Finance Glossary
Finance
Amortisation
The process of allocating acquisition cost or other value of assets either to periods as period costs or expenses, or to inventory accounts as product costs. The term is generally used in conjunction with non-physical assets.
Asset Backing
asset backing = net assets of a company (in $) divided by number of issued shares. This is a useful check for investors that can be related to a company's earnings capacity.
Beta
A measure of the company specific risk. This relates the expected share price move to the move in the market as a whole. A beta of 1.0 means that the share price is expected to track the market closely. A beta of 1.2 means that a 10% move in the market is expected to result in a 12% (10% * 1.2) move in the share price. Beta can be determined using either one of two principals: either using historic trends (say, over 5 years), on the assumption that historic relationships will hold in the future (the company will not fundamentally change); or a second method estimates future beta using a number of quantitative and qualitative factors.
Bond
A tradable debt security used to raise money. Holders of bonds have lent money for which they receive a fixed rate of interest over a set period of time. The bonds are repaid with interest on the predetermined maturity date. Bonds can be traded on the sharemarket.
Bond Issue
Additional shares issued by the company to existing shareholders for free, usually in a pre-determined ratio to the number of shares already held.
Book Value
The net amount shown in the books or in the accounts for any asset, liability or owners' equity item. In the case of a fixed asset, it is equal to the cost or re-valued amount of the asset less accumulated depreciation. Also called carrying value. The book value of a firm is its total net assets, i.e. the excess of total assets over total liabilities.
Books closing date
The date at which a company's share register is closed off to identify the shareholders and to calculate any entitlement to new issues and dividends.
Call Option
The right to purchase a parcel of shares within a specific period of time at a pre-determined price.
Capital Asset Pricing Model (CAPM)
CAPM is a valuation technique that uses the weighted average cost of capital (WACC) to discount future estimated cash flows of the company.
Capital Index
The Capital Index measures the capital value of securities excluding payments to shareholders, i.e. not adjusted for dividends thus reflecting the fall in share price when a security is quoted ex-dividend.
Capitalisation
The total market value of a company - current share price multiplied by the number of shares on issue.
Cash Flow
EBITDA is a good definition of cash flow, as is "Operating Cash Flow From Operations", as reported in the Cash Flow Statement. The total cash receipts (inflow) or cash payments (outflow) arising from a given asset, or group of assets, for a given period. Net cash flow is the inflows less the outflows.
Cash Issues
A new issue of shares for cash made to existing shareholders in proportion to their existing shareholding e.g. 1 new share for every 2 shares held) to raise additional capital for the company. It is usually issued at a discount to the market price.
Consolidated Financial Statements
Statements issued by legally separate but related companies that show financial position and income as they would appear if the companies were one legal entity. Such statements reflect an economic rather than a legal entity.
Convertible Note
A loan made to a company at a fixed rate of interest with the right to be either redeemed for cash or converted into ordinary shares at a predetermined date or within a certain period.
Coupon
Interest voucher generally attached to bonds and exchangeable for cash on its due date.
Cum Dividend
Cum means 'with'. Shares quoted cum dividend entitle the buyer to receive the current dividend. T he price of the shares will usually reflect the amount of the dividend.
Current Ratio
A measure of liquidity that shows a company's ability to pay its short-term debts.
Debt/Equity Ratio
Shows the relationship between funds provided by borrowing and funds provided by shareholders. The debt/equity ratio shows to what extent a company is financed by debt (also called the gearing or leverage ratio).
Depreciation
The difference between the cost or value of an asset and its residual value allocated over the series of accounting periods in the asset's useful life. The depreciation expense for a period is usually based on: (i) the likely useful economic life of the asset; (ii) the pattern of reduction in services during life; and (iii) its likely residual (or salvage) value on disposal at the end of its life.
Derivative
A derivative is a financial security that derives its value from that of an underlying security (such as shares, share price indices, fixed interest securities, commodities, currencies etc). Warrants are types of derivatives.
Disclosure Document
A document or prospectus that outlines the details of a new issue of securities to ensure that investors are fully informed.
