FinanceTalking Financial Glossary

An abbreviation of the term 'estimate', often found in analyst research reports. For example 2010E used in a table shows that the numbers in that column are the analyst's own estimate of future performance.

An arrangement in which sellers of a business receive additional future payments, usually based on future profits.

Earnings is often used as a word for profit. In the UK, earnings can refer specifically to the profit attributable to the shareholders - ie the profit after tax and the minority shareholders' proportion of profits and after any preference dividends but before ordinary dividends.

Acquisitions will either improve a company's earnings per share (EPS) or reduce them. Acquisitions which improve EPS are said to be earnings accretive. If they reduce EPS they are earnings dilutive.

Acquisitions will either improve a company's earnings per share (EPS) or reduce them. Acquisitions which improve EPS are said to be earnings accretive. If they reduce EPS they are earnings dilutive.

An increase in the earnings per share (EPS) growth rate from one period to another, e.g. 5% growth in year 1, 10% growth in year 2, 15% growth in year 3.

Earnings per share (EPS) is the profit after tax and the minority shareholders' proportion of profits, after any preference dividends, divided by the weighted average number of shares in issue. It is simply a measure of profit per share.

The quality of earnings refers to the visibility or predictability of future earnings.

The earnings per share expressed as a percentage of the share price. The earnings yield is the reciprocal (upside down) of the P/E ratio.

Earnings before interest and tax ? broadly the same as operating profit ? but EBIT is often adjusted to remove one-off (exceptional) items.

Earnings before interest, tax and amortisation. This is the operating profit before amortisation of intangible assets. Because amortisation is a notional expense (rather than a cash charge) and because many intangible assets (such as brands) tend to increase in value rather than fall, EBITA may offer a better measure of operating profit.

Earnings before interest, tax, depreciation and amortisation. This is the operating profit before depreciation of tangible fixed assets and amortisation of intangible assets is deducted. Both depreciation and amortisation are notional accounting expenses and have no cash effect, so EBITDA is often used as a proxy for cash flow. If a company is not profitable (ie EBIT is negative), it may still be generating cash (ie be EBITDA positive). EBITDA is used widely for comparing internationally, when depreciation and amortisation policies vary.

A company is said to make an economic profit if its return on capital exceeds the cost of that capital.

A company is said to be adding economic value if the return that it makes using the capital at its disposal exceeds the cost of that capital. See also cost of capital and economic profit.

European Embedded Value. The EEV method of accounting is a system agreed by European insurance companies, which produces a supplementary set of accounts which are disclosed alongside the statutory IFRS results. See also Embedded Value.

In life insurance, today's value of the future cash flows from new business after taking into account guarantees etc. See also Embedded Value and European Embedded Value.

The tax charge as a percentage of the profit before tax. This may differ from the corporation tax in effect in the country of incorporation, due to tax planning and differing organisational structures. Calculation = (tax/profit before tax) x 100%.

The efficiency ratio (or cost income ratio) measures expenses as a percentage of operating income. It shows what proportion of operating income is going to pay the overheads of the business. Banks hope to reduce their efficiency ratio as the business grows thanks to economies of scale. The idea is that additional revenue from existing or new customers has a relatively low or no additional cost associated with it and so is increasingly profitable. This is sometimes described as 'positive jaws' between income and expense growth ? ie income grows faster than expenses, creating bigger profits.

Extraordinary General Meeting. This is a special meeting of a company and its shareholders which can be called by company directors or anyone with at least 10% of the voting rights on the company's shares. EGMs are often called to pass certain special resolutions (eg to approve a takeover or break-up of the company). For special resolutions to be passed, 75% or more of the shareholders have to vote in favour.

An embedded derivative is a derivative instrument that is embedded in another contract. An embedded derivative can arise from deliberate financial engineering and intentional shifting of certain risks between parties. Many embedded derivatives, however, arise inadvertently through market practices and common contracting arrangements. For example, gas contracts often contain 'embedded derivatives' often some kind of optionality (take or pay for example) and indexation to oil or electricity prices.

In life insurance, embedded value is the present value of all the in-force policies at a point in time. Using assumptions for the drivers of future income and expenses, (including the level of future investment returns, expenses, surrender levels and mortality) a profile of the future cash flows for each contract can be estimated. These cash flows are then discounted back to present day values to give a new business profit.

A method of giving employees shares in the business for which they work.

The European Accounts Modernisation Directive requires companies to include in the annual report 'a balanced and comprehensive analysis of the development and performance of the company's business? [which] shall include both financial and, where appropriate, non-financial key performance indicators ? including information relating to environmental and employee matters' . This is known as an enhanced directors' report or 'business review'.

The value of an enterprise regardless of how it is financed. Can be estimated as market capitalisation plus average net debt.

Earnings per share. It is the profit after tax and the minority shareholders' proportion of profits, after any preference dividends, divided by the weighted average number of shares in issue. It is simply a measure of profit per share.

Shares in companies, especially publicly quoted companies.

