Financing Options and Financial Analysis

Comprehensive vocabulary flashcards covering corporate financing options, credit management, share issuance methods, Islamic finance, and financial ratio analysis from the Week 3 lectures.

Working Capital

The net operational liquidity of a business calculated as current assets minus current liabilities ($\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$). Key current asset elements include inventories, trade receivables, and cash, while key current liability elements include trade payables, bank overdrafts, and short-term borrowings.

Economic Order Quantity (EOQ)

An inventory management model designed to find the optimal order size that balances ordering and holding costs, calculated as $\text{EOQ} = \sqrt{\frac{2 \times D \times C}{H}}$, where $D$ represents annual demand, $C$ is the order setup cost, and $H$ is the holding cost per unit per year.

Character (5 Cs of Credit)

The trustworthiness and reputation of a borrower, evaluated by lenders through credit history, payment track records, and professional background to establish integrity and the likelihood of fulfilling debt obligations.

Capacity (5 Cs of Credit)

The financial ability of a borrower to service debt, assessed by analyzing steady cash flow, income streams, employment stability, and the debt-to-income (DTI) ratio.

Capital (5 Cs of Credit)

The borrower's personal financial stake or investment in a business or asset ('skin in the game'), such as a substantial down payment or accumulated retained earnings on the balance sheet.

Collateral (5 Cs of Credit)

A secondary asset pledged to secure credit, providing the lender with a legal claim to seize specified property, inventory, or equipment to mitigate financial loss in the event of default.

Conditions (5 Cs of Credit)

The external context and macroeconomic variables governing a credit application, such as loan purpose, prevailing interest rates, industry trends, and the state of the broader economy.

Ordinary Shares

Equity shares representing the risk capital of a company; holders possess voting rights, participate in unlimited upside potential, and rank last in repayment on winding up, with dividends that can be suspended if necessary.

Preference Shares

Shares that carry a fixed dividend rate paid prior to ordinary dividends, rank ahead of ordinary shares on liquidation, generally hold no voting rights, and are not tax-deductible for the issuing company.

Finance Lease

A financing arrangement in which a lessor acquires an asset and leases it to a lessee, who gains the operational risks and economic rewards of use throughout the lease period while legal ownership remains with the lessor.

Sale-and-Leaseback

A transaction where a company sells an existing owned asset (often commercial real estate) to an institutional investor to unlock liquidity and immediately enters into an agreement to lease it back, losing prospective capital appreciation.

Hire Purchase (HP)

An asset acquisition agreement wherein a customer pays an initial deposit followed by periodic instalments; legal title passes to the purchaser only after the final instalment has been paid.

Securitisation of Assets

The packaging of illiquid income-generating financial assets (such as residential mortgages or credit card receivables) into tradable bond issues sold to investors via a Special Purpose Vehicle (SPV).

Build-Own-Operate (BOO)

A Public-Private Partnership (PPP) model in which a private sector entity finances, constructs, owns, and permanently operates a facility without transferring legal ownership back to the public sector.

Build-Own-Operate-Transfer (BOOT)

A Public-Private Partnership (PPP) structure where a private contractor builds and temporarily owns an asset during an agreed operational period, transferring legal ownership to the public sector upon contract conclusion.

Design-Build-Finance-Operate (DBFO)

A Public-Private Partnership (PPP) procurement model in which the private consortium manages the full project lifecycle, while the government retains asset ownership and provides scheduled payments over the operating concession.

Bank Overdraft

A flexible short-term credit facility attached to a commercial bank account that permits withdrawals beyond the available cash balance up to an agreed limit, with interest levied strictly on the overdrawn amount.

Debt Factoring

A short-term financing arrangement where a company sells its trade receivable invoices to a specialized factor at a discount, commonly receiving an immediate cash advance of $80\%$ to $90\%$ while the factor collects from customers.

Invoice Discounting

A confidential short-term borrowing method where a business uses unpaid trade invoices as loan collateral to receive immediate funds, while retaining responsibility for credit control and customer collections.

Public Issue (Offer for Subscription)

A primary market share issuance method where a company invites members of the general public to apply directly for new shares at a fixed price by publishing an approved prospectus.

