Financial Know-How e Dictionary
that it is the cost of sales figure that is used here, not the sales. Tis is because stock is generally valued at cost in financial statements.
•Interest Cover. Tis ratio is regularly used by banks to calculate the amount they are prepared to lend. It calculates the number of times that the interest on any loans to the business are ‘covered’ by the profits generated. It is calculated by dividing the profits before interest and tax by the net interest paid or payable. A figure of 2 or more will generally be required.
ratios will demonstrate your knowledge and expertise, giving you confidence and providing reassurance in any financial discussions that may take place.
And so on to phrases. Tere aren’t that many you need to worry about, but here are some of the more frequently used ones that may come up from time to time:
Annual percentage rate (APR) – A finance charge expressed as an annual rate
Anti-Dilution – A technique used by investors to protect them against losses in the value of their investment in the event of a dilutive capital raising by a business
Basis Point (BP) – One hundredth of one per cent or 0.01%. Used to express loan and interest rates
BIMBO – A ‘Buy-In Management Buy- Out’ involving the internal management team and supplemented by additional management brought in from outside
Buy-out – Te purchase or takeover of an existing business
Call Option – A right, but not an obligation, to buy at a predetermined price at some time in the future
Cap – A credit arrangement whereby the
Tese are just a few of the more important ratios. You should be aware of them because they are frequently discussed in meetings with investors and finance providers. Understanding these basic
holder is protected against rises in interest rates above a certain level
Collar – A two way credit agreement to protect borrowers and lenders
from
interest rate movements, involving both a cap and a floor. Because a collar protects both parties, it is possible to structure these on a zero cost basis
Covenant – A promise to do or not to do. Typically used by lenders and investors to protect the value of their loans or investments eg not to allow certain balance sheet items or ratios to fall below or exceed an agreed limit
Debenture – A financial instrument that creates or acknowledges a debt, usually carrying interest and generally secured by the assets of the borrower
EBIT – Earnings before interest and taxation. A measurement of profit and free cash flow, typically used in capital intensive businesses
EBITDA – Earnings before interest, taxation, depreciation and amortisation. Tis is a frequently used phrase and is used a proxy for free cash flow in most businesses.
Purchasers of businesses
tend to use EBITDA, as opposed to Net Profit before tax, as the basis for an offer, applying a multiple to determine the actual offer price
Equity – Te capital introduced by the owners of a business, typically taking the form of ordinary or common shares in a company
Floor – A credit arrangement under which the holder is protected against interest rates below a certain level
falls in 29 entrepreneurcountry
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