A financial glossary that gets to the point.

Thirty terms used throughout the learning library. These short definitions are starting points; the linked lessons show the calculations and their limitations.

A–D

Asset allocation

How money is divided between types of assets, such as shares, bonds and cash. The mix changes the portfolio’s exposures; it does not guarantee a return.

Basis point

One hundredth of a percentage point. A move from 4.00% to 4.25% is 25 basis points, or 0.25 percentage points.

Bond

A debt instrument through which an issuer borrows from investors. Its terms specify payments; repayment depends on the issuer meeting its obligations.

Capital expenditure

Money spent to acquire or improve long-lived assets, such as equipment. The cash payment and the accounting expense may occur in different periods.

Cash flow

Cash entering or leaving over a period. Sales, profit and cash receipts can differ because of payment timing and accounting treatment.

Compounding

Growth on an amount that includes earlier growth. At an illustrative constant 5%, £100 becomes £105 and then £110.25 over two years.

Coupon

The contractual interest on a bond, commonly quoted as a percentage of face value. It is different from the return earned at a particular purchase price.

Debt service

Cash needed to meet borrowing obligations, including interest and scheduled principal repayments. EBITDA alone does not establish the ability to pay it.

Discount rate

The required return used to translate future cash flows into present value. It should be consistent with the currency, risk and type of cash flow being valued.

Discounted cash flow (DCF)

A valuation method that estimates future cash flows and discounts them to today. The result depends on the forecast and the required-return assumptions.

Diversification

Spreading exposures so the outcome is less dependent on one investment or risk. It cannot eliminate all losses, and different holdings can fall together.

E–L

EBITDA

Earnings before interest, tax, depreciation and amortisation. A measure of operating earnings that excludes several cash needs, including investment and working-capital changes.

Enterprise value

The value of a business’s operations to its capital providers. It is distinct from the equity value attributable to shareholders.

Equity value

Value attributable to shareholders after the relevant debt, cash and other claims are considered. A simple bridge is enterprise value less debt plus excess cash.

Free cash flow

Cash remaining after specified operating and investment needs. Definitions differ: cash available to all capital providers is not the same as cash available only to equity holders.

Inflation

A rise in the general price level. Falling positive inflation means prices are rising more slowly, not necessarily falling.

Internal rate of return (IRR)

The discount rate at which a cash-flow series has zero net present value. Timing matters; unusual cash-flow patterns can produce multiple rates or no meaningful rate.

Leverage

The use of borrowing or other exposure that magnifies the effect of changes on equity returns. It can increase both gains and losses.

Liquidity

The ability to meet cash needs or convert an asset into cash without a large price impact. An asset can have estimated value but be hard to sell promptly.

Loan-to-value (LTV)

A loan balance divided by the relevant asset value. A £180,000 loan against a £240,000 property has 75% LTV.

M–R

Margin

Profit divided by revenue, with the profit measure specified. EBITDA of £15 on revenue of £100 gives a 15% EBITDA margin.

Multiple of invested capital (MOIC)

Total value returned or attributed to an investment divided by the invested amount, under the stated definition. Unlike IRR, the ratio alone does not express timing.

Net debt

Debt less cash under the chosen definition. Transaction definitions can include other debt-like items and may exclude restricted or operationally required cash.

Nominal and real

Nominal figures are in money terms without adjusting for inflation. Real figures adjust for purchasing power. A growing balance can still buy less.

Present value

What a future payment is worth today at a stated discount rate. £105 due in one year has a present value of £100 at a 5% discount rate.

S–Z

Sensitivity analysis

Changing an input to see how an output responds, usually holding other inputs constant. It reveals dependence on assumptions, not the probability of an outcome.

Terminal value

An estimate of value beyond an explicit forecast period. In a DCF it can be a large part of total value, making long-term assumptions especially important.

Weighted average cost of capital (WACC)

A weighted required return for debt and equity capital, with appropriate tax treatment. It is commonly used to discount unlevered business cash flows.

Working capital

Resources tied up in operating timing, often analysed as receivables plus inventory less payables. Increasing operating working capital typically uses cash.

Yield

A return measure expressed relative to price or value. Specify whether you mean current yield, yield to maturity or another measure; they are not interchangeable.