Financial Glossary


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EBITDA. This is one of the most common acronym's in corporate financial circles and it is a key number when evaluating the value of a company because it indicates how much cash the company is taking in versus what it is paying out. See Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next. A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not necessarily cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA.

Earn Out. A contractual provision that allows an owner to earn additional money after the sale of a business if certain conditions are met. Put another way, an acquisition arrangement where a portion of the purchase price is contingent upon the achievement of certain performance targets after the deal's close. Historically it's been used in small, private-company deals, but recently large, public companies have begun using them. See Post Closing Adjustments.

Earnings. A corporations profits. An earnings report is a statement a company issues to shareholders and to the public declaring its current profits on either a quarterly or annual basis.

Earnings Before Interest and Taxes (EBIT). Earnings before interest and taxes (EBIT) A financial measure defined as revenues less cost of goods sold and selling, general, and administrative expenses. In other words, operating and non-operating profit before the deduction of interest and income taxes.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). A company's earnings before the deduction of interest expense, taxes, depreciation and amortization (or revenues less cost of goods sold and selling, general and administrative expenses) determined in accordance with GAAP. EDITDA is often used as an approximation of operating cash flow. Companies are often valued based on some multiple of EBITDA. Related measures include EBIAT, EBIT, EBITD and EBT.

Earnings Growth Rate. The percentage of annual increase in earnings.  

Earnings Per Share (EPS). A company's net earnings less preferred share dividends, divided by the number of common shares outstanding. Put another way, EPS is a company's Net Income, divided by its number of outstanding shares.

Earnings-price Ratio (EPR). Also known as the "earnings yield," this ratio is a corporation's earnings per share divided by its current stock price. It is used to compare the attractiveness of stocks, bonds, and money market instruments.

Earnings Statement. A financial statement showing the income and expenses of a business over a period of time. Also known as an income statement or profit and loss statement.

Earnings Yield. Also known as the "earnings price ratio," the earnings yield is a corporation's earnings per share divided by its current stock price. It is used to compare the attractiveness of stocks, bonds, and money market instruments.

Economic Assumptions. The assumptions about future economic performance underlying the government's projections of its revenues, expenditures and deficit -- such as assumptions about growth, interest rates and inflation. Economic assumptions help to determine the budget action needed to achieve deficit targets. Overly optimistic assumptions can lead to missed fiscal targets and damaged credibility. Using prudent economic assumptions and taking sufficient fiscal action helps to ensure that deficit targets are met.

Economic Indicator. Economic statistics that give important clues to changing economic conditions. For example, changes in the Consumer Price Index provide an indication of the rate of price inflation of consumer goods and services while changes in Gross Domestic Product provide an indication of overall growth in output.

Economies of Scale. A decrease in the marginal cost of production due to the increased size or scale of a company's operations.

Efficient Market Hypothesis. The theory that a stock's price reflects all available information and reflects its true value.

Efficient Market Theory. A theory stating that stock prices perfectly reflect all market information that is known by all investors. The theory also states that no investor can beat the market's returns through skill because it is impossible to determine future stock prices, and that luck explains why some investors beat the market. The theory is much debated.  

Effective Tax Rate. Also called your average income tax rate, this is the income tax you paid over a period divided by your gross income over the same period. It is different than your "income tax rate" because it is an average taken over several years.

Emerging Growth Fund. A type of growth mutual fund that invests in stocks of young, growing companies.

Employee Stock Ownership Plan (ESOP). A retirement plan that invests in the employer's stock for the benefit of employees.

Employee Stock Purchase Plan (ESPP). A plan established by your company that permits you to buy company stock, usually at a discount.

Employer Contribution (to tax-deferred savings). A contribution to your pension plan by your employer. In many cases the employer might match your contribution, or a portion of it. Employer contributions are intended to be an incentive for you to save for your own retirement.

Enterprise Value. The total capitalized value of a company consisting of its total debt and total equity value.

Equity Investments (Equities). Those shares issued by a company which represent ownership in the company. Common and preferred shares are usually called equity stock.

Equity. Different perspectives include: (1) a company's residual economic ownership after the claims of all creditors have been satisfied ( owned by its equity shareholders which include common and preferred stockholders); (2) the company's net worth or stockholders' equity is the difference between its assets and liabilities; and (3) the total value of all classes of a company's common and preferred stock.The net worth of a company. In short, this typically represents the ownership interest of the shareholders (common and preferred) of a company. For this reason, shares are often known as equities.

Equity Fund. A mutual fund whose portfolio consists primarily of common and preferred shares.

Escrow. A financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. Securities, funds and other assets can be held in escrow.

Estate. All assets owned by an individual at the time of death. The estate includes all finds, personal effects, interests in business enterprises, titles to property, real estate and chattels, and evidence of ownership, such as stocks, bonds, and mortgages owned and notes receivable.

Estate Planning. The process of providing for the orderly transfer of all of an individual's assets at death efficiently and, as per their wishes.

Estate Tax. A federal or state tax imposed on an individual's assets at death.

Event of Default. The failure of a company to satisfy its contractual agreements and covenants in loan agreements or mezzanine securities documents. Common events of default include failure to pay principal, interest, or dividends when due; violation of the company's representations, warranties, or covenants; or becoming insolvent.

Evergreen Fund. A fund in which returns generated on investments are automatically returned to the general pool, with the aim of keeping a continuous supply of capital on hand for investments.

Excess Capacity. This term refers to the amount of available plant and equipment not in use. When producers have spare capacity, they tend to reduce prices or minimize price increases in order to boost sales. Thus, the greater the spare capacity, the greater the downward pressure on the inflation rate.

Exchange. A public market for the buying and selling of public stocks.

Excise Tax. A tax imposed on a particular commodity or service. The tax can be imposed at any trade level and can either be a specific tax (the $100 automobile air conditioner tax) or an ad valorem tax (the 10 per cent jewelry tax).

Exercise Price. The exercise or strike price is the amount that must be paid by a security holder in order to convert a convertible security. The exercise price can be nominal ($.001) or significant, and frequently relates to the purchase price of another security purchased in the same offering or at the same time. In options trading, the exercise price is the specified price for the investment instrument underlying a call or put. If options are exercised, the underlying securities are traded at this exercise price. This is also known as the strike price.

Exit. The means by which a private equity firm realizes a return on its investment. For venture capitalists, this typically comes when a portfolio company goes public, or when it merges with, or is acquired by, another company.

Exit Strategies. Strategies by which a company's security holders hope to achieve liquidity. Private companies liquefy their shareholders' investments by selling the company, undertaking an initial public offering or redeeming the stock. Registration rights require a company to facilitate the sale of restricted securities after the company goes public. Put rights permit investors to cause a company, either private or public, to redeem the investors' securities. Also referred to as