Thursday, April 15, 2010

Financial terms defined - H through N -

Hurdle rate. The rate of return on investment dollars required for a project to be worthwhile. It is typically a higher rate of return than what would have been obtained by investing the capital in low- or moderate-risk financial instruments.

Income statement. A report that indicates how much profit or loss a company generates over a period of time—a month, a quarter, or a year. In addition, the income statement, sometimes referred to as the earnings statement, tells how much money the company spends to make its profits.

Interest coverage. This measures a company's margin of safety, or how many times over the company can make its interest payments. To calculate interest coverage, divide earnings before interest and taxes by the interest expense.

Inventory. The supplies of the company that are or will become its product. Examples include the merchandise in a shop, the finished work in a warehouse, work-in-progress, and raw materials.

Investment in PP&E. Dollars spent on Property, Plant, and Equipment. Sometimes called capital investment or capital expenditures.

Invoice. A bill submitted to the purchaser, listing all items or services, together with amounts for each.

Journals. The transaction records of the business.

Leverage ratios. Ratios that assess a company's debt structure. The greater the component of long-term debt in a company's overall debt structure, the greater the financial leverage. These ratios, including interest coverage and debt to equity, help determine whether a company's level of debt is appropriate and assess its ability to pay the interest on its debts.

Liabilities. The economic claims against a company's resources. Such debts include bank loans, mortgages, and accounts payable.

Margin (%). Another term for profit, this equals revenues minus expenses. The margin is often expressed as the percentage by which revenues exceed expenses.

Market price appreciation. The increase in the value of an asset over a specified time period.

Market value. The value of an asset if it were to be sold at the current market price.

Net book value (NBV). The value at which an asset appears on the books of an organization, minus any depreciation (usually as of the date of the last balance sheet) that has been applied since its purchase or its last valuation.

Net income. The income of an organization after deducting the expenses, including interest and taxes, incurred in earning that income.

Net present value (NPV). The economic value of an investment, calculated by subtracting the cost of the investment from the present value of the investment's future earnings. Because of the time value of money, the investment's future earnings must be discounted in order to be expressed accurately in today's dollars.

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