FINANCE

BUZZWORDS
Course 2 Edition
 Earnings after tax (EAT) is the measure of a company’s net profitability. It is

Earnings After Tax calculated by subtracting all expenses and income taxes from the revenues

earned by the business. For this reason, EAT is often referred to as “the bottom
(EAT) line'’. This is the money left/return earned for the shareholders (owners) of the

company.

Shareholders’ funds refer to the amount of equity in a company, which belongs

to the shareholders. The amount of shareholders’ funds yields a theoretical

Shareholders’ Funds approximation about how much the shareholders would receive if a business

were to liquidate. It is computed as paid-up capital + reserves and surplus –

accumulated losses, if any.

The rate of return (RoR) is the net gain or loss of an investment over a specified time

period, which is expressed as a percentage of the investment’s initial cost. When you

Rate of Return (RoR) calculate RoR, you determine the percentage change from the beginning to the end

of the period in the value of the investment as well as any income you have received

from it.

Trend Ratio Trend ratio is concerned with comparing the firm’s performance over time.

Current assets divided by current liabilities give the current ratio (CR), which is a

Current Ratio measure of short-term financial liquidity of a firm.

The acid-test or quick ratio compares a company’s most liquid assets to its

Acid-Test or Quick short-term liabilities to see if a company has enough cash to pay its immediate

Ratio liabilities, such as short-term debt. The acid-test ratio disregards current assets

that are difficult to liquidate quickly, such as inventory.

Turnover Ratios These ratios determine how quickly certain assets can be converted into cash.

Debtors turnover ratio (DTR) measures the average number of times the credit
Debtors Turnover
sales are made to the debtors and cash is received from such customers in a
Ratio (DTR) year. The greater is the frequency of this process of credit sales and cash

realisation, the faster paying are the debtors.

 Creditors turnover ratio (CTR) is a ratio of net credit purchases and the average

Creditors Turnover amount of creditors (preferably based on a 12-month average) outstanding

Ratio (CTR) during the year.

Inventory Turnover Inventory turnover ratio (ITR) indicates the average length of time for which the

Ratio (ITR) stock is stored before it is sold.

Solvency ratios measure a firm’s ability to meet obligations arising from long-
Solvency
term borrowings. Such borrowings entail two sets of obligations: (i) periodic
Ratios/Capital payment of interest or instalment as and when it becomes due and (ii)

Structure Ratios repayment of principal/loan on maturity.

Interest coverage ratio measures a firm’s ability to pay interest on its

Interest Coverage borrowings. This ratio is determined by dividing the earnings before interest and

Ratio taxes (EBIT) by the interest.

Intrinsic Value/Book Intrinsic value/book value/net worth per share indicates the asset backing per

equity share. In other words, it shows effective equity funds per equity share. It
Value/Net Worth Per is determined by dividing the shareholders’ funds by the number of equity shares

Share outstanding.

Business firms borrow funds that are normally payable in a number of equated
Debt-Service
annual instalments. Each instalment comprises both the principal and the
Coverage Ratio interest component. Debt-service coverage ratio (DSCR) ascertains a

(DSCR) company’s ability to pay the instalment.

Efficiency ratios are concerned with measuring the efficiency of a firm from the
Efficiency Ratios perspective of utilisation of its assets. For this reason, sometimes these ratios

are also called assets utilisation or activity ratios.

Finished Goods
Finished goods inventory turnover ratio (FGITR) indicates the number of times
Inventory Turnover the finished goods are sold out, replaced and sold out again in a year.

Ratio (FGITR)
 Work-in-Process
Work-in-process turnover ratio (WIPTR) measures the relationship between the
Turnover Ratio cost of goods produced and the average work-in-progress inventory.

(WIPTR)

Raw Materials Raw materials inventory turnover ratio (RMTR) establishes the relationship

Inventory Turnover between the cost of raw materials used and average raw material inventory.

Ratio (RMTR)

Fixed or Long-Term or Fixed or long-term or non-current assets turnover ratio (FATR) constitutes

Non-Current Assets another set of efficiency ratio that assesses the efficiency of a business to

utilise the total fixed or long-term assets that are measured on the basis of net
Turnover Ratio (FATR) depreciation.

Total Assets Turnover

Total assets turnover ratio (TATR) is a single statistical measure that indicates

the extent of utilisation of total assets, current assets (CA) and fixed assets (FA)
Ratio (TATR) as a group.

Profitability ratios are of crucial significance for the investors. In fact, the only

Profitability Ratios reason why the investors or the owners invest in a business firm is that they

expect that they will earn adequate return on their investments. Such ratios can

be determined on the basis of sales and investments.

Another variant of profitability ratios, based on sales, are the expenses ratios.
Expenses Ratios These ratios are computed by dividing expenses by sales.

Return On Assets Return on assets (ROA) is measured conventionally as the total return earned by

(ROA) the financiers of assets.

Return on capital employed (ROCE) measures the rate of return earned with
Return On Capital reference to the long-term/permanent capital employed by the business firm.

Employed (ROCE) Accordingly, current liabilities are subtracted from total assets to determine the

long-term capital employed.

 Earnings per share (EPS) measures the earnings available to equity shareholders

Earnings Per Share on a per share basis. Accordingly, it is computed by dividing the EAT available

for equity-holders by the number of equity shares outstanding. Preference

(EPS)
dividend (if any) is deducted from EAT before the computation of EPS.

Dividend Per Share

Dividend per share (DPS) measures the dividends paid per equity share. It is

determined by dividing the dividends distributed among equity shareholders by

(DPS) the number of equity shares outstanding