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Financial Terms and Phrases- Graham Interpretation of Financial Statements
Terms in this set (209)
Provision in a bond indenture whereby the principal may be declared due in advance of maturity, because of default in payment of interest or some "event of default."
Expenses charged against current operations but not requiring cash payment therefor until some future date. Thus, bond interest may be accrued on the corporation's books each month, although it usually is paid only at six-month intervals. Accruals may also refer to credit items, such as interest accrued on securities held.
Same as Cumulative. (Dividends)
"After Acquired Property" Clause
A provision in a mortgage indenture which places property subsequently acquired by the issuing company under the lien of the mortgage.
The process of gradually extinguishing a liability, deferred charge, or capital expenditure over a period of time. Thus, (a) a mortgage is amortized by periodically paying off part of the face amount; (b) bond discount is amortized by periodically charging the earnings each year during which the bonds are outstanding with their proper share of the total discount; (c) fixed assets are amortized by charges for depreciation, depletion, and obsolescence.
Simultaneous completion of purchase and sale of securities (or commodities) at a profit-yielding price spread, made possible by (1) existence of trading in such security or commodity in more than one market place; or (2) by existence of two separate securities with established terms of exchange from one to the other. Example of (1): Simultaneous sale in the London market and purchase in New York of United States Steel at a spread sufficient to provide expenses plus a profit; example of (2): Simultaneous sale in the same market place of a common stock and the purchase of a bond or preferred stock currently convertible at a definite ratio into such stock, or of "rights" entitling the owner upon payment of a fixed amount of cash to acquire such stock, the spread of prices being sufficient to provide expenses plus a profit.
Articles of Association
A document similar to a charter or certificate of incorporation setting forth the terms under which an enterprise is authorized by the state to do business.
Of a stock or bond issue: The value of assets available for that issue, as stated on the books, after deducting all prior liabilities. It is generally stated at so much per share or so much per $1000 bond.
The valuable resources, or properties and property rights, owned by a corporation.
An examination of the financial status and operations of an enterprise, based mostly on the books of an account, and undertaken to secure information for or to check the accuracy of the enterprise's Balance Sheet, Income Statement, and/or Surplus Statement.
A report of the financial status of an enterprise on a specific date. It lists in one column all the assets owned and their values and in another column the claims of creditors and the equity of the owners. The two columns are always equal in total amount.
A name given to certificates, generally issued by banks, each representing a fractional part of the share of some deposited stock. The usual purpose is to create a stock issue selling at a much lower price than the original shares. Also called Trustee Shares.
In the case of bonds, either the yield to maturity at a given price, as shown by the Bond Tables, or the price corresponding to a given yield to maturity.
Technically, unconditional orders in writing upon the enterprise by another enterprise or person for the payment of a sum of money. In practice they usually represent bank loans payable.
Blue Chip Issues
A colloquial term applied to stocks which are of accepted investment merit, but with abnormally high ratio of price to current earnings and dividends, and are popular market leaders.
"Blue Sky" Flotations
Originally applied to promotions of companies whose securities have no value. So named, because the purchaser receives no more than "blue sky" for his money. State and Federal laws to prevent such flotations are now in force. Registration of securities under such laws is now called "blue-skying."
A certificate of debt which (a) represents a part of a loan to a business corporation or governmentality, (b) bears interest, and (c) matures on a stated future date. Infrequently a bond issue may fail to possess one of these characteristics. Short term bonds (generally running for five years or less from date of issuance) are often called Notes.
In financial statements, represents the excess of the face value of a bond issue over the net amount received therefor by the issuing corporation. This discount usually is amortized over the life of the bonds. In popular investment parlance, represents the excess of the face value of a bond over its current market price. A bond "selling at discount" is one selling at a price less than 100, or par. Conversely, a bond "selling at a premium" is at a price above par.
Bonds conforming to the standard pattern; i.e., (a) unqualified right to repayment of a fixed principal amount on a fixed date, (b) unqualified right to fixed interest payment on fixed dates, (c) no further interest in assets or profits, and no voice in the management.
Bonds which have precedence over some other bond or bonds. They usually hold a first mortgage on property of a corporation which is also pledged under a junior General Mortgage.
(a) of an asset: The value at which it is carried on the company's books. (b) of a stock or bond issue: The value of the assets available for that issue, as stated on the books, after deducting all prior liabilities. It is generally stated at so much per share or so much per $1000 bond. The accepted practice excludes intangibles in computing book value, which is thus the same as "tangible asset value."
In the case of an investment trust or a holding company issue, the value of the assets available for the issue, the value of the assets available for the issue, taking all marketable securities at their market price.
Business Man's Investment
An investment in which a certain amount of risk is recognized but is thought to be offset either by the chance of increased principal value or by a high income return. (In our view, the second consideration is generally unsound.) This term is based on the thought that a business man is both financially able to assume some risk and capable of following his investments intelligently.
A provision of a bond issue by which it may be retired in advance of maturity at the option of the company- not the holder. The feature may provide for various prices at various times. Also applies to preferred stock.
Capital (of a business)
(a) In the narrower sense, the dollar value assigned in the balance sheet to the various stock issues; (b) in a broader sense the investment represented by the stock issues and the surplus, and (c) in a still broader sense the same as the foregoing, but adding thereto all long term obligations.
