Financial Statement Glossary

The total amount of money a company brings in from its primary business activities.

Sales Price x Number of Units Sold

Check year-over-year and quarter-over-quarter growth to gauge demand trends.

One-off project revenue can inflate growth; read footnotes for recognition rules.

Direct costs of producing goods, including materials and labor.

COGS = Beginning Inventory + Purchases − Ending Inventory

Analyze trends to monitor input cost pressures and production efficiency.

Inventory accounting methods (e.g., FIFO, LIFO) can significantly affect COGS.

The profit a company makes after deducting the costs associated with making and selling its products.

Gross Profit = Revenue − Cost of Goods Sold

Use alongside gross margin to judge pricing power and production efficiency.

Falling gross profit with rising revenue may hint at discounting or cost pressure.

The profit a company generates from its core business operations, excluding interest and taxes.

Operating Income = Gross Profit − Operating Expenses

Highlights how efficiently management turns gross profit into earnings.

Compare against peers to spot expense discipline; recurring restructuring costs should be scrutinized.

Profit before interest, taxes, depreciation, and amortization; a proxy for operating cash flow.

EBITDA = Operating Income + Depreciation & Amortization

Used to compare profitability between companies with different capital structures and tax rates.

Can overstate cash flow as it ignores changes in working capital and capital expenditures.

A company's total profit after all expenses, including taxes and interest, have been deducted.

Net Income = Operating Income − Interest Expense ± Non-operating Items − Income Tax

Track sustainability of earnings and link to EPS or dividend capacity.

Adjust for one-time gains or losses to assess core profitability.

The portion of a company's profit allocated to each outstanding share of common stock.

EPS = (Net Income − Preferred Dividends) ÷ Average Outstanding Shares

A primary indicator of a company's profitability and used to calculate the P/E ratio.

Can be presented as basic or diluted EPS, with the latter including the effect of potential share conversions.

The sum of all direct and indirect selling expenses and all general and administrative expenses of a company.

Analysis of SG&A is important as it includes many of the costs of running a business.

This can include everything from salaries of non-production employees to rent and advertising costs.

Costs incurred for the research and development of a company's products or services.

A key indicator of a company's investment in future growth.

The level of R&D spending can vary greatly by industry.

The cost incurred by an entity for borrowed funds.

Reflects the cost of a company's debt.

It is a non-operating expense shown on the income statement.

The expense of a physical asset over its useful life.

Depreciation is a non-cash expense that reduces a company's taxable income.

Different depreciation methods can be used, such as straight-line or accelerated depreciation.

The practice of spreading an intangible asset's cost over that asset's useful life.

Similar to depreciation, amortization is a non-cash expense that can reduce taxable income.

Intangible assets that are amortized include patents, copyrights, and goodwill.

The amount of tax that a company is liable for on its earnings.

Taxable Income x Tax Rate

Represents the cost of taxes on a company's profits.

The effective tax rate can differ from the statutory tax rate due to various tax deductions and credits.

Everything a company owns that has monetary value.

Total Assets = Current Assets + Non-current Assets

Compare with liabilities and equity to validate the accounting equation.

Asset growth funded purely by debt may raise leverage risk.

Assets expected to be converted to cash within one year.

Cash + Accounts Receivable + Inventory + Prepaid Expenses

Indicates a company's ability to meet short-term obligations.

A high proportion of inventory in current assets might indicate slow sales.

Long-term investments and assets not expected to be converted to cash within a year.

Property, Plant, and Equipment (PP&E) + Intangible Assets + Long-term Investments

Represents the long-term productive capacity of the company.

Depreciation and impairment charges can reduce the value of these assets over time.

The most liquid assets, including currency, bank deposits, and short-term securities.

Currency + Bank Deposits + Money Market Funds

A key measure of a company's liquidity and financial health.

Excessive cash may indicate inefficient use of capital.

Goods available for sale, including raw materials, work-in-progress, and finished goods.

Raw Materials + Work-in-Progress + Finished Goods

Inventory levels are a key indicator of sales trends and supply chain efficiency.

Obsolete inventory may need to be written down, impacting profitability.

Everything a company owes to others, including loans, bills, and other obligations.

Total Liabilities = Current Liabilities + Non-current Liabilities

Review maturity structure to judge refinancing or liquidity pressure.

Rising short-term debt with flat cash can signal tightening credit lines.

Obligations due within one year.

Accounts Payable + Short-term Debt + Accrued Expenses

Used to assess a company's short-term liquidity risk.

A sudden increase can signal cash flow problems.

Obligations not due within one year.

Long-term Debt + Bonds Payable + Deferred Tax Liabilities

Indicates the company's long-term financing and capital structure.

The maturity schedule of long-term debt is important for assessing future cash needs.

Money owed to suppliers for goods or services received on credit.

Sum of all outstanding invoices from suppliers

Managing payables is a key part of working capital management.

Lengthening payment cycles can improve cash flow but may strain supplier relationships.

The total amount of interest-bearing obligations.

