to purchase a company.
Cost of Capital
The weighted average return expected by all investors in a firm, based on the opportunity cost incurred in making an investment in that firm.
Cost of Equity
The return expected by shareholders in a firm, based on the opportunity cost incurred in making an investment in that stock.
Cost of Goods Sold (COGS)
The total cost of products sold, including material, labor overhead, and other manufacturing costs and variances.
Dashboard
A one‐page, visual summary or screen presenting graphs and charts of key performance measures.
Data Visualization
The visual representation of data, using graphics and other visuals to identify and communicate patterns and trends that might not otherwise be evident.
Days Sales of Inventory (DSI)
A measure of the level of inventories on hand relative to sales.
Days Sales Outstanding (DSO)
A measure of the average time to collect accounts receivable from customers.
Debt
A formal borrowing obligation of the firm, including bonds, notes, loans, and short‐term financing.
Depreciation
A periodic charge to earnings to reduce the book value of long‐term assets, including equipment.
Depreciation and Amortization (D&A)
Periodic charges to earnings to reduce the value of long‐term and intangible assets. D&A is a noncash charge and is often an adjustment to income to estimate cash flows for valuation purposes.
Discounted Cash Flow (DCF)
A valuation and decision tool that considers the cash flows of an asset or project and the time value of money.
Distribution Channel
Refers to the method of selling and distributing the firm's products, including internal sales force, third‐party distributors, and value‐added resellers.
Earnings before Interest and after Taxes (EBIAT)
Also called net operating profit after taxes (NOPAT), this measure estimates the after‐tax operating earnings. It excludes financing costs but does reflect income tax expense. It is useful in comparing the operational performance of firms, excluding the impact of financing costs.
Earnings before Interest and Taxes (EBIT)
Also called operating income, this measure reflects the income generated by operating activities before subtracting financing costs (interest) and income tax expense.
Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA)
EBITDA adjusts EBIT (operating income) by adding back noncash charges, depreciation, and amortization. This measure is used in valuation and financing decisions, since it approximates cash generated by the operation. It does not include capital requirements such as working capital and expenditures for property and equipment.
Earnings per Share (EPS)
The accounting net income per share of common stock and equivalents outstanding.
Earnings per Share (EPS) Accretive‐Dilutive Test
A decision test to determine if a project, an acquisition, or a financing alternative will increase or decrease earnings per share.
Economic Profit
A financial measure of performance that subtracts a capital charge from earnings to arrive at an economic profit, consistent with other economic techniques such as NPV and DCF.
Engineering Change Notice/Engineering Change Order (ECN/ECO)
A document used to initiate changes in a product's bill of materials or manufacturing process.
Enterprise Value
The sum of a firm's market value of equity and debt.
Equity
The book value of shareholders' equity or investment in the firm, including common stock and earnings retained in the business.
Financial Accounting Standards Board (FASB)
The accounting standards setter in the United States.
Financial Leverage
The use of debt and other liabilities to leverage the investment of equity investors; computed as assets divided by equity.
Fixed Assets
A term used to describe property, plant, and equipment.
Fixed Cost
A cost that cannot be eliminated in the short term (e.g. six months) and does not vary with changes in sales levels.
Forecast
A financial projection, generally referring to a short‐term horizon, less than 12 to 18 months.
Free Cash Flow to Equity (FCFE)
The cash flow available to equity investors after providing for working capital requirements; investments in property, plant, and equipment; and payments to service debt (interest and principal).
Free Cash Flow/Free Cash Flow to the Firm (FCF/FCFF)
The cash flow available to all investors after providing for working capital requirements and investments in property, plant, and equipment.
Generally Accepted Accounting Principles (GAAP)
The cumulative body of accounting rules issued by the FASB, SEC, and other rule‐making organizations.
Gross Margin
The residual of sales minus cost of goods sold (COGS).
Income Statement
One of the three primary financial statements, providing a summary of the firm's sales, costs, and expenses for a period.
Innovation
The introduction of something new or the process of radically changing, transforming, or achieving breakthrough results.
Intangible Assets
Assets of a firm that are not tangible, physical assets, such as reputation, brands, trademarks, patents, and goodwill.
Internal Rate of Return (IRR)
The economic return of a project based on its cash inflows and outflows.
Invested Capital
The total capital invested in a business, including equity and interest‐bearing debt.
Key Performance Indicator/Key Performance Measure (KPI/KPM)
A measure of a business process, activity, or result that is significant to the overall performance of the firm.
Lagging Performance Measure
A measure that is computed after an event, transaction, or the close of an accounting period, such as DSO or ROE.
Liability
An amount or service due another party.
Market Capitalization (Value)
The market value of common stock outstanding, computed as the price per share times the number of common shares outstanding.