Capital Assets or Fixed Assets
Assets of a relatively permanent nature which are held for use or income rather than for sale or direct conversion into salable goods or cash. The chief capital assets are real estate, buildings and equipment, often referred to together as "plant account" or "property account." Intangible assets, such as goodwill, patents, etc., are also capital assets.
Expenditures or outlays of cash or its equivalent which are undertaken to increase or improve capital assets.
The aggregate of the various securities issued by a corporation including bonds, preferred stock, and common stock. (It is sometimes a question of judgement whether a short-term obligation should be considered part of the capitalization or as a non-capital current liability. If it falls due within a year, it is usually considered to be a current liability.)
The division of the capitalization as between bonds, preferred stock, and common stock. Where common stock represents all or nearly all of the capitalization, the structure may be called "conservative"; where the common stock represents a small percentage of the total, the structure is called "speculative."
Certain kinds of expenditures may at the option of the company be treated either as a current expense or a capital expense. In the latter case the expenditure appears on the balance sheet as an asset, which is generally written off gradually over a period of years. Examples of such expenditures: Intangible drilling costs (of oil concerns); development expense (in mines, and by manufacturing companies); organization expense; expense of floating bond or stock issues, etc.
Capitalizing Fixed Charges
Computing the principal amount of a debt which would carry the fixed charges in question. Method: Divide the fixed charges by the assumed interest rate. Example: Fixed charges of $100,000, capitalized at 4%, yield a principal value of ($100,000)/(.04)=$2,500,000
That part of surplus arising from other sources (e.g., write-ups of fixed asset values, write-downs of the par or stated value of capital stock issues, or sale of stock at a premium) is frequently referred to as this.
Cash Asset Value
The value of the cash assets (cash and cash equivalents) alone applicable to a given security issue, after deducting all prior liabilities. Ordinarily stated at so much per share or per $1000 bond. The Cash Asset Value of a stock is sometimes stated without deducting liabilities from the cash assets. This should be termed the "gross cash asset value," and it is a useful calculation only when the other assets exceed all the prior liabilities.
Assets held in place of cash and convertible into cash within a short time. Examples: Time deposits, US Government bonds and other marketable securities.
Certificate of Deposit
(a) A receipt for a security deposited with a protective committee or for some purpose such as a reorganization plan. These certificates of deposit, known as "c/d"s are generally transferrable and are dealt in as securities. (b) The same as a time deposit.
A corporate report (Balance Sheet, Income Statement and/or Surplus Statement), the correctness of which is attested to by a certified public accountant as the result of an independent audit. It always is advisable to study carefully the accountant's certificate appended to the report, since audits vary widely as to their scope, and a given audit may be subject to important limitations and reservations.
The certificate of incorporation or franchise received from the state, legally authorizing the corporation to carry on business as set forth under the grant of powers in the charter.
Loans contracted by a government agency- national, state, or municipal.
Class "A" Stock
A name given to a stock issue to distinguish it from some other stock issue of the same company, generally called Class "B" or merely common. The difference may lie in voting rights, dividend or asset preferences, or other special dividend provisions. If there is a preference, it is generally held by the Class "A" shares, but other advantages may go either to the Class "A" issue or to the other common stock issue.
Bonds secured by other securities (either stocks or bonds) deposited with a trustee. The real investment merit of these bonds depends upon either or both of (1) the financial responsibility of the company issuing them, and (2) the value of the deposited securities.
A combination of two or more companies into one, to form a new company. (aka Merger)
A corporate report (Balance Sheet, Income Statement, and/or Surplus Statement) that combines the separate statements of the corporation and its subsidiaries. Such consolidated reports eliminate all inter-company accounts, and show the entire group of companies as if it were a single enterprise.
Liabilities indefinite as to either their amount or their occurrence. Examples: amounts involved in law suits or tax claims; liabilities under a guarantee.
Reserves set up out of earnings or surplus to indicate a possible future loss or claim against the corporation, the likelihood of which is open to considerable question (e.g., possible future decline in the market value of inventories or marketable securities owned). In most cases they may be regarded as part of the surplus, but occasionally indicate probable as well as merely possible losses or claims.
A company whose policies are controlled by another through ownership of 51% or more of its voting stock.
Conversion Parity or Conversion Level
That price of the common stock which is equivalent to a given quotation for a convertible issue, or vice versa. For example, if a preferred stock is convertible into three shares of common and sells at 90, the conversion parity for the common would be 30. If the common is selling at 25, the conversion parity for the preferred would be 75. This may also be called the conversion value of the preferred stock.
That price of the common stock equivalent to a price of 100 for a convertible bond or a convertible preferred stock of $100 par value. For example, if a $1000 bond is convertible into 40 shares of common stock, the conversion price of the common is $25 a share.
The ability to exchange a security for other securities in accordance with provisions of the indenture (bonds), or the charter or by-laws (stock).
Cumulative Deductions Method
A method of computing bond interest coverage which takes into account only the interest on bonds of prior or equal rank to the issue being considered. Interest on bonds of junior rank is ignored by this method. This method should be used, if at all, only as a secondary test, supplementing the "over-all" method.
Cumulative Preferred Stock
Preferred stock entitled to dividends at a fixed rate and entitled to receive all such dividends not paid in previous years before the common stock can receive any payment. Some issues are cumulative only to the extent that dividends have been earned but unpaid in any year. (Suggested title for these: earned-cumulative issues).