Discounted Cash Flow
The Cash Flow forecasts, discounted back to today's dollars using a discount rate. The discount rate is generally the WACC.
Dividend
Distribution of part of a company's net profit to shareholders.
Dividend Imputation
The tax credits passed on to a shareholder who receives a dividend.
Discount
If the share price is lower than the NAV (Net Asset Value), the company is trading at a discount.
Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA)
This is a number closer to operating cash flow (with the major difference being working capital changes). A purer form of profit without distorting effects of depreciation and amortisation schedules. It is the profit that the business generates before funding the capital, or debt and equity interests. As such, it does not consider gearing. Often used by analysts in preference to profit after tax.
Earnings Per Share (EPS)
A company's net profit divided by the total number of shares in the company.
Enterprise Value
The total value of a company - including the value of equity and debt interests. Mathematically, it is the market capitalisation of a company (price x number of shares) plus the market value of debt (or book value if a proxy for market value of debt cannot be estimated). Therefore it is the value of all funding vehicles for a company, which have to be serviced by operating profits.
Ex Date
The date at which shares change from being quoted "cum" to "ex".
Ex Dividend
The date at which the dividend is excluded from the dealing price. Purchases made after the ex-dividend date will not receive that dividend.
Gross Index
The Gross Index measures the value to an investor of investing in the sharemarket assuming dividends are reinvested, i.e. is adjusted for dividends and therefore does not fall when the securities are quoted ex-dividend.
Hedge
A transaction which reduces or offsets the risk of a current holding.
Imputation
The dividends of a company will carry a tax credit (imputation credit) when a company has paid tax on its profits, thus entitling shareholders to a rebate or reduction in the net amount of tax to pay.
Joint Venture
An association of persons to jointly explore, finance or direct a particular development with a view to mutual profit.
NAV (Net Asset Value)
The NAV is the value of total assets less total liabilities of the company divided by the number of ordinary shares in issue.
NAV (Fully Diluted)
Fully diluted NAV is calculated assuming conversion of all warrants and all convertible stocks outstanding at the financial year end of the company.
NTA (Net Tangible Assets)
An indication of the amount each share in a company is worth if all the assets were liquidated, all the debts were paid and the residual was distributed to the ordinary shareholders on a per share basis.
NZSE40
The NZSE40 tracks the change in the total market value of the 40 largest publicly listed companies in New Zealand, incorporating about 95% of the market value of all listed companies. This index is most frequently used as a barometer of the market's performance.
Price/Earnings Ratio
This shows the number of times the price covers the earnings per share.
Prospectus
The document issued by a company or fund setting out the terms of its public equity issue or debt raising. This provides the background and financial and management status of the company.
Proxy
A written authorisation given by a shareholder to another person so that the second person can act in place of the shareholder when attending and voting at shareholders' meetings. The person authorised to act is called the proxy.
Put Options
An option contract that entitles the taker to sell a fixed number of shares of the underlying security at a stated price on or before a fixed expiry date.
Share Registry
An organisation which, on behalf of a listed company, maintains the register of ownership of the company's securities, issues share holding statements, and makes adjustments for dividend payments, bonus and rights issues etc.
Split
Adjustment of a company's capital issues by splitting its shares into units of lesser value. Splitting $2 shares into $1 shares often makes the company shareholding more widespread and helps small investors.
Substantial Security Holder
A person/company which holds a prescribed percentage of a company's voting rights.
Warrent
A financial instrument that gives the holder the right to buy shares at a fixed time in the future for a price that is set when the warrant is issued.
Weighted Average Cost of Capital (WACC)
Both equity and debt are used to fund businesses and each has a cost to the company. The cost of debt is a function of the interest rate on the debt. The cost of equity is a function of the "risk free rate" (for example, 10 year government bonds), equity market risk premium, and the company "beta" (or company specific risk). The weighted average cost of debt and cost of equity is used to calculate the Weighted Average Cost of Capital (WACC), and is expressed as a percentage.
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