Glossary
Every term in the course, in plain English. Each one links to the lesson that teaches it.
- 10-K / 10-Q / 8-K
- Annual report (audited) / quarterly report / filing for a major event. Filed with the SEC. How to read a 10-K and 10-Q
- Accounts payable
- Money owed to suppliers for things bought on credit. A liability. Debits and credits
- Accounts receivable
- Money customers owe the business. An asset. Accrual accounting
- Accrual accounting
- Revenue when earned, expenses when incurred. Required for US public companies (GAAP). Accrual accounting
- Adjusted / non-GAAP earnings
- Company-defined profit excluding chosen items. Check what was excluded. Quality of earnings
- Amortization
- Depreciation for intangible assets such as patents or software. Depreciation and capex
- ARR / churn / NRR
- Annual recurring revenue / share of customers or revenue lost / revenue kept from existing customers including upgrades. Segment reporting and KPIs
- Articulation
- The three statements tie together: net income → retained earnings, and net cash flow → change in cash. How the three financial statements connect
- Asset turnover
- Revenue ÷ total assets. The cash conversion cycle
- Assets = Liabilities + Equity
- Always true. Equity is the owner’s leftover claim. The accounting equation
- Balance sheet
- A snapshot of what a business owns and owes on one day. The accounting equation
- Beat / miss
- Results above / below consensus. Earnings beats, misses and guidance
- Buyback
- A company repurchasing its own shares, raising EPS without raising profit. EPS, dilution and buybacks
- CAGR
- Compound annual growth rate: the steady yearly rate from start to end over several years. Revenue growth and CAGR
- Capex
- Capital expenditure: cash spent on long-term assets. Shows in investing cash flow. Depreciation and capex
- Cash conversion cycle
- DIO + DSO − DPO. Days cash is tied up in operations; negative means suppliers fund you. The cash conversion cycle
- Cash flow statement
- Cash in and out over a period, split into operating, investing and financing. How to read a cash flow statement
- Closing the books
- Applying a period’s transactions to the opening balance sheet to get the closing one. Closing the books: a small-business case
- COGS
- Cost of goods sold: the direct cost of making what was sold. How to read an income statement
- Consensus
- The average of analysts’ estimates. Results are judged against it. Earnings beats, misses and guidance
- Cost of capital
- The return investors and lenders demand. ROIC above it creates value. ROE, ROA and ROIC
- Credit (Cr)
- Right side. Grows liabilities, equity and revenue; shrinks assets and expenses. Debits and credits
- Current
- Within one year. Applies to both assets and liabilities. How to read a balance sheet
- Current / quick ratio
- Current assets (excluding inventory, for quick) ÷ current liabilities. Short-term liquidity. Liquidity and solvency ratios
- DCF
- Discounted cash flow: value = present value of all future free cash flows. Free cash flow and DCF valuation
- Debit (Dr)
- Left side. Grows assets, expenses and dividends; shrinks liabilities, equity and revenue. Debits and credits
- Deferred revenue
- Cash received for work not done yet. A liability. Accrual accounting
- Depreciation
- Spreading an asset’s cost over its useful life. A non-cash expense. Depreciation and capex
- Dilution
- New shares shrink each existing share’s slice. Diluted EPS counts options and grants. EPS, dilution and buybacks
- Discount rate
- The rate used to discount; higher for riskier cash flows. Time value of money
- Diversification
- Owning several unrelated investments so no single mistake is ruinous. Moats and margin of safety
- Double entry
- Every transaction changes at least two accounts, so the books always balance. Debits and credits
- DSO / DIO / DPO
- Days to collect from customers / days stock sits / days to pay suppliers. The cash conversion cycle
- DuPont analysis
- ROE = net margin × asset turnover × (assets ÷ equity). Shows how a return is earned. DuPont analysis: comparing two companies
- EBITDA
- Earnings before interest, taxes, depreciation & amortization: operating income + D&A. Liquidity and solvency ratios
- Enterprise value
- Market cap + debt − cash. The price of the whole business. P/E and EV/EBITDA multiples
- EPS
- Earnings per share: net income ÷ shares outstanding. EPS, dilution and buybacks
- EV/EBITDA
- Enterprise value ÷ EBITDA. Compares companies regardless of debt. P/E and EV/EBITDA multiples
- Expenses
- The costs of running the business. Revenue, expenses and profit
- Fiscal year
- A company’s financial year. It doesn’t have to match the calendar year. How to read a 10-K and 10-Q
- Free cash flow
- Operating cash flow − capex. Cash owners could take out. Free cash flow and DCF valuation
- GAAP
- Generally Accepted Accounting Principles: the US rulebook for financial statements. GAAP vs. non-GAAP earnings
- Gross / operating / net margin
- Gross profit, operating income or net income ÷ revenue. Profit margins
- Gross margin
- (Revenue − Cost of goods sold) ÷ Revenue. How much of each sales dollar is left after paying for the product. Gross margin and business models
- Guidance
- Management’s own forecast for coming periods. Earnings beats, misses and guidance
- Historical cost
- Most assets are recorded at what they cost, less depreciation, not at market value. How to read a balance sheet
