A
Accretion/Dilution Analysis: A type of analysis used in the context of mergers and acquisitions to determine the effect of the transaction on the earnings per share of the combined company.
Adjusted Net Asset Method: A business valuation method that adjusts asset values on the balance sheet to reflect fair market values and identify intangible assets not previously recorded.
Appraisal: The process of estimating the value of a business or asset by a professional appraiser using standardized methods and expertise.
B
Beta Coefficient: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Book Value: The value of a company based on its books or financial statements, specifically the net asset value of the company calculated as total assets minus intangible assets and liabilities.
Business Enterprise Value (BEV): The value of a business enterprise as a whole, including both operating and non-operating assets, typically used in the market and income approaches to valuation.
C
Capital Asset Pricing Model (CAPM): A model that describes the relationship between systematic risk and expected return for assets, particularly stocks, used in finance to determine a theoretically appropriate required rate of return of an asset.
Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment.
Capital Structure: The composition of a company’s liabilities and equity, such as debt, common equity, and preferred equity, which reflects how a business finances its overall operations and growth.
D
Debt Capacity: The total amount of debt a business can incur and repay according to the terms of the debt agreement.
Discount Rate: The interest rate used to discount future cash flows of a business to their present value, crucial in the discounted cash flow analysis for valuation.
Discounted Cash Flow (DCF): A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for time value of money.
E
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): A measure of a company’s overall financial performance and is used as an alternative to simple earnings or net income in some circumstances.
Economic Life: The expected period over which an asset remains useful to the average owner, used in depreciation calculations and valuation models.
Economic Value Added (EVA): A measure of a company’s financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit.
Excess Earnings Method: A business valuation approach that separates return on assets from other earnings considered more likely to continue in the future.
F
Fair Market Value: The price at which a willing buyer and a willing seller, both having reasonable knowledge of all relevant facts, would willingly engage in a transaction.
Fair Value Accounting: A financial reporting approach in which companies are required or permitted to measure and report on an ongoing basis certain assets and liabilities at estimates of their current value.
Financial Forecasting: The process of making predictions about the future performance of a company based on historical and current data, used in various valuation methods.
G
Gearing Ratio: A financial ratio that compares an owner’s equity or capital to borrowed funds, used to evaluate a company’s financial leverage.
Going Concern Value: The value of a business assuming it will continue to operate indefinitely and not be liquidated.
Goodwill: An intangible asset that arises when a buyer acquires an existing business, representing the value of the brand name, customer base, good customer relations, good employee relations, and any patents or proprietary technology.
H
Historical Cost: The original monetary value of an economic item. Historical cost is based on the stable measuring unit assumption.
Holding Period Return: The total return received from holding an asset or portfolio of assets over a specified period of time, generally expressed as a percentage.
Hurdle Rate: The minimum rate of return on an investment required by an investor to compensate for risk, used as a benchmark for funding decisions.
I
Illiquidity Discount: A reduction in the valuation of an asset due to the lack of marketability or the difficulty of quickly converting it into cash at its fair market value.
Income Approach: A valuation method that estimates the value of a business based on the income the company is expected to generate in the future.
Intangible Assets: Non-physical assets such as patents, copyrights, trademarks, goodwill, and brand recognition, which are considered in business valuation.
J
Joint Venture Valuation: The process of determining the value of a business partnership where two or more parties undertake economic activity together.
Junior Debt: Debt that ranks below other debts with regard to claims on assets or earnings. Also known as subordinated debt.
Just Value: The fair and equitable value assigned to an asset, taking into consideration factors like market conditions and asset utility.
K
Key Person Discount: A reduction in a company’s valuation to reflect the risk associated with the potential loss of a key executive or employee whose contributions are critical to the company’s performance.
Key Value Drivers: Elements that significantly impact the value of a business, such as proprietary technology, customer relationships, or strategic location.
Kicker: An additional feature of a debt or equity instrument that provides rights, warrants, or other features to the holder, enhancing the desirability of the instrument.
L
Leverage Ratio: Any one of several financial measurements that look at how much capital comes in the form of debt, or that assesses the ability of a company to meet financial obligations.
Leveraged Buyout (LBO): The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.
Liquidation Value: The estimated amount that would be received if all assets were sold and liabilities paid off immediately, usually considered a lower-bound valuation.
M
Market Approach: A method of determining the valuation of a firm by comparing it with similar companies in the same industry whose market value is known.
Market Capitalization: The total dollar market value of a company’s outstanding shares of stock, calculated as share price times the number of shares outstanding.
