IB Terminology

Revenue (Top Line)

The total amount of money a business brings in from selling its goods or services before any expenses are deducted

Cost of Goods Sold (COGS)

The direct expenses required to produce a good or service (e.g., raw materials, truck fuel, direct labor wages)

Gross Profit

The profit a company makes strictly on its product or service before overhead costs are factored in

Operating Expenses (SG&A)

The overhead costs required to keep the lights on and run the company day-to-day, which are not directly tied to production (e.g., office rent, marketing, executive salaries, corporate software)

Operating Income (EBIT)

A company’s profit from its core business operations before stripping out financing costs (interest) and government costs (taxes)

EBITDA

It strips away financial structure, tax jurisdictions, and asset age to serve as a proxy for raw operating cash flow

Earnings Before Interest, Taxes, Depreciation, and Amortization

What does EBITDA stand for

Net Income (Bottom-Line)

A company’s final “paper profit” after all expenses, interest, and corporate taxes have been subtracted from revenue

Asset

Anything of value that a company owns or controls that can be used to generate economic value (e.g., cash, inventory, vehicles, equipment)

Liability

Any financial obligation or debt that a company owes to outside parties (e.g., bank loans, unpaid supplier invoices)

Shareholders’ Equity

The net worth of the company belonging to the owners; it represents the “inside claims” on the company’s assets once all outside liabilities are paid off

Accounts Receivable (A/R)

An asset account representing money that customers owe to the business for goods or services that have already been delivered but not yet paid for in cash

Accounts Payable (A/P)

A liability account representing money that the business owes to its suppliers or vendors for goods or services already received but not yet paid for in cash

Property, Plant, and Equipment (PP&E)

A long-term asset account on the balance sheet that holds the value of a company’s vital physical infrastructure (e.g., factories, land, trucks, machinery)

Retained Earnings

The cumulative amount of net income a business has earned over its lifetime that was kept and reinvested inside the company rather than paid out to shareholders as dividends

Statement of Cash Flows

The financial statement that tracks the actual movement of physical cash into and out of a business’s checking account over a period of time

Operating Activities

The section of the Cash Flow Statement that tracks cash generated or spent from normal, day-to-day business operations (starts with Net Income and adjusts for non-cash items)

Investing Activities

The section of the Cash Flow Statement tracking cash spent or received from long-term investments, primarily the buying and selling of physical assets like equipment or buildings

Financing Activities

The section of the Cash Flow Statement tracking cash moving between the company and its funding sources, such as borrowing loans, paying off debt, or raising capital from investors

Capital Expenditures (CapEx)

The actual cash money a company spends to buy, maintain, or upgrade its physical assets (like PP&E). This flows through the Investing Activities section.

Depreciation

A non-cash accounting method used to spread out the cost of a physical asset over its useful lifespan, reflecting how the equipment wears down over time

Tax Shield

A reduction in taxable income achieved by utilizing allowable deductions, such as depreciation or interest expenses, which results in paying less real cash in taxes to the government

Free Cash Flow (FCF)

The actual, spendable cash a business generates after accounting for day-to-day operations and the capital expenditures needed to maintain its asset base

Income Statement

A financial statement that tracks a company’s revenues and expenses over a specific period of time (like a quarter or a year) to show its final paper profit or loss (Net Income). It answers the question: "How profitable is this business engine on paper?"

Balance Sheet

A financial snapshot frozen at a single point in time (usually December 31st) that shows everything a company owns (Assets), everything it owes (Liabilities), and the net worth belonging to the owners (Shareholders' Equity). It follows the master formula: Assets - Liabilities + Equity

WACC

The blended interest rate a company must pay to satisfy all of its funding sources, including both bank lenders (Debt) and stock investors (Equity). It serves as the ultimate "hurdle rate" or "discount rate" to determine if a future project or investment makes economic sense.

(Weight of Equity x Cost of Equity) + (Weight of Debt x After-Tax Cost of Debt)

WACC equation

Valuation Multiple

A financial ratio used to value a company by comparing a metric like Enterprise Value or Stock Price to an operational metric. It standardizes value so companies can be compared like "price per square foot" in real estate.

Control Premium

The extra amount an acquiring company is willing to pay over the market value of a target company to gain full voting control and leadership of the business.

Discount Rate

The interest rate used in a Discounted Cash Flow (DCF) model to determine the present value of future cash flows, accounting for the time value of money and opportunity cost.

Cost of Equity (Re)

The rate of return that equity investors expect to earn in exchange for taking on the financial risk of holding a company’s stock.

Cost of Debt

The effective interest rate a company pays on its borrowed funds from banks, bonds, or other lenders.

Interest Tax Shield

The reduction in corporate income taxes brought about by the deductibility of interest payments. It is why the Cost of Debt is multiplied by (1 - T) in the WACC formula.

Equity Value (Market Cap)

The total value of a company’s outstanding shares available strictly to its equity investors. Formula: Shares Outstanding x Current Stock Price

Enterprise Value (EV)

The total economic value of an entire operating business, reflecting its theoretical takeover cost to an acquirer. It includes the value available to both debt and equity holders. Formula: Equity Value + Debt - Cash

Net Debt

A combined metric calculated as total debt minus cash and cash equivalents. It reflects a company’s true debt burden if it were to use all available liquid cash to pay down its liabilities immediately.

Diluted Shares Outstanding

The total number of shares a company would have if all convertible securities (like stock options or warrants) were exercised. This is the share count used to find a true Equity Value.

Comparable Companies Analysis, Precedent Transactions, and DCF Analysis (Discounted Cash Flow)

What are the main valuation methodologies?

Comparable Companies Analysis (Public Comps)

This valuation method values a private or public company by looking at publicly traded peers in the same or similar industry. Analysts look at financial ratios and valuation multiples—such as Enterprise Value to EBITDA or Price to Earnings of the peer group and apply those average multiples to the target company’s financial metrics to estimate its worth.

Precedent Transaction

A relative valuation methodology that values a company by looking at the historic prices and valuation multiples paid for similar businesses that were completely acquired in past M&A deals. Because these deals involve buying out entire companies, this methodology typically yields a higher valuation to account for a built-in "control premium."

DCF Analysis

An intrinsic valuation methodology that values a company based on the present value of its projected future cash flows. These future cash flows are brought back to today's dollars using a discount rate, typically the company's WACC, which means a higher discount rate will aggressively shrink the cash value and lower the overall valuation.