|Operating cash flow (OCF). The net movement of funds from the operations side of a business, as opposed to the investment side. OCF is usually described in terms of the sources and uses of cash. When more cash is going out than coming in, there is a negative cash flow; when more cash is coming in than going out, there is a positive cash flow. |
Operating profit (EBIT). The difference between the revenues of a company and the costs and expenses associated with conducting business. Also known as earnings before interest and taxes.
Operating ratios. Financial measures that link various income statement and balance sheet figures to provide an assessment of a company's operating efficiency. Examples of operating ratios include asset turnover, days receivables, days payables, days inventory, current ratio, and quick ratio.
Payback period. The length of time needed to recoup the cost of a capital investment; the time that transpires before an investment pays for itself.
Pretax profit. Net income before federal income taxes.
Price-to-book ratio. A method of valuation for stock, this ratio is calculated by dividing the current market price of a share of stock by the stock's book value per share.
Price-to-earnings ratio (P/E). A common measure of how cheap or expensive a stock is, relative to earnings. P/E equals the current price of a share of stock divided by the previous 12 months' earnings per share.
Productivity measures. Indicators such as sales-per-employee and net-income-per-employee, which link revenue and profit generation information to work force data, thereby providing a picture of employees' effectiveness in producing sales and income.
Profitability ratios. Measures of a company's level of profitability, in which sales and profits are expressed as a percentage of various other items. Examples include return on assets, return on equity, and return on sales.
Property, plant, and equipment (PP&E). A line item on a balance sheet that lists the value of a business's land, buildings, machinery, equipment, and natural resources that are used for the purpose of producing products or providing services.
Purchase order. A written authorization to a vendor to deliver goods or services at an agreed upon price. When the supplier accepts the purchase order, it is a legally binding purchase contract.
Quick ratio. A measure of a company's assets that can be quickly liquidated and used to pay debts. It is sometimes called the acid-test ratio, because it measures a company's ability to deal instantly with its liabilities. To calculate the quick ratio, divide cash, receivables, and marketable securities by current liabilities.
Ratio analysis. A means of analyzing the information contained in the three financial statements, a financial ratio is two key numbers from a company's financial statements expressed in relation to each other. Ratios are most meaningful when compared to the same measures for other companies in the same industry.
Return on assets (ROA). Expressed as a percentage, ROA is a quantitative description of how well a company has invested in its assets. To calculate it, divide the net income for a given time period by the total assets. The larger the ROA, the better a company is performing.
Return on equity (ROE)/return on owner's equity. This measure shows the return on the portion of the company's financing that is provided by owners. It answers the question, "How profitable have management's efforts been?". To calculate ROE, divide the total income by total owners' equity.
Return on sales (ROS). Also known as profit margin, ROS is a way to measure a company's operational efficiency—how its sales translate into profit. To calculate ROS, divide net income by the total sales volume.
Sales. An exchange of goods and services for money.
Sunk costs. Prior investment that cannot be affected by current decisions, and thus should not be factored into the calculation of the profitability of an initiative.
SWOT analyses. An analysis of a company's strengths, weaknesses, opportunities, and threats.
Time value of money. The principle that a dollar received today is worth more than a dollar received at a given point in the future. Even without the effects of inflation, the dollar received today would be worth more because it could be invested immediately, thereby earning additional revenue.
Top-down budgeting. A budgeting process whereby senior management sets very specific objectives for such things as net income, profit margins, and expenses. Unit managers then allocate their budget within these parameters to ensure that the objectives are achieved.
Valuation. An estimate of a company's value, usually for the purposes of purchase and sale, or taxation. Leverage ratiosand operating ratios provide means of evaluating and comparing companies' worth. Wall Street uses other ratios that describe a company's financial performance in relation to its stock price: earnings per share (EPS), price-to-earnings ratio (P/E), and price-to-book ratio.
Working capital. A measure of a business's ability to pay its financial obligations, working capital equals the difference between a company's current assets (easily sellable goods, cash, and bank deposits) and its current liabilities (debt due in less than a year, interest payments, etc.). Shortages of working capital are often relieved by short-term loans.
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