Market Penetration: A measure of the amount of sales or adoption of a product or service compared to the total theoretical market for that product or service.
N
Net Operating Loss (NOL): A period in which a company’s allowable tax deductions are greater than its taxable income, resulting in a negative taxable income.
Net Present Value (NPV): The difference between the present value of cash inflows and the present value of cash outflows over a period of time.
Normalized Earnings: Adjustments made to a company’s financial statements to remove the effects of nonrecurring events or non-operational income and expenses to show true earning power.
O
Operating Leverage: The degree to which a firm or project can increase operating income by increasing revenue, a measure of how revenue growth translates into growth in operating income.
Operating Margin: A profitability measure that looks at how much profit a company makes after paying for variable costs of production such as wages and raw materials but before paying interest or tax.
Opportunity Cost of Capital: The potential return that is given up by investing in one project instead of another with a higher return.
P
Preferred Stock: A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock.
Pre-Money Valuation: The valuation of a company immediately before the latest round of investment, used by venture capitalists to determine how much equity to claim in exchange for funding.
Price to Earnings Ratio (P/E Ratio): A valuation ratio of a company’s current share price compared to its per-share earnings.
Q
Qualitative Analysis: The examination of non-quantifiable aspects of a company such as quality of management, brand reputation, and business model, used in business valuation.
Qualitative Value Assessment: Evaluation of non-quantifiable factors such as management quality, competitive advantage, and market conditions that affect a business’s value.
Quick Ratio: Also known as the acid-test ratio, it measures the ability of a business to meet its short-term obligations with its most liquid assets.
R
Replacement Cost: The current cost of replacing an asset with another of similar grade and condition.
Residual Value: The estimated value that an asset will realize upon its sale at the end of its useful life.
Return on Investment (ROI): A performance measure used to evaluate the efficiency or profitability of an investment relative to its cost.
S
Secured Debt: Debt backed or secured by collateral to reduce the risk associated with lending, such as a mortgage.
Solvency Test: An analysis conducted to determine whether a company can meet its long-term obligations, an important consideration in assessing its overall value.
Synergistic Value: Additional value created from combining two companies that is above and beyond what the two companies are worth separately.
T
Tangible Assets: Physical assets that include machinery, buildings, land, and inventory.
Tangible Net Worth: The total assets of a company minus its liabilities and intangible assets like goodwill.
Terminal Value: The value of a business or project beyond the forecast period when future cash flows can be estimated.
U
Unlevered Beta: A metric that compares the risk of an unlevered company to the risk of the market, used to evaluate the volatility of a company without debt.
Unsecured Debt: Debt that is not protected by collateral, posing higher risk to the lender.
Useful Life: The estimated duration for which an asset is expected to be economically usable by a company, with normal repairs and maintenance.
V
Valuation Analyst: A professional who specializes in evaluating businesses, securities, or assets to determine their worth.
Valuation Multiple: A financial metric used to value a business by multiplying a specific financial metric (like EBITDA) by a commonly used multiplier to estimate the market value of a company.
Valuation Premium: An additional amount willing to be paid by a buyer above the current market value of a company due to perceived synergies or future growth prospects.
W
Weighted Average Cost of Capital (WACC): The rate that a company is expected to pay on average to all its security holders to finance its assets, used as a discount rate for financing future cash flows.
Winding Up: The process of dissolving a company by selling off its assets to pay liabilities and giving any remaining assets to its shareholders.
Working Capital: A measure of both a company’s operational efficiency and its short-term financial health, calculated as current assets minus current liabilities.
X
X-Efficiency: The effectiveness with which a firm utilizes its resources under conditions of imperfect competition, important for understanding operational value.
XIRR (Extended Internal Rate of Return): A method used to calculate the internal rate of return (IRR) for a series of cash flows that occur at irregular intervals.
Y
Yield Capitalization: A valuation method used for income-producing properties, which converts income into value by dividing annual net income by the capitalization rate.
Yield on Cost (YOC): A financial ratio that measures the annual dividend rate of return relative to the original cost of the investment.
Yield to Maturity (YTM): The total return anticipated on a bond if the bond is held until it matures, used in valuing bonds as long-term investments.
Z
Zero-Based Budgeting (ZBB): A method of budgeting in which all expenses must be justified for each new period, applicable in assessing cost efficiency in valuation scenarios.
Zero-Based Valuation: An approach to valuation that assumes the business does not continue to operate, determining the value of a company’s assets if sold separately without continuing business operations.
Z-Score: A statistical measure that quantifies the distance (in standard deviations) a data point is from the mean of a data set; in finance, used to predict company bankruptcies.
