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What is an Investment Center?

An investment center is an almost autonomous division of a company whose purpose is to generate returns on invested money. Cost center and profit center are terms used for various kinds of business divisions when observed from a solely financial, instead of operational, standpoint. These categories help a business to identify and group its similar assets for evaluation. A cost center can be turned into a profit center if it manages to reduce costs enough to generate a profit. Continue reading...

What is Operating Cash Flow (OCF)?

Operating cash flow is the amount of cash a company is able to generate from its operations - i.e., how much real cash flow is being generated after accounting for expenses. It is calculated by adjusting net income for items like depreciation and changes in inventory. A company’s OCF is an important metric in determining whether it can generate cash flow without requiring external financing. The timeliness and frequency of cash flows is important as well, in that a company ideally produces consistent and favorable OCF. Continue reading...

What is Net Operating Income?

Net Operating Income (NOI) is a measure of profitability most often used with income producing real estate businesses. In the real estate world, net operating income is calculated by taking all revenues generated by a property (rent, parking, etc…) from all of the operating expenses needed to upkeep the property, which can include insurances, taxes, maintenance, utilities, and so on. Net Operating Income is a before tax figure, so does not include principal and interest payments on loans, depreciation and amortization. If the NOI figure is negative, it is referred to as a net operating loss (NOL). Continue reading...

What is Net Income?

Net income is the amount of earnings left over once expenses have been deducted from sales. In short, it is the net amount of profit or loss. It is calculated by taking total earnings in a period (such as a quarter), and deducting all elements of the cost of doing business (labor, depreciation, fixed expenses, overhead, etc…) Net income is ultimately a measure of a company’s profitability, and its calculation should be scrutinized closely to ensure all expenses are being accounted for accurately. Continue reading...

What is Minority Interest?

Minority interest is a portion of a company’s stock that is not owned by the parent company, and refers to a type of ownership that generally cannot exert influence over a company’s business decisions. If an outside investor or another company has a less than 50% stake in a company via shares, then they are said to have a minority interest. From an accounting standpoint, only the dividends of a minority interest are counted on a company’s books. If they exert influence over the decision-making, then a percentage of the income may also need to be included. Continue reading...

What is Operating Income?

Operating income is essentially another term for EBIT, or earnings before interest and taxes. It is a company’s profits (revenue - COGS) minus operating expenses and depreciation. Operating income is different from net income in that it does not account for expenses such as taxes, interest from debt payments, or outside business activities. It offers a pure look at how a company effectively generates cash from internal operations. Continue reading...

What is a Quick Ratio?

The quick ratio (also known as an “acid test”) is a financial ratio used to measure how well equipped a company is to meet its short-term liquidity needs. It basically measures how much cash (or assets easily and quickly converted to cash) a company has available to meet its short-term liquidity obligations. Since inventories are assets but are not necessarily liquid, they are excluded from the calculation. Continue reading...

What are Profitability Ratios?

Profitability ratios are useful analytical tools to evaluate a company’s ability to generate profits relative to all costs and expenses. A company that has high profitability ratios relative to competitors/peers, or a company that has demonstrated to improve their profitability ratios over time, is generally viewed as a healthy and attractive company from an ownership perspective. Some examples of profitability ratios are profit margin, return on assets, and return on equity. Continue reading...

What is the Operating Cash Flow Ratio?

The operating cash flow ratio, or OCF ratio, is used to measure whether a company’s cash flows are sufficient to cover current liabilities. It essentially measures how many times a company can use cash flow from operations to cover debt expenses. It can be measured by dividing a company’s cash flow from operations by its current liabilities. Companies with high (relative to their peers or other companies in the sector OCF ratios are generally in good financial health, meaning they can adequately cover ongoing liabilities with cash flow from operations. Continue reading...

What are Net Tangible Assets?

Net Tangible Assets represent a company’s total amount of physical assets less its intangible assets, like intellectual property and equipment, and also less the fair market value of its liabilities. Tangible assets can include things such as cash, inventory, and accounts receivable, versus liabilities like accounts payable, long-term debt and loans. This measurement of a company's tangible assets is important because it allows a firm's management team to analyze its asset position without including obsolete or difficult to value intangible assets. A company's return on assets (ROA) can be more accurate when net tangible assets are used in the calculation. Continue reading...

