Julian Shocron's Finance Glossary

Short definitions, each tied to the invented bakery in the casebook. Figures are made up for teaching.

Sales (revenue). Everything customers paid for the period's goods. The bakery's sales are 1,000.

Cost of goods sold. The direct cost of producing what was sold, such as flour and packaging. For the bakery it is 600.

Gross profit. Sales minus cost of goods sold; the bakery keeps 400.

Gross margin. Gross profit as a share of sales, showing how well a product is priced against its making cost. 400 ÷ 1,000 = 40%.

Operating income. Profit after all running costs but before interest and tax; for the bakery, 150.

Operating margin. Operating income divided by sales. The bakery's is 15%.

Net income. What remains for owners after interest and taxes: 100 for the bakery.

Net margin. Net income as a share of sales; 10% here.

Depreciation and amortization. An accounting charge that spreads the cost of long-lived assets across their useful years. The bakery books 20, with no cash leaving that year.

EBITDA. Operating income with depreciation and amortization added back, a quick gauge of operating earnings. 150 + 20 = 170.

Free cash flow. What the operation generates once day-to-day needs and new equipment are paid for, available to lenders or owners. The bakery's is 35.

Working capital. Money tied up in daily operations: amounts owed by customers plus stock, minus amounts owed to suppliers. It rose from 15 to 40 at the bakery.

Capital expenditure (capex). Spending on long-lived assets such as ovens. The bakery spent 60.

Cash conversion cycle. How many days a business funds its own operations, from paying for inputs to being paid by customers. A slow-paying customer stretched the bakery's cycle to 15.8 days, up from 6.7.

Inventory turnover. How many times stock is used up and replaced in a year. At 40 turns, bread sits about 9 days.

Break-even point. The volume at which revenue exactly covers costs. With boxes at 10, variable cost of 6 and fixed costs of 2,000, it is 500 boxes.

Contribution margin. Price minus variable cost per unit, the amount each sale adds toward fixed costs. Each box contributes 4.

Net debt. Borrowing minus cash on hand. 200 − 30 = 170.

Leverage (net debt to EBITDA). How many years of EBITDA would cover net debt; the bakery sits at 1.0x.

Interest coverage. Operating income divided by interest, a measure of how easily interest is paid. 150 ÷ 20 = 7.5x.

Cost of debt. The interest rate a business pays on borrowing; 10% for the bakery.

Return on equity (ROE). Net income relative to the owners' money invested in the business. The bakery's is 20%.

Return on invested capital (ROIC). After-tax operating profit relative to all capital invested, from owners and lenders alike; about 17.2% here.

Discount rate. The yearly rate used to convert future cash into today's value. The casebook uses 10%, with 8% and 12% for comparison.

Present value. What a future amount is worth today after discounting. Three yearly payments of 35 at 10% are worth 87.0.

Net present value (NPV). Present value of an investment's cash inflows minus its upfront cost. New ovens costing 60 that return 20 a year for 4 years give an NPV of 3.4 at 10%.

Internal rate of return (IRR). The discount rate at which NPV equals zero. For the oven project it is about 12.6%.

Real interest rate. A nominal rate adjusted for inflation. A 10% rate with 4% inflation is roughly 5.8% in real terms.

Enterprise value. The value of the whole business, before splitting it between lenders and owners. At 6x EBITDA, 1,020.

Equity value. Enterprise value minus net debt, the part belonging to owners: 850.