Financial Management and Ratio Analysis - Vocabulary Flashcards

A comprehensive set of vocabulary flashcards covering core concepts from financial management, capital structure, budgeting, liquidity, and ratio analysis.

Financial Management

The process of monitoring a firm's financial position, including analyzing liquidity and profitability.

Financial Manager

Person responsible for maximizing the owner’s wealth by planning and directing the firm’s financial resources.

Analyzing Financial Position

Evaluating liquidity, solvency, and profitability to assess the firm’s financial health.

Asset Structure

The mix of fixed versus current assets a firm holds to support operations.

Financial Structure

The mix of long‑term debt and equity financing used by the firm.

Risk

Possibility of loss due to known phenomena like market fluctuations.

Uncertainty

Unpredictability of future events that could negatively impact a venture.

Operating Risk

Risk that sales income may not cover operating and marketing costs.

Financial Risk

Risk that profits are insufficient to meet financial obligations (e.g., interest, taxes).

Diversifiable Risk

Risk that can be reduced by adding less risky projects or diversification.

Unsystematic Risk

Risks that are industry- or project-specific and can be mitigated.

Non-Diversifiable Risk

Systemic risk that cannot be eliminated by diversification (e.g., recessions).

Cash Flow

Movement of money into and out of a business; crucial for liquidity.

Cash

Money in circulation within the firm and the economy.

Cash Inflows

Income generated from operations (sales of goods/services).

Cash Outflows

Payments for expenses, typically predictable.

Net Cash Flow

Difference between cash inflows and outflows; indicates financial health.

Raw Material

Materials awaiting transformation in production.

Goods-in-Process

Work-in-progress inventory; partly completed products.

Finished Goods

Completed products ready for sale or delivery.

Land and Buildings

Physical capital used to operate the business.

Labor

Human input: supervisors, workers, and staff.

Capital

Machinery, vehicles, and other productive assets.

Entrepreneurship

Willingness to take risks to start, manage, or grow a business.

Capital Structure

Composition of long-term capital (equity, retained earnings, long-term debt).

Liquidity

Ability to have enough cash to meet short-term obligations.

Solvency

Ability to repay all debts in the event of liquidation.

Transactional Motive

Need for cash to meet routine, day-to-day payments.

Precautionary Motive

Cash reserves to cover emergencies or unexpected costs.

Speculative Motive

Cash held to take advantage of opportunities or discounts.

Debtors

Individuals or firms that owe money to a creditor.

Accounts Receivable

Debtor accounts representing money owed to the firm from credit sales.

Owner

Single individual who establishes and maintains a business.

Ordinary Shareholders

Owners with common stock; bear the most risk and are last to receive rewards.

Preference Shareholders

Shareholders with priority to dividends but usually fixed returns; higher claim than ordinary shareholders.

Public Company

Company whose shares are listed on a stock exchange and freely transferable.

Private Company

Company whose shares are not freely transferable and are not listed.

Share

Certificate representing ownership and right to dividends.

Revenue

Total income generated from sales.

Cost of Sales

Direct costs attributable to producing goods sold.

Gross Profit

Revenue minus Cost of Sales; profitability before other expenses.

EBIT

Earnings Before Interest and Taxes; a measure of operating profitability.

Statement of Financial Position

Snapshot of a firm’s financial status on a specific date, showing assets and liabilities and equity.

Non-Current Assets

Long-term assets such as property and equipment.

Current Assets

Short-term assets like cash and receivables.

Total Assets

Sum of all assets owned by the firm.

Asset Structure (ratio)

Ratio of fixed assets to current assets.

Financial Structure (ratio)

Ratio of long-term to short-term capital financing.

Capital Structure (composition)

Mix of long-term capital components (equity and debt).

Equity Capital

Funds contributed by owners, including ordinary and preference shares and retained earnings.

Debt Capital

Funds borrowed from lenders, such as loans, debentures, and bonds.

Debentures

IOUs issued by companies to raise funds; promise to repay with interest.

Bonds

Loans to governments or companies with periodic interest payments and principal repayment.

Capital Budgeting

Essential calculations (NPV, IRR, Payback) before fixed asset purchases.

Net Present Value (NPV)

Present value of inflows minus outflows; measures profitability.

Internal Rate of Return (IRR)

Discount rate that makes NPV zero; used for investment appraisal.

Payback Period

Time required to recover the initial investment.

Capital Rationing

Selecting the best investment opportunities when capital is limited.

Liquidity Motives

Reasons to hold cash: Transactional, Precautionary, and Speculative.

Creditworthiness

Assessment of a borrower’s ability to repay; affects borrowing cost.

Legal Consequences of Financial Commitments

Possible legal outcomes arising from debt contracts and obligations.

Liquidity Ratios

Ratios assessing a firm’s ability to meet short-term obligations.

Current Ratio

Current Assets divided by Current Liabilities; typical benchmark around 2:1.

Acid-Test Ratio

(Current Assets minus Inventory) divided by Current Liabilities; stricter liquidity test.

Net Working Capital

Current Assets minus Current Liabilities; positive indicates liquidity.

Activity Ratios

Ratios showing how efficiently assets generate sales.

Fixed Asset Turnover

Revenue divided by Fixed Assets; measures efficiency of fixed asset use.

Total Asset Turnover

Revenue divided by Total Assets; overall asset efficiency.

Inventory Turnover

Cost of Sales divided by Inventory; how quickly inventory converts to sales.

Inventory Holding Period

Average time inventory is held before sale (365 × Inventory / Cost of Sales).

Average Collection Period

Average time to collect receivables (Receivables ÷ Credit Sales × 365).

Average Payables Period

Average time to pay suppliers (Payables ÷ Credit Purchases × 365).

Debt Ratio

Total Debt divided by Total Assets × 100; debt financing share.

Debt/Equity Ratio

Total Interest-Bearing Debt divided by Shareholders’ Equity × 100.

Total Interest-Coverage Ratio

EBIT divided by Interest Expense; shows ability to cover interest.

Gross Profit Margin

Gross Profit divided by Revenue × 100; profitability after cogs.

Operating Profit Margin

Operating Profit divided by Revenue × 100; efficiency of core operations.

Net Profit Margin

Net Profit divided by Revenue × 100; overall profitability.

Return on Investment (ROI)

Earnings After Interest divided by Total Assets × 100; profit relative to investment.

Return on Assets (ROA)

EBIT divided by Total Assets × 100; efficiency of asset use to generate profit.