Short-term Debt + Long-term Debt

A key indicator of a company's financial leverage and risk.

High levels of debt can increase financial risk, especially in economic downturns.

The value of the company that is owned by its shareholders.

Equity = Total Assets − Total Liabilities

Track equity growth to see retained earnings and capital injections.

Negative equity signals accumulated losses or heavy leverage; check debt covenants.

An intangible asset that arises when a buyer acquires an existing business.

Goodwill = Purchase Price of Company - Fair Market Value of Net Assets

Represents assets that are not separately identifiable, such as brand reputation and customer relationships.

Goodwill is tested for impairment annually and can be written down if its value decreases.

The cumulative net earnings or profits of a company after accounting for dividend payments.

Retained Earnings = Beginning Retained Earnings + Net Income - Dividends

A key source of internal financing for a company's growth.

Can be a sign of a company's profitability over time.

Money owed to a company by its customers for goods or services delivered.

Sum of all outstanding customer invoices

Analyze receivable days to assess how quickly a company collects payments.

A sharp increase in receivables relative to sales may signal issues with credit quality.

Long-term, tangible assets used in the operations of a business.

Gross PP&E - Accumulated Depreciation

Changes in PP&E can indicate a company's investment in growth or maintenance.

Depreciation methods can vary, affecting the book value of PP&E.

The cash generated from a company's normal business operations.

Operating Cash Flow = Net Income + Non-cash Expenses ± Working Capital Changes

Positive and steady CFO confirms earnings quality and collection efficiency.

Large swings from working capital warrant a look at receivable and inventory turnover.

Cash used for or generated from investments in assets.

CFI = Sale of Assets − Purchase of Assets

Indicates how a company is allocating capital for future growth.

Consistently negative CFI often indicates a company is investing in its future.

Cash flow between a company and its owners and creditors.

CFF = Issuance of Equity/Debt − Repurchase of Equity/Debt − Dividends Paid

Shows how a company raises capital and returns it to shareholders.

Positive CFF may indicate a company is raising capital for growth, but could also signal an inability to generate sufficient cash from operations.

The cash a company has left after paying for its operating expenses and capital expenditures.

Free Cash Flow = Operating Cash Flow − Capital Expenditures

Key for valuing dividends, buybacks, and debt paydown capacity.

Consistently negative FCF may be acceptable during planned expansion but should match strategy.

The cash generated by a company's principal revenue-producing activities.

Net Income + Depreciation & Amortization - Changes in Working Capital

A key indicator of a company's ability to generate sufficient cash to maintain and grow its operations.

Positive CFO is generally a sign of a healthy company.

The cash used for or generated from a company's investments in long-term assets and other business investments.

Purchase of Property, Plant, and Equipment (PP&E) + Purchase of Other Businesses - Sale of Assets

Provides insight into a company's investment strategy and future growth prospects.

Negative CFI can be a sign of a company investing in its future growth.

The flow of cash between a company and its owners (shareholders) and creditors.

Issuance of Stock - Repurchase of Stock + Issuance of Debt - Repayment of Debt - Payment of Dividends

Shows how a company is financed, whether through debt or equity, and how it returns capital to investors.

A company that frequently issues new stock or debt may be struggling to generate enough cash from its operations.

Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment.

Change in Gross PP&E + Depreciation Expense

Indicates how much a company is investing in its existing and future assets to maintain or grow the business.

High CapEx can be a sign of growth, but it can also strain a company's cash flow.

Measures the profitability of a company's products.

Gross Margin = Gross Profit ÷ Revenue

Higher margins suggest differentiation; watch stability across cycles.

Compare with peers in the same industry; accounting changes to cost capitalization can shift this ratio.

Indicates how much profit a company makes from its core operations.

Operating Margin = Operating Income ÷ Revenue

Useful for comparing cost discipline across peers and across time.

Seasonality or marketing campaigns can temporarily compress margins; focus on normalized levels.

Represents the percentage of revenue that turns into profit.

Net Margin = Net Income ÷ Revenue

Helps compare bottom-line efficiency across business models.

Differences in tax rate or leverage affect comparability; consider EBIT-based metrics too.

Measures how much profit a company generates for each dollar of shareholder equity.

ROE = Net Income ÷ Average Shareholders' Equity

Higher ROE shows effective use of equity, but check leverage and one-off gains.

Sustainable ROE pairs strong margins with prudent leverage; DuPont breakdown clarifies drivers.

Measures how efficiently a company is using its assets to generate earnings.

ROA = Net Income ÷ Average Total Assets

A good indicator of how well the company is managed.

ROA can vary significantly between industries, so it's best used for peer comparison.

Measures the return generated on all capital invested in the business.

ROIC = (Net Income − Dividends) ÷ (Total Debt + Equity)

A measure of a company's capital allocation efficiency.

A ROIC that is consistently higher than the company's cost of capital indicates value creation.

Measures how efficiently a company uses its assets to generate sales.

Asset Turnover = Revenue ÷ Average Total Assets

Higher turnover implies lean operations; compare with margins to balance volume and profitability.