An arrangement whereby each share of stock may cast as many votes for one director as there are directors to be elected. Its effect it to permit a substantial minority to elect one or more directors. Mandatory in some states (e.g., Pennsylvania, Michigan) and specified by the by-laws of some corporations in other states.
Assets which either are cash or can be readily turned into cash or will be converted into cash fairly rapidly in the normal course of business. Include cash, cash equivalents, receivables due within one year and inventories. (Slow-moving inventory should properly be excluded from current assets, but it is not customary to do so).
Current Asset Value
The value of current assets alone applicable to a given security, after deducting all prior liabilities. Ordinarily stated as so much per share or so much per $1000 bond.
Recognized claims against the enterprise which are considered to be payable within one year.
Obligations of a corporation secured only by the general credit of the corporation. Have no direct lien on specific property of the corporation. (Sometimes applied, with no special meaning, to a preferred stock issue).
Debit and Credit
Bookkeeping terms to describe types of accounts and entries to accounts. Entries to the left side of an account are called debits, and accounts which normally have left-side balances (asset accounts and expense accounts) are called debit accounts. One debits an account to record an increase in an asset, a decrease in a liability, or an expense. Entries to the right side of accounts are called credits, and accounts with right-side balances (liability accounts, owners' equities accounts, and revenue or profit accounts) are called credit accounts. One credits an account to record a decrease in an asset, an increase in a liability, or a revenue or profit.
Deed of Trust
The legal document prepared in connection with a bond issue setting forth the terms of the issue, its specific security, remedies in case of default, duties of the Trustee, etc. Also called an Indenture.
Deferred Assets or Deferred Charges
Bookkeeping assets representing certain kinds of outlays which will eventually be treated as expenses. They are not immediately charged to any expense account because they are more properly chargeable against future years' operations. Include unamortized bond discount, organization expense, development expense, and prepaid advertising, insurance, and rent. These latter prepaid expenses are sometimes called prepaid assets.
The amount of repairs that should have been made to keep plant in good running condition, but that have been put off to some future time. This measure of equipment neglect does not appear in the corporate reports, although its existence frequently is suggested by maintenance expenditures drastically lower than those of earlier years. This is most readily noticeable in the income accounts of railroads.
When appearing in the balance sheet, represents the amount by which assets fall short of equalling the sum of liabilities (creditors' claims) and capital stock. When appearing in the income statement, usually represents the amount by which revenues fell short of equalling expenses and charges. An "operating deficit" means a loss before deducting fixed charges. "Deficit after dividends" is self-explanatory.
The reduction in the value of a wasting asset due to the removal of part of that asset, e.g., through mining ore reserves or cutting timber.
The valuation reserve reflecting the total depletion to date of the assets to which it pertains (usually mineral or timber resources). Deduction of this reserve from the corresponding balance sheet asset indicates the corporation's valuation of what remains of the asset, i.e., its net value.
The loss in value of a capital asset, due to wear and tear that cannot be compensated for by ordinary repairs, or to allowance for the asset's becoming obsolete before it wears out. The purpose of the bookkeeping charge for depreciation is to write off the original cost of an asset by equitably distributed charges against operations over its entire useful life. (When in any year more is charged on the books for depreciation than is reinvested in plant, the excess may be called "unexpended depreciation.")
(a) The cost of developing manufacturing or other processes or products to make them commercially usable. New enterprises frequently treat such items as deferred assets; established and successful enterprises more frequently treat them as current expense. (b) The cost of opening up a mining property- in most cases treated as a deferred asset.
The valuation reserve reflecting the total book depreciation to date- and therefore indicating the expired portion of the useful life- of the assets to which it pertains. A depreciation reserve of $200,000 against a $1,000,000 asset indicates, not that the asset's present resale value is $800,000, but merely that about 20% of the asset's useful life is believed to have expired.
From the standpoint of a convertible issue, an increase in the number of common shares without a corresponding increase in the company's assets. Most convertible issues are protected against this contingency by an "anti-dilution clause," which reduces the conversion price in the event of dilution.
Spreading the risk of an investment by dividing the funds to be invested among a number of issues. An investment fund may diversify among different industries, or- less effectively- among different companies in the same industry; or geographically.
The number of times a dividend has been earned a given period. Preferred dividend coverage should properly be stated only as the number of times the combined fixed charges and preferred dividends have been earned. Common dividend coverage is stated separately, but the figure must be viewed in the light of the senior obligations.
A percentage figure, found by dividing the dividend rate in dollars by the market price in dollars. Example: If a stock paying $4 annually sells at $80, the dividend yield is 4/80=5.00%.
(a) Certificates issued as a scrip dividend. (b) Fractional shares of stock, received as a stock dividend. These fractional shares usually are not entitled to dividends or voting power until combined into full shares.
A term usually applied to bonds secured by a mortgage on a section of minor length of a railroad system. If the mileage covered by the lien is a valuable part of the system, the specific security is good. If the mileage covered by the lien is of small value to the system the specific security is poor.
Surplus resulting from earnings retained in the business.
Properly, a rate of earnings which is considered as "normal," or reasonably probable, for the company or particular security. It should be based both upon the past record, and upon a reasonable assurance that the future will not be vastly different from the past. Hence companies with highly variable records or especially uncertain futures may not logically be thought of as having a well defined earning power. However, the term is often loosely used to refer to the average earnings over any given period, o even to the current earnings rate.
