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Cash Flow Cash flow is 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. Net cash flow is distinguished from net income, which includes accounts receivable and other items for which payment has not actually been received. Cash flow is used to assess the quality of a company's income, that is, how liquid it is, which can indicate whether the company is positioned to remain solvent.

Breaking it Down: The accrual accounting method allows companies to count their chickens before they hatch, so to speak, by considering credit as... Read More

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Debt/Equity Ratio Debt/Equity (D/E) Ratio, calculated by dividing a company’s total liabilities by its stockholders' equity, is a debt ratio used to measure a company's financial leverage. The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.

Breaking it Down: Given that the debt/equity ratio measures a company’s debt relative to the total value of its stock... Read More

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Swap A swap is a derivative contract through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount that both parties agree to. Usually, the principal does not change hands. Each cash flow comprises of one leg of the swap. One cash flow is generally fixed, while the other is variable, that is, based on a a benchmark interest rate, floating currency exchange rate, or index price.

Breaking it Down: In an interest rate swap, the parties exchange cash flows based on a notional... Read More

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Inflation Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.

Breaking it Down: As a result of inflation, the purchasing power of a unit of currency falls. For example, if the inflation rate is 2%, then a pack of gum that costs... Read More

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Gross Margin Gross margin is a company's total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services it sells. The higher the percentage, the more the company retains on each dollar of sales, to service its other costs and debt obligations.

Breaking it Down: The gross margin number represents the portion of each dollar of revenue that the company... Read More

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Mutual Fund A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets. Mutual funds are operated by professional money managers, who allocate the fund's investments and attempt to produce capital gains and/or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Breaking it Down: Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds and... Read More

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Dividend A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.

Breaking it Down: The board of directors can choose to issue dividends over various timeframes and... Read More

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Balance Sheet A balance sheet is 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.

Breaking it Down: The balance sheet gets its name from the fact that the two sides of the equation above – assets on the one side and... Read More

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Cash Flow Cash flow is 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. Net cash flow is distinguished from net income, which includes accounts receivable and other items for which payment has not actually been received. Cash flow is used to assess the quality of a company's income, that is, how liquid it is, which can indicate whether the company is positioned to remain solvent.

Breaking it Down: The accrual accounting method allows companies to count their... Read More

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Exchange-Traded Fund - ETF An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

Breaking it Down: An ETF is a type of fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides... Read More

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Net Present Value - NPV Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.

Breaking it Down: Determining the value of a project is challenging because there are different ways to measure the value of... Read More

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Return On Equity - ROE Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

Breaking it Down: The ROE is useful for comparing the profitability of a company to that of other firms in... Read More

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Bond A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.

Breaking it Down: Bonds are commonly referred to as fixed-income securities and are one of the three main.... Read More

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Compound Annual Growth Rate - CAGR The compound annual growth rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year.

Breaking it Down: The compound annual growth rate isn't a true return rate, but rather a... Read More

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Return On Investment - ROI A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio.

Breaking it Down: Return on investment is a very popular metric because of its versatility and simplicity. Essentially, return on investment can be used as a rudimentary gauge... Read More

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Time Value of Money - TVM The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value. Term Of The Day Selected By Deva Panambur Managing Director Sarsi, LLC New York, NY www.sarsillc.com

Breaking it Down: Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than...Read More

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Fiscal Year-End Fiscal year-end is the completion of a one-year, or 12-month, accounting period. The reason that a company's fiscal year often differs from the calendar year and may not close on Dec. 31 is due to the nature of a company's needs. If the fiscal year-end is too close to a heavy selling season, the company may have a hard time producing annual financial statements and counting inventories because manpower and resources are dedicated to the sales floor.

Breaking it Down: Every year public companies are required to publish financial statements for review by the Securities and Exchange Commission. These documents give investors... Read More

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Rule Of 70 The rule of 70 is a way to estimate the number of years it takes for a certain variable to double. To estimate the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable. This rule is commonly used with an annual compound interest rate to quickly determine how long it takes to double your money.

Breaking it Down: Another useful application of the rule of 70 is in the area of estimating how long it would take a country's real GDP to double. Similar to calculating compound... Read More