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Coursera - IESE Foundations of Management Specialization

This document defines key financial terms and concepts used in operational finance including balance sheet, cash flow, cost of goods sold, depreciation, EBITDA, gross margin, income statement, leverage, net income, return on equity, and working capital. It provides the standard definitions and formulas for these terms to give readers foundational knowledge for analyzing a company's financial performance and position.

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138 views2 pages

Coursera - IESE Foundations of Management Specialization

This document defines key financial terms and concepts used in operational finance including balance sheet, cash flow, cost of goods sold, depreciation, EBITDA, gross margin, income statement, leverage, net income, return on equity, and working capital. It provides the standard definitions and formulas for these terms to give readers foundational knowledge for analyzing a company's financial performance and position.

Uploaded by

Enrique Egea
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Coursera

- IESE Foundations of Management Specialization


Operational Finance: Building a Robust Business
Prof. Miguel Antón



Financial Terms & Definitions1

Balance Sheet – A financial statement that summarizes a company's assets, liabilities
and shareholders' equity at a specific point in time. These three balance sheet
segments give investors an idea as to what the company owns and owes, as well as the
amount invested by shareholders. The balance sheet adheres to the following formula:
Assets = Liabilities + Shareholders' Equity

Cash Flow- The net amount of cash and cash-equivalents moving into and out of a
business. Positive cash flow indicates that a company's liquid assets are increasing,
enabling it to settle debts, reinvest in its business, return money to shareholders, pay
expenses and provide a buffer against future financial challenges. Negative cash flow
indicates that a company's liquid assets are decreasing.

COGS-Cost of Goods Sold. These are the direct costs associated with the production of
goods sold by a company.

Cyclicality (Cyclical Industry) - A cyclical industry is one that is sensitive to the business
cycle meaning that revenues are generally higher in periods of economic prosperity
and expansion, and lower in periods of economic downturn and contraction.

Depreciation & amortization - Both depreciation and amortization (as well as


depletion) are methods used to prorate the cost of a specific type of asset to the
asset's life. It is important to mention that these methods are calculated by subtracting
the asset's salvage value from its original cost. Amortization is for intangible assets and
depreciation for tangible assets.

DuPont Decomposition – This analysis offers insight into a three key components of a
company’s strategy by breaking down the ROE (Return on Equity) into the following
elements:
𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 𝑺𝒂𝒍𝒆𝒔 𝑨𝒔𝒔𝒆𝒕𝒔 𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
𝑹𝑶𝑬 = 𝒙 𝒙 =
𝑺𝒂𝒍𝒆𝒔 𝑨𝒔𝒔𝒆𝒕𝒔 𝑬𝒒𝒖𝒊𝒕𝒚 𝑬𝒒𝒖𝒊𝒕𝒚


1
These definitions are based both on Prof. Anton’s course and www.investopedia.com.

EBITDA- Earnings before interest, taxes and amortization. EBITDA allows for
comparison between companies and industries since it eliminates the effects of
financing and accounting decisions.

Gross Margin- Sales revenue minus COGS divided by sales revenue. This represents the
percent of total sales revenue that a company retains after incurring the costs related
to producing the product or services.

Income Statement – Also known as profit & loss statement, it is a financial report that
measures a company’s performance over a specific period of time. It summarizes
revenues and expenses through both operating and non-operating activities.

Leverage – How much leverage a company uses indicates to what extent it is using
debt to finance its activities. The leverage ratio would be the ratio of third party
liabilities to equity.

Net Income – Often referred to as “the bottom line,” net income is revenues minus
the cost of doing business.

NFO – Need of Funds for Operations

OPEX – Operating expenses

P&L – Profit and Loss Statement, also known as income statement.

ROE- Return on Equity. The amount of net income returned as a percentage of
shareholder equity.

ROS – Return on Sales. A ratio used to assess a company’s operational efficiency. ROS
equals Net income (before interest and taxes) divided by sales.

Turnover – The number of times an asset is replaced during an accounting period. In
terms of inventory, the shorter time the inventory is sitting on the shelves, the better.

WC – Working Capital
WC = EQUITY + LONG-TERM DEBT – FIXED ASSETS
OR
WC=CURRENT ASSETS – CURRENT LIABILITIES
(Please see week 3 for further explanation of why both formulas work.)

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