The ratio of the market price to the annual earnings. Example: A stock earning $6 annually and selling at 50, shows an earnings yield of 12%.
The annual earnings stated as so much per share, or (less frequently) as a percentage of the par value.
The relationship between the annual earnings and the market price, in which the price is expressed as a multiple of the earnings.
The total debt of a company, including the principal value of annual lease or other payments which are equivalent to interest charges. (Such may not appear as part of the funded debt.) The effective debt may be calculated by capitalizing fixed charges at an appropriate rate. Where long-term bond issues carry an abnormally high or abnormally low coupon rate, the effective debt may be thought of as higher or lower than the face value.
In the case of preferred stocks, the par value which would ordinarily correspond to a given rate of dividend. Found by capitalizing the dividend in dollars at an appropriate rate, say 6%. Example: The effective par of a $2.40 preferred stock would be 2.40/.06=40. Useful when dealing with no-par preferred issues or those having a par out of line with the dividend rate.
Equipment Obligations or Equipment Trust Certificates
Bonds, usually maturing serially, secured by a lien on the rolling stock of a railroad. There are two methods generally used to protect the creditor: (1) the Philadelphia Plan- now almost universal (title to equipment rests in hands of trustee until all certificates have been paid off, at which time title is transferred to the corporation); (2) the New York Plan (a conditional bill of sale is given to the corporation which issues the certificates; after the certificates have been paid off the corporation receives unqualified title).
Sums paid by one railroad, generally to another railroad, for the use of rolling stock. These payments are on a per diem (per day) basis, in accordance with a standard schedule. The amounts paid or received appear in the railroad income statement immediately after the tax item.
An arrangement relating to the ownership or control of equipment (usually rolling stock of railroads) by a trustee, under which equipment trust certificates or bonds are issued. Often used to mean equipment trust certificates.
The interest of the stockholders in a company, as measured by the capital and surplus. Also the protection afforded by a senior issue by reason of the existence of a junior investment.
(a) Any stock issue, whether preferred or common. (b) More specifically, a common stock or any issue equivalent thereto through having a virtually unlimited interest in the assets and earnings of the company (after prior claims, if any).
Trading on the Equity
When a business man borrows money for his business, to supplement his owned capital, he is said to be "trading on the equity". The underlying idea is that more profit can be made on the borrowed capital than the interest paid thereon. The phrase is sometimes used to mean specifically the extreme case where most of the capital is borrowed and only a small amount is owned.
Expenditures vs. Expenses
Expenditures are outlays of cash or the equivalent; frequently they involve no concurrent charge against operations or earnings (e.g., Capital Expenditures). Expenses are costs, i.e., charges against current operations or earnings; frequently they involve non concurrent cash expenditure (e.g., Accruals, Depreciation).
Factor of Safety
A method stating fixe charge coverage, as the percentage of the balance after fixed charges to the fixed charges. Example: Earnings available for interest, $175,000; interest charge, $100,000. Factor of safety equals (175,000-100,000)/(100,000)= 75%. Factor of safety equals (Interest Coverage - 1) x 100%. (This term is becoming obsolete).
The 12-month period selected by a corporation as the basis for computing and reporting profits. Usually coincides with the calendar year (i.e., ends December 31) but often differs from it. Many merchandising companies' fiscal years end January 31, to facilitate inventory taking after the close of the most active season, while some meat packers' fiscal years end October 31, for the same reason.
Interest charges and other deductions equivalent thereto. These include rentals, guaranteed dividends, subsidiary preferred dividends ranking ahead of parent company charges and amortization of bond discount (the annual allowance to write off discount on bonds sold). Ordinarily building rents are not considered as fixed charges, but are included in operating expenses.
In the oil industry, the large production yielded by new oil wells during the first period of their life. This lasts a short time and is succeeded by a "settled production" at a much smaller rate. In analysis it is important not to consider the earnings from flush production as permanent.
The legal process of enforcing payment of a debt secured by a mortgage, by taking the properties which it covers and selling them. This may be done when the principal or interest on the mortgage is not paid.
Debt represented by securities, i.e., by formal written agreements evidencing the borrower's obligation to pay a specified amount at a specified time and place, with interest at a special rate. Includes bonds, debentures, and notes, but does not include bank loans.
Going Concern Value
The value of an enterprise considered as an operating business, and therefore based on its earning power and prospects rather than on liquidation of its assets.
A clause in virtually all bonds issued for many years prior to 1933, under which payment was promised in gold dollars of the same weight and fineness as existed when the debt was contracted. No longer legal since 1933.
Intangible Asset purporting to reflect the capitalization in excess of some future profits expected to accrue as a result of some special intangible kind of advantage held, such as good name, reputation, strategic location, or special connections. In practice, the amount at which goodwill is carried on the balance sheet is rarely an accurate measurement of its true value.
Sometimes used as the equivalent of Gross Sales. More often represents an intermediate figure between Gross Sales and Net Income.
Gross Revenues or Gross Sales
Total business done, without deduction of costs or expenses.
Bonds or stocks which are guaranteed as to principal, interest, dividends, sinking fund, etc., by a company other than the issuer. Guarantees usually come about through lease of the property of the issuing company to another company, or to facilitate the sale of securities by one company which is controlled by another. The value of the guarantee depends upon the credit standing and earnings of the guaranteeing company; but a guaranteed issue may stand on its own feet, even though the guarantee itself is questionable.
