Business and company basics

What is a company?

A business organisation that exists as a separate legal entity from its owners (distinct from its shareholders and directors)

What is a share?

A unit of ownership in a company which gives an investor an economic interest in the company - shares can increase and decrease in value and may entitle shareholders to dividends (money back to the shareholders) and voting rights

What is a shareholder and how do shareholders make money?

A person or organisation that owns shares in a company, and they can make money through an increase in the value of their shares and dividends paid by the company

What is a board of directors?

The group responsible for overseeing the management and major strategic decisions of a company (while shareholders own the company, directors manage it)

What is the difference between a private and public company?

For a private company, its shares are privately held and aren’t offered to the general public on a stock exchange
For a public company, their shares can be offered to the public and may be listed on a stock exchange (these companies generally face greater disclosure and regulatory requirements so that their shares can be widely traded, but a public company is not automatically listed)

What does it mean for a company to be listed?

Its shares are admitted to trading on a stock exchange (e.g. LSE) and this gives companies access to public investors and can help them raise capital, but it also brings disclosure and regulatory obligations

What is a company’s share price and why does it change?

The current market price of one share in a listed company
This changes as investors continually reassess what they think the company’s future prospects are worth (earnings, acquisitions, regulation, economic conditions, and news can therefore affect demands for the shares) e.g. if investors expect a takeover offer at a high price, the target company’s share price may rise

What is market capitalisation?

The market value of all of a listed company’s outstanding shares (share price x number of shares)
This gives a quick indication of the stock market’s valuation of a company’s equity (but not necessarily the amount someone would have to pay to acquire the company)

What is revenue?

The money that a company generates from its normal business activities before costs and expenses are deducted - it tells us how much business the company is generation, but not whether it is actually profitable

What is profit, and how is it different from revenue?

Broadly, the money remaining after relevant costs and expenses are deducted from revenue - this matters because a company can have a huge revenue but still make little or no profit if its costs are high

What is cash flow, and why is it different from profit?

The actual movement of cash into and out of business - this matters because a company can appear profitable on paper while still struggling to pay bills if cash isn’t arriving when it needs it e.g. if a company records a large sale as revenue but doesn’t receive payment for a period, it may be profitable while still being currently short of cash

What are assets and liabilities?

Assets are something valuable a company owns or controls e.g. cash, property, machinery, IP
Liabilities are something the company owns or an obligation it must meet e.g. bank debts, unpaid bills, certain legal obligations
Looking at both helps assess the company’s financial position and what an acquirer would actually be taking on

What is debt financing?

Money a company borrows and is normally required to repay, usually with interest e.g. bank loans and bonds - this allows them to obtain money for investment or acquisitions without giving the lender ownership of the company
Too much debt can create financial pressure because repayments and interest still need to be made

What is equity financing, and how does it differ from debt?

Raising money by giving investors an onwership interest in the company, usually through shares
Equity generally doesn’t require fixed loan repayments, but existing owners may give up some ownership/control

What is a company’s valuation?

As assessment of what a company or business is worth - this is central to investments and acquisitions because the buyer and seller may have different views of the company’s current and future value (price and value aren’t necessarily the same thing)

What is a dividend?

A distribution a company may make to its shareholders, usually from profits - this is one way shareholders can receive a financial returm without selling their shares

What does liquidity mean for a company?

Broadly, having sufficient cash or assets that can readily be turned into cash to meet obligations when they fall due - this matters because a business can own valuable assets but still encounter problems if it doesn’t have enough accessible cash to pay salaries, suppliers, or debt repayments

What is return on investment?

The profit generated from an investment relative to what was originally invested