Corporate Finance

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The balance sheet 1 (Chapter 11)

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Balance sheet

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a statement that shows the value of a company's assets (= things of positive value) and its debts

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Asset

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Things owned by the company, such as factories, and machines, that will bring future economic benefits.

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Liabilities

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Obligations to pay other organizations or people: money that the company owes, or will owe at a future date

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Suppliers

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Companies which provide raw materials or parts

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Granting credit

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If the suppliers have given the buyer a period of time before they have to pay for the goods

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Assets = liabilities + capital

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A = L + C

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Shareholders' equity

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Consists of all the money belonging to shareholders

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Shareholder

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a person who owns shares in a company and therefore gets part of the company's profits and the right to vote on how the company is controlled:

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Share capital

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The money the company raised by selling its shares.

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Retained earnings

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Profits from previous years that have not been distributed - paid out to shareholders - as dividends

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Dividend

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(a part of) the profit of a company that is paid to the people who own shares in it

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Profit and loss account & Cash flow statement

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Shows how much money a company has spent or received during a year.

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The balance sheet 2: Assets (Chapter 12)

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Fixed assets or non-current assets

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Such as buildings and equipment, that will be used by a business for a long time.

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Current Assets

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Things that will probably be used by the business in the near future. They include cash - money available to spend immediately.

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Write off

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If a company thinks a debt will not be paid, it has to anticipate the loss - take action in preparation for the loss happening. It will write off or abandon the sum as bad debt.

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Tangible assets

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Assets with a physical existence- things you can touch- such as property, plant, and equipment.

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Accumulated depreciation charges

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The amount of their cost the already been deducted from profits = net book value.

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Intangible assets

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brand names and trademarks

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The balance sheet 3: Liabilities (Chapter 13)

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Current Liabilities

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are expected be paid within a year of the date of the balance sheet

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Share premium & face value

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Share premium: money made if the company sells shares at above their face value - the value written on them.

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The other financial statements (chapter 14)

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Profit and loss account

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The is a financial statement which shows the difference between the revenues and expenses of a period.

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surplus

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If there is more income than expenditure

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Total sales

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The amount of money received during a specific period.

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Cost of goods sold

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The costs associated with making the products that have been sold, such as raw materials, labour, and factory expenses.

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Gross Profit

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The difference between the sales revenue and the cost of sales

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EBITDA (earnings before interest, tax, depreciation, and amortization)

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EBIT (earnings before interest tax)

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Net Profit

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After all the expenses and deductions, also called the bottom line.

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Cash flow statement

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Gives details of cash flows- money coming into and leaving the business, relating to: operations, investing, financing

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Financial ratios 1 (Chapter 15)

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Liquidity

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How easily a company can turn some of its assets into cash

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Current ratio

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Current assets / current liabilities

It measures liquidity and shows how much of a company's assets will have to be converted into cash in the next year to pay debts. The higher the ratio, the more chance creditors have of being paid. A healthy company should have a current ratio closer to 2 than to 1.

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Quick ratio or acid test

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liquid assets / current liabilities

It measures short term solvency

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Earnings per share (EPS)

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total earnings per year / the number of ordinary shares

It tells investors how much of the company's profit belongs to each share.

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Price/earnings ratio or P/E ratio

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the market price of an ordinary share / the past year's EPS

It shows how expensive a share is

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Dividend cover

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ordinary share dividend / net profit

Shows how many times the company's total annual dividends could have been paid out of it's available annual earnings .

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Financial ratios 2 (Chapter 16)

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Gross profit margin

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gross profit (sales - cost of goods sold) / sales

The money a company has left after it pays the cost of goods or services it has sold.

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Return on assets

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Net profit / total assets

Measures how efficiently the firm's assets are being used to generate profits.

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Return on equity (ROE)

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net profit / shareholders equity

It shows how big a company's profit is (after interest and tax) compared with the shareholders' equity or funds.

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leverage

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debt / shareholders equity

often expressed as a percentage. It shows how far a company is funded by loans rather than its own capital.