Usually to make a commitment in commodities for future delivery in order to avoid risk of price change in such a commodity entering into the cost of goods already contracted for manufacture and sale. In stock market operations, to purchase a senior convertible issue and sell short the amount of common stock obtainable if conversion privilege is exercised- (or other operations similar thereto).
A corporation which owns all or a majority of the stock of subsidiaries. The distinction sometimes made between a holding company and a parent company is that the latter is an operating company which also owns or controls other operating companies, whereas the holding company merely holds or controls operating companies.
House of Issue
Investment banking company engaged in the underwriting and distribution of security issues.
Idle Plant Expense
The cost of carrying (maintaining and allowing for depreciation on) non-operating manufacturing properties.
A report of operations over a specified period of time, summarizing the revenues or income and the expenses or costs attributed to that period, and indicating the net profit or loss for the period. Frequently called the Profit and Loss Statement.
Bonds the payment at interest on which is dependent on earnings. In some bonds part of the interest is on a fixed basis and the balance is on an income or contingent basis. Income bonds are sometimes called adjustment bonds.
The legal document prepared in connection with a bond issue setting forth the terms of the issue, its specific security, remedies in the case of default, duties of the Trustee, etc. Also called the "deed of trust".
Capital (Fixed) Assets which are neither physical nor financial in character. Include patents, trademarks, copyrights, franchises, goodwill, leaseholds, and such deferred charges as unamortized bond discount. These assets should be shown on the balance sheet at cost, if at all, but frequently are assigned purely arbitrary values.
Debt of one corporation to another corporation controlling it, controlled by it, or controlled by the same interests that control the debtor.
The number of times that interest charges are earned, found by dividing the (total) fixed charges into the earnings available for such charges (either before or after deducting income taxes).
The "real value" behind a security issue, as contrasted with its market price. Generally a rather indefinite concept; but sometimes the balance sheet and earnings record supply dependable evidence that the intrinsic value is substantially higher or lower than the market price.
Current assets representing the present stock of finished merchandise, goods in process of manufacture, raw materials used in manufacture, and sometimes miscellaneous supplies such as packing and shipping supplies. Usually stated at cost or market value, whichever is lower.
The name given to an enterprise which invests its capital in a varied list of securities, intending to give its bond and stock holders the benefit of expert financial management and diversification. Really a misnomer, since practically all these enterprises are now corporations and not legal trusts; and also because many of the purchases may be of a speculative rather than an investment character.
Joint and Several Guarantee
A guarantee by more than one party under which each party is potentially liable for the full amount involved if his associations do not meet their share of the obligation.
Joint Facility Rents
In railroad income statements, represent rentals paid (debit) or received (credit) for terminal facilities or other similar properties used jointly by several railroads.
An issue whose claim for interest or dividends, or for principal value, comes after some other issue, called a senior issue. Second mortgages are junior to first mortgages on the same property; common stock is junior to preferred stock, etc.
The right to occupy a property at a specified rental for a specified period of years. To obtain a long term lease at a favorable rental a cash bonus is frequently paid by the lessee to the lessor (owner), if it is a new lease, or to the former lessee, if the lease is taken over. The balance sheet item "Leaseholds" should represent only this cash consideration, and should be amortized over the life of the lease.
The cost of improvements or betterments to property leased for a period of year. Such improvements ordinarily become the property of the lessor (owner) on expiration of the lease; consequently their cost must be amortized over the life of the lease.
The obligation or liability, inherent in a Leasehold, to pay a specified rental for a specified period of years.
Securities which conform with the regulations set up by legislative enactment governing the investments made by savings banks and trust funds in a given State. Usually the banking department of the State publishes annually a list of securities considered eligible for investment by savings banks and trust funds, commonly referred to as "legals".
The condition making for wide changes in per share earnings and market value, arising from the fact that a company's common stock has relatively heavy fixed costs or deductions (interest and/or preferred dividends) ahead of it. Small percentage changes in gross earnings or operation costs will affect the earnings and market price of the common stock in a much greater ratio. A leverage stock usually sells at a small aggregate figure in proportion to the total amount of senior securities.
Recognized claims against an enterprise. In its narrower sense includes only creditors' claims, i.e., excludes the claims of owners represented by the Capital Stock, Surplus, and Proprietorship Reserve accounts. In its broader sense, includes all items on the right side of the balance sheet.
A reserve or claim against an enterprise representing a liability the existence of which is unquestioned but the exact amount of which cannot as yet be determined (e.g., reserve for taxes).
Same as current assets; but sometimes applied to current assets excluding inventory.
The amount which would be available for a security if the business were wound up and the assets turned into cash. Is less than "book value," because allowance must be made for shrinkage in the value of the various kinds of assets if sold during a short period.
Upkeep and repair costs required to maintain plant and equipment in efficient operating condition.
Margin of Profit
Operating income divided by sales. Depreciation is usually included in the operating expenses while income taxes are usually excluded. Non-operating income received and interest charges paid are not included in arriving at the operating income.
Margin of Safety
In general the same as "interest coverage". Formerly used in a special sense, to mean the ratio of the balance after interest to the earnings available for interest. Example: If interest is covered 1.75 times, the margin of safety (in this special sense) becomes .75/1.75= 42.8%.
The facility with which a security may be bought and sold. Good marketability requires a continuous close relation between bid and offering prices sufficient to permit ready purchase or sale in fair volume.