Multiple
A ratio of value to one of several financial measures, including price‐earnings and price‐to‐sales ratios. These ratios are used to compare values of similar companies.
Net Income
Represents the bottom line of the income statement, the excess of sales over all costs and expenses for a period.
Net Present Value (NPV)
The present value of cash inflows less the present value of cash outflows.
Operating Capital
The level of net working capital required to support the business, reflecting the excess of current operating assets over current operating liabilities. The measure excludes financing components of working capital such as cash and debt.
Operating Effectiveness
An important value driver that reflects the effectiveness and efficiency of the firm's business processes and activities.
Operating Income/Profit
A pretax measure of operating performance, reflecting all operating income and expenses for a period.
Operating Leverage
A measure of the proportion of fixed costs to total costs that causes wider variations in profits resulting from changes in sales levels.
Operating Profit after Tax (OPAT)
A measure that estimates the after‐tax operating earnings. It excludes financing costs but does reflect income tax expense. It is useful in comparing the operational performance of firms, excluding the impact of financing costs.
Payback
The period of time it takes to recover the original investment in a project.
Performance Management Framework (PMF)
A comprehensive system of management practices to measure, report, and improve business performance.
Perpetuity
A measure of time meaning forever, typically used in valuing an asset or cash flow.
Predictive (Leading) Performance Measure
A measure that covers key business processes and activities on a current basis, providing an early indication of future business and financial results.
Present Value
The value today of a future payment or cash flow, reflecting a discount for the time value of money.
Price‐Earnings (P/E) Ratio
A key valuation measure representing the ratio of the firm's share price to earnings per share.
Pricing Strength
The ability of a firm to command a premium price for its products and services based on a competitive advantage that will result in acceptable or above‐average economic performance for the firm.
Proxy Statement
A filing with the SEC required for publicly traded companies that presents matters to be voted on by shareholders. The proxy statement also contains disclosures on the company's stock performance (TRS) and management compensation levels and policies.
Return on Assets
A measure of overall effectiveness, computed as net income divided by total assets.
Return on Equity
A measure of overall effectiveness, computed as net income divided by total shareholders' equity.
Return on Invested Capital (ROIC)
A measure of overall effectiveness, computed as after‐tax operating profit divided by the total of shareholders' equity and interest‐bearing debt. Since it considers all capital invested in a firm, this measure is independent of the mix of capital.
Revenue Linearity
The pattern of revenue within a period (e.g. quarter). A linear pattern would result from a constant level of shipments over the entire period.
Revenue Process
The entire process that supports delivering a product or service to a customer, commencing with presales activities and concluding with the collection of cash from customers.
Rolling Forecast
A technique for extending the horizon of financial projections by adding on additional months or quarters into the future.
Scenario Analysis
A projection or forecast version based on a specific set of conditions (e.g. a recession).
Securities and Exchange Commission (SEC)
The US federal agency tasked with monitoring securities markets and financial reporting of publicly traded companies.
Selling, General, and Administrative (SG&A) Expenses
An income statement line item that captures all costs and expenses associated with sales, marketing, and administrative activities of the firm.
Sensitivity Analysis
A summary of the changes in a decision outcome (e.g. net present value) based on changes in one or more input variables.
Supply Chain Management
A key business process incorporating all aspects of planning, procuring, manufacturing, and distributing a firm's product.
Synergies
The incremental savings or income that results from an acquisition beyond the sum of the two independent companies.
Terminal Value
The estimated value of a company at the end of the forecast period in discounted cash flow valuations.
Times Interest Earned
A measure of the ability to service debt, computed by dividing profit before tax by interest expense.
Total Return to Shareholders (TRS)
An overall measure of returns earned by shareholders that reflects both capital appreciation and dividends paid over a period of time.
Valuation
The process of estimating the value of an asset or a company using one or more commonly accepted techniques such as multiples, comparables, and discounted cash flow analysis.
Value Driver
A factor that has a significant impact on the value of the firm (e.g. sales growth).
Value Performance Framework (VPF)
A comprehensive performance management framework that emphasizes building and sustaining long‐term shareholder value.
Variable Cost
A cost that varies with changes in sales levels.
Vertical Integration
The extent to which a firm directly owns its supply chain and distribution channels.
Weighted Average Cost of Capital (WACC)
The blend of returns expected by all suppliers of capital to the firm (weighted by market value).
Working Capital
The excess of current assets (cash, accounts receivable, inventories, and prepaid expenses) over current liabilities (accounts payable, debt, and accrued expenses).
Yield to Maturity
The current rate an investor will earn on a bond, adjusting the bond's stated (coupon) rate for current market conditions.
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