- Income statement
- Revenue and costs over a period, ending in net income. Also called the P&L. How to read an income statement
- Indirect method
- Operating cash flow = net income + non-cash costs ± changes in working capital. Working capital
- Interest coverage
- Operating income ÷ interest expense. Liquidity and solvency ratios
- Journal entry
- A transaction written as debits (left) and credits (right). Total debits = total credits. Debits and credits
- KPI
- Key performance indicator: an operating metric specific to a business model. Segment reporting and KPIs
- LTV / CAC
- Lifetime gross profit per customer ÷ cost to acquire one. Segment reporting and KPIs
- Margin of safety
- (Estimated value − price) ÷ value. Room for error. Moats and margin of safety
- Market cap
- Share price × shares outstanding. P/E and EV/EBITDA multiples
- Matching principle
- Expenses are recorded in the same period as the revenue they help produce. Accrual accounting
- MD&A
- Management’s discussion and analysis: management explains the results in its own words. How to read a 10-K and 10-Q
- Moat
- A durable competitive advantage: brand, network effects, switching costs, cost advantage, patents. Moats and margin of safety
- Net debt
- Debt − cash. Liquidity and solvency ratios
- Non-GAAP / adjusted
- Company-defined measures excluding chosen items. Must be reconciled to GAAP. GAAP vs. non-GAAP earnings
- One-off items
- Gains or charges that won’t recur; remove them to see underlying earnings. Quality of earnings
- Operating cash flow
- Cash generated by running the business. Often written CFO. How to read a cash flow statement
- Operating income
- Profit from the core business before interest and tax. Often close to “EBIT”. How to read an income statement
- Operating leverage
- With fixed costs, a small change in sales causes a bigger change in operating profit. Worse with thin margins. DuPont analysis: comparing two companies
- Organic growth
- Growth from the existing business, excluding acquisitions. Revenue growth and CAGR
- P/E
- Price ÷ EPS: dollars paid per dollar of annual earnings. P/E and EV/EBITDA multiples
- Peer comparison
- Judge ratios against the same company’s history and direct competitors, never across industries. Profit margins
- Prepaid expense
- Cash paid in advance for something not used up yet, like insurance. An asset. Accrual accounting
- Present value
- Future amount ÷ (1 + r)ⁿ. What a future cash flow is worth today. Time value of money
- Priced in
- Already expected, so already reflected in the share price. Earnings beats, misses and guidance
- Profit
- Revenue − Expenses. Also called net income or the “bottom line”. Negative = a loss. Revenue, expenses and profit
- Profit vs. cash
- They differ whenever cash moves without revenue or an expense, such as loan repayments, buying equipment or customers paying late. Closing the books: a small-business case
- Quality of earnings
- How repeatable profit is, and how well it turns into cash. Quality of earnings
- Reading a release
- Beat or miss vs consensus → growth in context → GAAP vs adjusted → KPIs → guidance. The future moves prices. Reading an earnings release: a software case
- Reconciliation
- The table showing exactly what was added back to get from GAAP to adjusted. GAAP vs. non-GAAP earnings
- Recurring revenue
- Revenue that renews by itself, like subscriptions. It’s valued highly because it’s predictable. Gross margin and business models
- Restatement
- A company correcting previously published financial statements. Often follows aggressive accounting. Spotting accounting red flags: a final case
- Retained earnings
- All past net income kept in the business (not paid as dividends). How to read a balance sheet
- Revenue
- Money earned from customers. Also called sales or the “top line”. Revenue, expenses and profit
- ROA
- Return on assets: net income ÷ total assets. ROE, ROA and ROIC
- ROE
- Return on equity: net income ÷ shareholders’ equity. ROE, ROA and ROIC
- ROIC
- Return on invested capital: after-tax operating profit ÷ (debt + equity). Not inflated by leverage. ROE, ROA and ROIC
- Rule of 72
- 72 ÷ growth rate ≈ years to double. Revenue growth and CAGR
- Same-store sales
- Sales growth only at stores open in both periods. Segment reporting and KPIs
- Segment reporting
- Results broken down by business line or region. Segment reporting and KPIs
- Stock-based compensation
- Paying staff in shares or options: a real cost borne by existing shareholders. EPS, dilution and buybacks
- Terminal value
- Value of cash flows beyond the forecast: next cash flow ÷ (r − g). Free cash flow and DCF valuation
- The ten-minute read
- Profit → cash → balance sheet → returns → price. If the story and the numbers disagree, believe the numbers. Spotting accounting red flags: a final case
- Three-statement model
- Opening balance sheet + a period’s transactions → income statement, cash flow statement, closing balance sheet. Three-statement model: a manufacturing case
- Time value of money
- A dollar today is worth more than a dollar later. Time value of money
- Value trap
- A stock that looks cheap because its business is in decline. P/E and EV/EBITDA multiples
- Working capital
- Current assets − current liabilities. The cash tied up in day-to-day operations. Working capital
- YoY growth
- (This period − same period last year) ÷ same period last year. Revenue growth and CAGR