A combination in which one company absorbs one or more other companies.
In a consolidated income statement, represents the interest or equity of the minority stockholders of a subsidiary in the earnings of that subsidiary. In a consolidated balance sheet, represents the interest or equity of these minority stockholders in the net worth of the subsidiary.
Usually the same name as general mortgage. May be applied more specifically to a mortgage issue covering a number of separated properties.
A lien on all the fixed property of a corporation at the time of issuance, usually junior to underlying mortgages.
A mortgage on real estate on which payment of principal or interest (usually both) is guaranteed by a Mortgage Guarantee Company or a Surety Company. Sometimes the whole mortgage is sold with the guarantee attached; frequently one or more mortgages are deposited with the trustee and "guaranteed mortgage certificates" are issued with the mortgage(s) as security.
Certain kinds of property- e.g., currency, checks, promissory notes, acceptances, coupon bonds- title to which passes on delivery and cannot be attacked when in the hands of a holder in due course and in good faith. Stocks are not negotiable instruments; hence stolen certificates may not be recovered from an innocent holder.
Net Current Assets (Working Capital)
Current assets less current liabilities.
Net Quick Assets
Net Current Assets excluding inventory.
The amount available for the stockholders as shown by the books. Is made up of capital, surplus, and such reserves as are equivalent to surplus. It is ordinarily used to include intangible assets as they appear on the books, and to that extend differs from the "book value" of the stock issues.
Non-Cumulative Preferred Stock
Preferred stock subject to the provision that if dividends are not declared in any period, the holder loses all rights to dividends for that period. Where the dividends are cumulative to the extent earned, the issue stands midway between a straight cumulative and a straight non-cumulative preferred.
Warrants that cannot be dealt in separately from the security with which they were issued, and can only be exercised upon presentation with the original security.
Earnings or deductions from some special source not likely to appear in subsequent years. Such items should not be separated from the regular earnings or deductions in analyzing a report. Examples of non-recurrent earnings: Profit on sales of capital assets; special dividends from subsidiaries; profit on bond retirement; amount received in settlement of litigation; etc. Examples of non-recurrent deductions: Loss on sale of capital assets; inventory write-off; idle plant expense (in some cases); etc.
The loss of value of a capital asset resulting from new manufacturing developments or inventions which render the asset commercially unusable. Also, the accounting charge (usually part of the Depreciation charge) to adjust for the probable future loss in value resulting from these causes.
In the case of railroads, the ratio found by dividing total operating revenue (or "gross revenue") into operating expenses excluding taxes. In the case of public utilities, it is generally defined as the ratio of operating expenses including taxes and depreciation to the total revenue. Similarly in the case of industrials, except that some authorities do not include depreciation and most do not include income taxes in operating expenses.
Warrants issued in reorganizations or granted to management as additional compensation and incentive.
Direct costs of forming new corporate enterprise: mostly incorporation fees and taxes and legal fees. May appear on the balance sheet as a Deferred Asset; if so, is usually written off against the first few years' earnings.
The proper method of calculating bond interest or preferred dividend coverage. In the case of bond interest it means finding the number of times that total fixed charges are covered. In the case of preferred dividends it means finding the number of times that the aggregate of all fixed charges plus preferred dividends are covered. (In dealing with a preferred issue senior to another preferred issue, the requirements of the junior issue may be omitted.)
Bonds (very infrequently) or preferred stocks which are entitled to additional interest or dividends, above the regular rate, depending either on (a) the amount of earnings, or (b) the amount of dividends paid on the common stock.
The right of shareholders to purchase additional shares or other securities (generally securities convertible into common stock) before these are sold to other purchasers. Preemptive rights are generally accorded stockholders under State laws, but may be waived in the charter or by-laws.
Stock which has a prior claim on dividends (and/or assets in the case of dissolution of the corporation) up to a certain definite amount before the common stock is entitled to anything.
Premium on Bonds
The excess of the market price of a bond, or the amount received by the issuer, over its face value.
Premium on Capital Stock
The excess of cash or equivalent received by the issuer over the par value of capital stock issued therefor.
Market price divided by current annual earnings per share. Example: Stock selling at 84 and earning $7 per share has a price earnings ratio of 12 to 1 (or is said to be selling at 12 times earnings).
Prior Deductions Method
An entirely improper method of calculating bond interest or preferred dividend coverage. The requirements of senior obligations are first deducted from earnings and the balance is applied to the requirements of the junior issue.
A lien or mortgage ranking ahead of some other lien. A prior lien need not itself be a first mortgage.
A bond or preferred stock which has a conversion or participating right, or has a stock purchase warrant attached to it.
The cost (or sometimes, the appraised value) of land, buildings, and equipment acquired to carry on business operations. Net Property Account represents cost or appraised value of these assets less accrued depreciation to date, i.e., property account less depreciation reserve. The terms Plant and Net Plant frequently are used with the same respective meanings, but sometimes exclude land or non-stationary assets such as delivery equipment.
Reserves set up as segregations of Surplus, which serve merely to earmark part of the stockholders' equity as not subject to distribution in the form of cash dividends. Include most contingency reserves and also reserves for sinking funds and plant extensions. Represent, not liabilities, but equities.
A document describing a new security issue; especially, the detailed description which must be supplied to intending purchasers under the Securities Act of 1933.