Capital-intensive industries naturally have lower turnover; compare within the same sector.

Shows how many times a company has sold and replaced inventory during a given period.

Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

Faster turnover reduces holding risk; watch for overly low levels that risk stockouts.

Compare with days inventory outstanding; sudden slowdowns can hint at demand softness.

Measures how efficiently a company collects revenue from its customers.

Receivables Turnover = Net Credit Sales ÷ Average Accounts Receivable

A high ratio implies efficient credit and collections.

A declining turnover ratio may indicate that the company is taking on more credit risk.

The average number of days it takes for a company to collect payment after a sale.

DSO = (Accounts Receivable ÷ Net Credit Sales) x Number of Days

A low DSO number means that it takes a company fewer days to collect its accounts receivable.

Comparing DSO with the company's stated credit terms can reveal the effectiveness of its collection practices.

Measures a company's ability to pay off its short-term liabilities with its short-term assets.

Current Ratio = Current Assets ÷ Current Liabilities

A level near 1.0 is lean; well below 1 signals liquidity strain.

Very high ratios may mean idle cash or inventory; evaluate cash conversion cycle.

A stricter liquidity test that excludes inventory from current assets.

Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities

Useful for industries where inventory is not easily converted to cash.

A ratio of 1 or higher is generally considered healthy.

The most conservative liquidity ratio, measuring a company's ability to pay current liabilities with only cash and equivalents.

Cash Ratio = Cash and Equivalents ÷ Current Liabilities

Provides a worst-case scenario view of a company's liquidity.

While a high ratio is safe, it may also indicate poor use of cash.

Compares a company's total liabilities to its shareholder equity.

Debt-to-Equity = Total Liabilities ÷ Shareholders' Equity

Higher ratios indicate leverage risk; compare to industry norms and interest coverage.

Negative equity makes D/E misleading; use debt-to-assets as a cross-check.

Measures how well a company can pay the interest on its outstanding debt.

Interest Coverage = Operating Income ÷ Interest Expense

Values above 3× are typically comfortable; under 1.5× merits caution.

Use EBITDA-based coverage for high depreciation industries; compare with debt maturity schedule.

Compares a company's stock price to its earnings per share.

P/E = Share Price ÷ Earnings per Share

Compare with growth prospects and peer multiples; high P/E may price in optimism.

Use trailing and forward P/E together; accounting adjustments can distort EPS.

Compares a company's market value to its book value.

P/B = Share Price ÷ Book Value per Share

Useful for asset-heavy sectors; values below 1 may imply distress or underappreciated assets.

Banks and insurers often quoted on P/B; adjust for intangible-heavy models where book value is light.

Compares a company's total value (enterprise value) to its earnings before interest, taxes, depreciation, and amortization.

EV / EBITDA = Enterprise Value ÷ EBITDA

Helps compare firms with different capital structures; less affected by accounting policies than P/E.

Use sector benchmarks; adjust EBITDA for one-offs to keep multiples comparable.

Shows how much a company pays out in dividends each year relative to its stock price.

Dividend Yield = Annual Dividend per Share ÷ Share Price

Useful for income focus; confirm payout sustainability with payout ratio and FCF.

Extraordinary dividends can spike yield; check whether payouts are recurring or one-off.

Compares a company's stock price to its revenue.

P/S = Market Capitalization ÷ Total Revenue

Useful for valuing growth stocks that have yet to achieve profitability.

Can be less susceptible to accounting manipulation than P/E.

A measure of a company's total value, often used as a more comprehensive alternative to market capitalization.

EV = Market Capitalization + Total Debt − Cash and Equivalents

Used in valuation multiples like EV/EBITDA to compare companies with different capital structures.

EV is theoretically the amount you would have to pay to buy the entire company, including its debt.

The cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

FCF = Cash Flow from Operations - Capital Expenditures

Indicates a company's ability to generate cash and is a key measure for valuation.

Positive FCF is often seen as a sign of a healthy company.

An indicator of how profitable a company is relative to its total assets.

ROA = Net Income / Total Assets

Used to assess how efficiently management is using its assets to generate earnings.

ROA can vary significantly across different industries.

A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

Dividend Yield = Annual Dividends Per Share / Price Per Share

Often used by investors to show the return on investment from dividends.

A very high yield may be unsustainable or a sign of a falling stock price.

A valuation ratio of a company's current share price compared to its per-share earnings.

P/E Ratio = Market Value per Share / Earnings per Share (EPS)

Used to determine if a stock is overvalued or undervalued.

A high P/E could mean that a stock's price is high relative to earnings and possibly overvalued.

Compares a company's market capitalization to its book value.

P/B Ratio = Market Price per Share / Book Value per Share

Can be used to find undervalued stocks.

A P/B ratio under 1 is often considered a good value.

Measures the profitability of a corporation in relation to stockholders’ equity.

ROE = Net Income / Average Shareholder Equity

A measure of how effectively management is using a company’s assets to create profits.

A higher ROE is generally better.