Introduction

Financial analysis is a critical aspect of business management and investment decision-making. It involves assessing financial statements and various economic indicators to understand the performance and financial health of a company or investment. To effectively communicate and understand financial analysis, it’s essential to have a strong grasp of the relevant English vocabulary. This article aims to provide a comprehensive list of essential English terms used in financial analysis, categorized for clarity and ease of learning.

Basic Financial Statements

1. Balance Sheet

  • Assets: Resources owned by a company, including cash, inventory, and property.
    • Example: The company’s assets include \(1 million in cash and \)5 million in real estate.
  • Liabilities: Obligations or debts that a company owes to others.
    • Example: The firm’s liabilities include a \(2 million loan and \)500,000 in accounts payable.
  • Equity: The value of an ownership interest in a property, including shareholders’ equity in a corporation.
    • Example: Shareholders’ equity is calculated as total assets minus total liabilities.
  • Current Assets: Assets that are expected to be converted into cash within a year.
    • Example: Examples of current assets include cash, accounts receivable, and inventory.
  • Non-current Assets: Long-term investments or assets not intended for sale within a year.
    • Example: Buildings, equipment, and long-term investments are non-current assets.

2. Income Statement

  • Revenue: Income generated from normal business operations.
    • Example: The company reported quarterly revenue of $10 million.
  • Expenses: Costs incurred in the process of earning revenue.
    • Example: Operating expenses include salaries, rent, and utilities.
  • Net Income: Total earnings after subtracting all expenses from revenues.
    • Example: Net income for the fiscal year was $3 million.
  • Gross Margin: Revenue minus the cost of goods sold (COGS).
    • Example: A gross margin of 40% indicates that 40% of revenue is profit after accounting for COGS.
  • Operating Income: Revenue minus operating expenses.
    • Example: The operating income shows the company’s profitability from its core business operations.

3. Cash Flow Statement

  • Cash Flow: The movement of cash into or out of a business.
    • Example: Positive cash flow indicates that more money is coming in than going out.
  • Operating Activities: Cash flows related to the company’s core business operations.
    • Example: Cash received from customers and cash paid to suppliers are operating activities.
  • Investing Activities: Cash flows related to the purchase or sale of long-term assets.
    • Example: Cash spent on acquiring new machinery is an investing activity.
  • Financing Activities: Cash flows related to borrowing, repaying debts, or equity transactions.
    • Example: Issuing new shares of stock is a financing activity.

Financial Ratios and Metrics

1. Liquidity Ratios

  • Current Ratio: Current assets divided by current liabilities.
    • Example: A current ratio of 2 suggests that for every dollar in liabilities, the company has $2 in assets.
  • Quick Ratio: (Current assets minus inventory) divided by current liabilities.
    • Example: The quick ratio provides a more stringent measure of liquidity by excluding inventory.

2. Profitability Ratios

  • Return on Equity (ROE): Net income divided by shareholder equity.
    • Example: A 15% ROE indicates that for every dollar of equity, the company generated 15 cents in profit.
  • Return on Assets (ROA): Net income divided by total assets.
    • Example: ROA measures how efficiently a company uses its assets to generate profit.

3. Solvency Ratios

  • Debt-to-Equity Ratio: Total liabilities divided by shareholder equity.
    • Example: A high debt-to-equity ratio may indicate higher financial risk due to significant debt.
  • Interest Coverage Ratio: Earnings before interest and taxes (EBIT) divided by interest expenses.
    • Example: This ratio measures a company’s ability to meet its interest obligations.

4. Efficiency Ratios

  • Inventory Turnover: Cost of goods sold divided by average inventory.
    • Example: Inventory turnover indicates how often inventory is sold and replaced over a period.
  • Accounts Receivable Turnover: Net credit sales divided by average accounts receivable.
    • Example: This ratio measures how efficiently a company collects revenue from its credit sales.

Conclusion

Mastering the vocabulary of financial analysis is crucial for anyone involved in business management, investment, or finance. By understanding the terms related to financial statements, ratios, and metrics, individuals can better interpret and communicate financial data, leading to more informed decision-making. This glossary serves as