A committee, generally organized at the initiative of substantial holders of a given security, to act for all the owners of that security in important matters in difficulty or dispute. Most protective committees arise in connection with receivership and deal with the question or reorganization. Others may develop merely because of differences of opinion on some basic policy; e.g., between certain stockholders and the management.
Provisions in a bond indenture, or charter provisions affecting a preferred stock, (a) which bind the company not to do certain things considered injurious to the issue or, (b) which set forth remedies in the event of unfavorable developments. Example of (a): Agreement not to place a lien on the property ahead of the bond issue. Example of (b): The passing of voting power to the preferred stock if dividends are not paid.
An authorization given by a security holder to someone else to vote his holdings for directors, or on some question put to vote.
Purchase Money Mortgages
Mortgages issued in partial payment for real estate or other property and having a lien on the property purchased. They are often used to circumvent the "after acquired property clause" in bonds which a company has previously issued.
The theoretical interest rate on a riskless investment. Varies with general credit conditions. The actual interest rate on a given investment is presumed to be made up of the pure interest rate, plus a premium to measure the risk taken.
In stock market operations, the practice of using unrealized paper profits in marginal trading to make additional purchases. In corporate finance, the practice of creating a speculative capital structure by a series of holding companies, whereby a relatively small amount of voting stock in the parent company controls a large corporate system.
Considerations which cannot be stated in figures- such as management, strategic position, labor conditions, prospects, etc.
Considerations which can be stated in figures- such as balance sheet position, earnings record, dividend rate, capitalization setup, production statistics, etc.
Current assets excluding inventory.
The operation of a company by an agent of the court, under direction of the court, usually arising from inability to meet obligations as they mature. there are technical differences between (a) an equity receivership, (b) a bankruptcy receivership, and (c) a trusteeship under Sections 77 and 77B of the Bankruptcy Act as amended.
The forms filed by a corporation (or foreign governmental body) with the SEC in connection with an offering of new securities or the listing (registration) of outstanding securities on a national securities exchange. The "prospectus", supplied to intending purchasers or a new issue, contains most, but not all, of the the information in the registration statement.
Offsets total or specific asset values, set up on the books (a) to reduce or revalue assets, (b) to indicate existence of liabilities generally of uncertain amount, or (c) to earmark part of Surplus for some future use. Properly speaking, reserves represent, not assets, but claims against or deductions from assets. Assets sed aside to take care of reserves should be called reserve funds.
Common stock issued under an unusual agreement whereby they do not rank for dividends until some event has happened, usually the reaching of a certain level of earnings.
Retirement Expense or Retirement Reserve
(a) In the income account: The accounting charge, used by many concerns in lieu of Depreciation, for accruing loss due to ultimate retirement (scrapping) of operating equipment. May take into account all equipment owned, in which case it would approximate normal depreciation charges. More commonly, takes into account only equipment likely to be retired within the next few years, and hence is usually lower than normal depreciation charges. (b) In the balance sheet: Retirement Reserve is a valuation reserve representing accrued Retirement Expense to date. Similar to Depreciation Reserve, for which it is supposed to be a substitute, but frequently represents a smaller proportion of the value of pertinent assets than would a properly built up depreciation reserve.
Expenditures or outlays of cash or its equivalent which are undertaken to maintain asset values (e.g., repairs, but not improvements) or to obtain current revenue (e.g., raw material purchases, factory labor payroll).
A privilege accorded to each unit of an existing security to purchase new securities. Generally must be exercised within a short time and is offered at a price under the existing market.
A payment made (a) for the use of a patent, (b) to the owner of oil or gas lands by those extracting oil or gas therefrom, or (c) to the author of a book, play, etc.
Dividends payable in notes or other written promises to pay the amount involved in cash at a later date. The date may be fixed, or contingent on a certain happenings, or entirely discretionary with the directors.
Changes in operating results due to time of the year. Allowance must be made for these in interpreting the results shown over part of the year.
Securities of established large companies which have been favorably known to the investment public for a period of years covering good times and bad.
A long term movement- e.g., of prices, production, etc.- in some definite direction. Opposed to seasonal fluctuations or variations.
Separation from a holding or operating company of one or more of its subsidiaries or operating divisions, effected by distributing stock of the subsidiary to the shareholders of the parent company.
A bond issue providing that certain proportions thereof mature on successive dates instead of all at once. Serial maturities are usually spaced one year apart.
Sale of stock which is not owned. Delivery to purchaser is arranged by borrowing the stock from an owner who receives as security cash in amount equal and kept equal to the market price. Upon ultimate purchase of the stock by the short-seller, the certificate thereby received is turned over to the lender and cash posted with him returned.
An arrangement under which a portion of a bond or preferred stock issue is retired periodically in advance of its fixed maturity. The company may either purchase a stipulated quantity of the issue itself, or supply funds to a trustee or agent for the purpose. Retirement may be made by call at a fixed price, or by inviting tenders, or by purchase in the open market. The amount of the sinking fund may be fixed in dollars, or as a percentage of the issue, or be based upon volume of production or earnings.
Sliding Scale Privilege
A conversion or stock purchase privilege in which the price changes (almost always unfavorably to the senior issue) either with the passage of time or upon exercise of the privilege by a given amount of the issue.
Financial transactions involving acknowledged risk entered into with the purpose of profiting from anticipated future events.