The equity in a company is the total of the capital put in by the shareholders and the profits retained in the business on their behalf. Alternatively, equity could be regarded as the excess of the assets over the liabilities - what is left for the shareholders after the assets have been used to repay the liabilities. The term is also used to refer to shares.

The usual method for accounting for joint ventures and associated companies. The balance sheet will show the group's share of the investment's net assets and the income statement will show the group's share of profit.

The process of analysing sectors and companies, to give advice to professional fund managers and private clients on which shares to buy. Sell-side analysts work for brokers who sell shares to the investors (mainly fund management firms and private clients). Buy-side analysts work for fund management firms.

An investment analyst analyses sectors and companies, to give advice on making investments. Sell-side analysts work for brokers who sell shares to the investors (mainly fund management firms and private clients). Analysts working in fund management firms are known as buy-side analysts.

The share capital of a company owned by ordinary shareholders, who are entitled to a vote, to receive dividends and to a repayment of capital if the company is wound up.

The equity or shareholders funds in a business is often referred to as the 'equity cushion'. In a bank, the idea is that if the bank experienced heavy losses, the equity cushion would protect the other sources of funding, especially the depositors. So the bigger the equity cushion, the safer the bank is and the less likely it is to go under.

A reduction in the percentage of the equity owned by a shareholder as a result of a new issue of shares in the company.

The extra that investors expect for investing in shares rather than putting their money into risk-free investments such as government bonds. Over the last 90 years, the equity risk premium has been between 3% and 9%. Currently, most commentators believe that the risk premium is around 3% or 4%.

Employee Share Ownership Plan. A method of giving employees shares in the business for which they work.

Exchange Traded Fund. An ETF allows small investors to track indices and buy into them through shares and units. Shares are available on the open market and can be bought and sold for cash, just like the shares in an investment trust. By purchasing shares investors can, in effect, buy precise amounts of the index they want to track.

A bond issued outside national jurisdiction, usually denominated in US$ or Euros.

Brussels-based clearance and settlement system for international bonds and shares.

A loan in a eurocurrency.

A currency held in a European country other than its country of origin. For example, US dollars held in a French bank.

European Embedded Value. The EEV method of accounting is a system agreed by European insurance companies, which produces a supplementary set of accounts which are disclosed alongside the statutory IFRS results. See also Embedded Value.

Enterprise Value. The value of an enterprise regardless of how it is financed. Can be estimated as market capitalisation plus average net debt. Alternatively see Embedded Value (in the life insurance industry).

The ratio of enterprise value to operating profit (EBIT) ? this ratio shows how much investors (including both debt and equity investors) are prepared to pay per ?1 of operating profit.

The ratio of enterprise value to operating profit before depreciation and amortisation (EBITDA) ? this ratio shows how much investors (including both debt and equity investors) are prepared to pay per ?1 of operating profit before depreciation and amortisation, which are non-cash expenses and which vary according to the company's accounting policy.

The ratio of enterprise value to sales ? this ratio shows how much investors (including both debt and equity investors) are prepared to pay per ?1 of sales.

Economic Value Added. A company is said to be adding economic value if the return that it makes using the capital at its disposal exceeds the cost of that capital. See also cost of capital and economic profit.

A share is described as ex-dividend or ex-div when a potential purchaser will no longer be entitled to receive the company's current dividend, the right to which remains with the vendor. Cum-dividend or cum-div has exactly the opposite sense, meaning that the dividend or other benefits belong to the buyer rather than the seller. The price of a share that has gone ex-dividend will usually fall by the amount of the dividend, while one that is cum-dividend will usually rise by this amount.

A share is described as ex-dividend or ex-div when a potential purchaser will no longer be entitled to receive the company's current dividend, the right to which remains with the vendor. Cum-dividend or cum-div has exactly the opposite sense, meaning that the dividend or other benefits belong to the buyer rather than the seller. The price of a share that has gone ex-dividend will usually fall by the amount of the dividend, while one that is cum-dividend will usually rise by this amount.

A share or a company is described as ex-growth after having had substantial growth in the past but now not holding out prospects for immediate growth of earnings or value.

An exchange traded fund allows small investors to track indices and buy into them through shares and units. Shares are available on the open market and can be bought and sold for cash, just like the shares in an investment trust. By purchasing shares investors can, in effect, buy precise amounts of the index they want to track. Often referred to as an ETF.

A director is person appointed to carry out the running of a company. Executive directors are in charge of running the company from day to day. Non-executive directors act in an advisory capacity and look after the interests of the shareholders.

Executives of a company are given options to purchase shares at preferential rates.

Usually the price at which an option can be taken up.

The expense ratio is used in general insurance and represents expenses as a % of premiums. See also Combined Operating Ratio.

An Extraordinary General Meeting or EGM is a special meeting of a company and its shareholders which can be called by company directors or people with at least 10% (in combination) of the voting rights on the company's shares. EGMs are often called so that certain special resolutions to be passed (eg to approve a takeover or break-up of the company). For special resolutions to be passed, 75% or more of the shareholders must vote in favour.