Offer for Sale

A share distribution method where a company sells an entire issue of shares to an issuing house or merchant bank at a negotiated price, with the intermediary bearing the underwriting risk of marketing them to the public.

Placing

A private method of share distribution where new securities are placed directly with selected institutional or high-net-worth investors rather than being marketed openly to the public, reducing flotation costs.

Rights Issue

An equity offer that gives existing shareholders the pre-emptive right, but not the obligation, to buy new shares in proportion to their current holdings, typically offered at a discounted market price.

Tender Issue

A method of issuing shares where investors submit individual bids indicating the price and quantity they are willing to purchase; the company subsequently establishes a uniform 'striking price' based on overall demand.

Botswana Stock Exchange (BSE) Listing Requirements

Mandatory criteria for listing on the BSE, requiring a minimum subscribed capital of $\text{P}5{,}000{,}000$, a three-year profit history with at least $\text{P}1{,}000{,}000$ pre-tax profit in the latest year, a $30\%$ public free float, a minimum of $300$ public shareholders, and an initial share price of at least $100\,\text{thebe}$ ($\text{P}1.00$).

Venture Capital

Long-term equity investment capital supplied to early-stage or rapidly growing small and medium enterprises (SMEs), accompanied by strategic oversight, governance, and hands-on operational support.

Business Angels

Affluent private individual investors who provide equity capital, business expertise, mentoring, and professional networks to early-stage startup ventures.

Riba

An Islamic financial term referring to interest or usury, the payment or receipt of which is strictly prohibited under Shariah law.

Gharar

Excessive uncertainty, hazard, or ambiguity in commercial transactions, which is strictly prohibited under Islamic financial jurisprudence.

Maysir

Speculative transactions or gambling, which are strictly prohibited within Islamic financial systems in favor of risk-sharing and asset-backed commerce.

Murabaha

A Shariah-compliant cost-plus financing contract where a financial institution purchases a tangible asset on behalf of a client and resells it to the client at a disclosed markup, payable over time.

Mudarabah

An Islamic investment partnership where one party provides the capital and the second party supplies management expertise, with realized profits divided according to an agreed ratio and financial losses borne entirely by the capital provider.

Musharakah

An Islamic joint venture arrangement in which all partners contribute capital to an enterprise, dividing profits based on pre-agreed terms and bearing losses strictly in proportion to their contributed capital.

Ijara

An Islamic leasing contract under which a financial institution purchases a physical asset and leases its usufruct to a customer in exchange for pre-specified rental payments.

Sukuk

Shariah-compliant debt-like investment certificates (Islamic bonds) that grant holders undivided proportional ownership in underlying tangible assets, generating yields from asset performance rather than interest.

Vertical Analysis

A financial analysis technique that expresses every line item on a financial statement as a percentage of a single base item for the same period (total revenue on the income statement or total assets on the balance sheet).

Trend Analysis

A time-series financial appraisal method comparing financial performance over multiple periods by indexing a chosen base year to $100\%$ and tracking relative percentage shifts across subsequent periods using $\text{Index Number} = (\frac{\text{Current Year Amount}}{\text{Base Year Amount}}) \times 100$.

Cross-Sectional Analysis

The analytical practice of comparing a firm's financial metrics and ratios against immediate competitors, peer groups, or broader industry benchmarks during a matching accounting timeframe.

Return on Equity (ROE)

A profitability ratio indicating the net return generated on capital supplied by equity shareholders, calculated as $\text{ROE} = \frac{\text{Net Income}}{\text{Shareholders' Equity}}$.

Return on Assets (ROA)

A profitability ratio measuring management's efficiency at turning deployed capital assets into bottom-line profit, calculated as $\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}}$.

Return on Capital Employed (ROCE)

A fundamental profitability ratio reflecting how efficiently long-term capital generates operating returns, calculated as $\text{ROCE} = \frac{\text{EBIT}}{\text{Total Assets} - \text{Current Liabilities}}$.