Division of a corporation's share capital into a greater number of share units, usually (in the case of shares having a par value) by reduction in the par value represented by each share. Thus, a split-up might consist of the issue, in exchange for each share of $100 par common stock outstanding, or four new $25 par common shares. Sometimes the reverse procedure is resorted to, i.e., the share capital is consolidated into a fewer number of shares by issuing only a fraction of a new share in exchange for each old share outstanding. For lack of a better title, this is frequently referred to as a Reverse Split-Up or Split-Down.
Stock Value Ratio
(a) In the case of a bond, the ratio of the total market value of the capital stock of a corporation to the par value of its funded debt. (b) In the case of a preferred stock, the ratio of the total market value of the common stock issues to the total par value of all the bonds plus the total market value of the preferred stock.
Value at which no-par capital stock is carried on the balance sheet. May be purely arbitrary or nominal amount, or the issue price, or the book value of the stock. (In some states, par-value shares may be given a stated value less than their par).
Dividends payable in the form of stock of the declaring company, but not necessarily of the same class as the shares receiving the stock dividend.
A bond or preferred stock, definitely limited in interest or dividend rate, purchased solely for its income return and without reference to possible increase in value.
A company controlled by another company (called the Parent Company) through ownership of at least a majority of its voting stock.
Th excess of the total New Worth or stockholders' equity over the total of par or stated value of the capital stock and the amount of Proprietorship Reserves. At least part of this excess usually results from earnings retained in the business; this part frequently is labeled Earned Surplus or P&L Surplus, to indicate its source. That part of surplus arising from other sources (e.g., write-ups of fixed asset values, write-downs of the par or stated value of capital stock issues, or sale of stock at a premium) frequently is labeled Capital Surplus.
A financial report summarizing the changes in Surplus during the fiscal year (or another period). Shows surplus at beginning of period, plus net income for the period, less dividends declared, plus or minus any extraordinary credits to or charges against surplus. Final item of report, consequently, is surplus at end of period. Report also called Statement of Surplus and Analysis of Surplus.
The process of selling a presently owned security and replacing it by another, to gain some expected advantage.
Assets either physical or financial in character- e.g. plant, inventory, cash, receivables, investments.
Tax Free Covenant
An agreement by a corporation to pay interest without deduction of federal taxes that may be required to be withheld by law, usually up to a certain maximum percentage. By special provision of the income tax laws, the covenant means that corporations will pay income taxes up to two percent of the amount of the coupons.
Money on deposit with a bank withdrawable at the end of a (short) period instead of on demand, and generally drawing interest.
Lawfully issued stock that has been required by the corporation through purchase or donation.
A persistent change (e.g., of earnings) in a certain direction over a given period.
One to whom the title to property has been conveyed, for the benefit of another party. Thus the trustee for a mortgage bond issue holds the mortgage (i.e., has conveyed to it the mortgage property) for the benefit, primarily of the bondholders. The trustee in bankruptcy holds title to the bankrupt's property (with certain exceptions) for the benefit primarily of the bankrupt's creditors. A trustee may also assume obligations not connected with the direct holding of property- e.g., a trustee under the indenture of an unsecured (debenture) bond.
Funds held by a trustee for the benefit of another. Terms set forth by the creator of the trust govern the type of property in which the trustee may invest, whether restricted to "Legal Investments" or left to the discretion of the trustee.
Unamortized Bond Discount
That part of the original Bond Discount which has not as yet been amortized, or charged off against earnings.
Reserves set up (a) to indicate a diminution in the value of the assets to which they pertain, or (b) to provide for a reasonably probably failure to realize full value. Example of (a): Depreciation and depletion reserves; reserve to reduce securities owned to market value. Example of (b): Reserve for bad accounts.
An arrangement by which stockholders turn over their voting rights (generally for directors only) to a small group of individuals called voting trustees. The original stock certificates are registered in the name of the voting trustees and held in trust, the stockholders receiving instead other certificates called "voting trust certificates", (abbreviation v.t.c.). Voting trusts generally run for five years. They usually give the holders all the privileges of the deposited securities, except that of voting.
(a) Stock Purchase Warrants or Option Warrants. A right to purchase shares of stock, generally running for a longer period of time than the ordinary subscription rights given shareholders. These warrants are often attached to other securities, but they may be issued separately or detached after issuance. (b) A name given to certain kinds of municipal obligations.
Tangible Fixed Assets subject to depletion through gradual removal in the normal course of operation of the business (e.g., metal oil, or sulphur deposits; timber lands).
Stock with real net asset value considerably less than its par or stated value, because some of the asset value included in the company's balance sheet is either fictitious or highly questionable.
A term applied to dealings in securities proposed to issued under some reorganization, merger, or new capitalization scheme. The full descriptive phrase is "when, as, and if issued". If the plan is abandoned, or changed materially, the "when issued" trades are void.
The net current assets. Found by deducting current liabilities from the current assets.
The return on an investment, expressed as a percentage of cost. Straight Yield or Current Yield is found by dividing the market price into the dividend rate in dollars (for stocks) or interest rate (for bonds). It ignores the factor of maturity or possible call at a price higher or lower than the market. Amortized Yield or Yield to Maturity (of a bond) takes into account the eventual gain or loss of principal value to be realized through repayment at maturity. Where a bond is callable before maturity, the amortized yield might be lower if it is assumed that call takes place. The true amortized yield should be lowest shown on any assumption as to call.
Recommended textbook explanations
Principles of Economics
N. Gregory Mankiw
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