Gross Margin Ratio

A profitability ratio evaluating trading profitability relative to sales before administrative and selling overheads, calculated as $\text{Gross Margin Ratio} = \frac{\text{Total Revenue} - \text{COGS}}{\text{Total Revenue}}$.

Operating Profit Margin

A profitability metric demonstrating operational efficiency prior to the deduction of interest and taxation, calculated as $\text{Operating Profit Margin} = \frac{\text{EBIT}}{\text{Total Revenue}}$.

Net Profit Margin

The percentage of sales revenue left as net income following the settlement of all operating expenses, finance costs, and tax liabilities, calculated as $\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Total Revenue}}$.

Current Ratio

A liquidity ratio that evaluates a firm's capacity to cover short-term debt obligations using short-term assets, calculated as $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$.

Quick Ratio

A strict liquidity assessment (acid-test) testing whether a firm can settle short-term obligations using only its most liquid current assets, calculated as $\text{Quick Ratio} = \frac{\text{Cash} + \text{Marketable Securities} + \text{Accounts Receivable}}{\text{Current Liabilities}}$.

Cash Ratio

A conservative liquidity ratio measuring a company's immediate capability to clear current liabilities using exclusively cash and cash equivalents, calculated as $\text{Cash Ratio} = \frac{\text{Cash and Cash Equivalents}}{\text{Current Liabilities}}$.

Defensive Interval Ratio (DIR)

A liquidity metric indicating how many days a company can maintain operational spending without requiring fresh cash inflows or long-term asset sales, calculated as $\text{Defensive Interval Ratio} = \frac{\text{Current Assets}}{\text{Daily Expenditures}}$, where $\text{Daily Expenditures} = \frac{\text{Annual Operating Expenses} - \text{Non-Cash Charges}}{365}$.

Accounts Receivable Turnover Ratio

An efficiency metric showing how many times during a given fiscal period a company successfully converts trade credit balances into cash, calculated as $\text{Accounts Receivable Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}$.

Accounts Receivable Days

An efficiency metric indicating the average number of days a business takes to collect cash from customers after a credit sale, calculated as $\text{Accounts Receivable Days} = \frac{\text{Number of Days in Period}}{\text{Accounts Receivable Turnover Ratio}}$.

Asset Turnover Ratio

An efficiency metric indicating how many units of sales revenue are generated for each unit of money invested in firm assets, calculated as $\text{Asset Turnover Ratio} = \frac{\text{Net Sales}}{\text{Average Total Assets}}$.

Inventory Turnover Ratio

An efficiency metric showing the number of times a company sells out and replenishes its total stock of inventory over a year, calculated as $\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$.

Inventory Turnover Days

An efficiency metric expressing the average duration in days that goods remain held in stock before being sold, calculated as $\text{Inventory Turnover Days} = \frac{\text{Number of Days in Period}}{\text{Inventory Turnover Ratio}}$.

Debt-to-Equity Ratio

A leverage metric comparing total borrowed obligations to shareholders' capital, calculated as $\text{Debt-to-Equity Ratio} = \frac{\text{Short Term Debt} + \text{Long Term Debt} + \text{Other Fixed Payments}}{\text{Shareholders' Equity}}$.

Equity Ratio

A financial leverage ratio measuring the proportion of total business assets financed through equity capital, calculated as $\text{Equity Ratio} = \frac{\text{Shareholders' Equity}}{\text{Total Assets}}$.

Debt Ratio

A financial leverage ratio indicating the proportion of a business's total assets funded through short-term and long-term debt, calculated as $\text{Debt Ratio} = \frac{\text{Short Term Debt} + \text{Long Term Debt}}{\text{Total Assets}}$.

Earnings Per Share (EPS)

An investment valuation ratio relating net earnings generated for equity owners to the volume of issued shares, calculated as $\text{EPS} = \frac{\text{Earnings available to ordinary shareholders}}{\text{Number of ordinary shares in issue}}$.

Price-to-Earnings (P/E) Ratio

A valuation ratio measuring the market price paid per unit of current net earnings, calculated as $\text{P/E Ratio} = \frac{\text{Share Price}}{\text{Earnings per Share}}$.