What does 'Outstanding Shares' mean?

Outstanding shares refers to all of the shares of company held in total, which includes all ownership - retail investors, institutional, the company’s officers, insiders, and so on. Outstanding shares are listed on the balance sheet under “Capital Stock,” and are used in calculating market capitalization, earnings per share, and other critical per share calculations. The amount of outstanding shares can fluctuate over time on the basis of corporate actions, such as share buybacks (reduces overall count) or new share issuance (increases overall count). Continue reading...

What is Paid-Up Capital?

Paid-up capital is the money (‘capital’) collected by a company from issuing shares of their stock. In other words, its money raised from issuing and selling stock. Paid-in capital is not money borrowed, but rather money invested in the company by shareholders. A company will generally issue shares of stock with a par value and an offer price, and paid-up capital represents the difference between total dollars invested and par value of the shares. Continue reading...

What is an Operating Profit?

Operating profit is a company’s profit from its business operations, and can be calculated by taking gross profits minus operating expenses. Operating profit is synonymous to operating income, and represents a company’s profitability from its core operations, which excludes earnings from other investments or interests and also does not factor the impact of taxes or interest. Continue reading...

What is the Structure of a Corporation?

Each state has different stipulations concerning what defines a corporation, but there are some commonalities across the country. Businesses must file Articles of Incorporation with the Secretary of State in the state of their home office, which detail the proposed structure of the business, before their status as a corporation can be approved. Each corporation is going to be different, of course, and each state has slightly different laws delineating the structure and bylaws that corporations must adopt. Continue reading...

What is Income from Operations?

Income from operations will be the net income which is solely focused on revenue from operations minus the cost of operations. It excludes gains or losses from minority interest investments, or sale of assets. Income from Operations is also called Net Operating Income (NOI). In accounting terms it is arrived at by subtracting operating expense from gross profit, where gross profit is net sales minus cost of goods sold. Continue reading...

What is Operating Margin?

Operating margin is a ratio (expressed as a percentage) that indicates how much a company makes for each dollar of sales. It can be calculated by dividing a company’s operating income by net sales, and generally a company that has a high and consistently improving operating margin is thought to be healthy. Operating margin can be looked at in terms of the overall company, or in a more focused vacuum - such as analyzing the operating margin of a new clothing line or an experimental sales project. Continue reading...

What is a Non-Current Asset?

A non-current asset is an asset on the balance sheet that is not expected to convert into unrestricted cash within a year’s time. Non-current assets may include such things as intellectual property and production/operations equipment - meaning they likely do not have a need to convert to cash. From a balance sheet standpoint, non-current assets are capitalized rather than expensed - meaning the company can allocate the asset’s cost of the asset over the number of years for which the asset will be used, instead of allocating it all in the year it was purchased. Continue reading...

What is Net Operating Profit After Tax?

Net Operating Profit After Tax (NOPAT) is a way to measure profits that excludes the impact of debt financing (via tax benefits and costs). The easiest way to think about Net Operating Profit After Tax is as a company’s profit if it were unleveraged, i.e., if it had no debt. There are costs associated with debt but also tax benefits, so there’s some give and take. The reason an analyst might use NOPAT is to gain a more accurate look at the operating efficiency of a leveraged companies, since it excludes the tax savings many companies get because of existing debt. Continue reading...

What is a Corporate Bond?

A corporate bond is a debt security issued by a public or private company to raise capital. They are generally issued in multiples of $1,000 or $5,000, and the issuing company must agree to pay a certain interest rate typically determined by their creditworthiness and earning history/potential. Often times the corporation issuing the debt must use their physical assets as collateral, and it is often found that corporations are more likely to issue debt during an environment when interest rates are low, so they can borrow at attractive rates. Corporate debt that matures in less than one year is called ‘commercial paper.’ Continue reading...

What is Operating Leverage?

Operating leverage is a measure of how critical each sale of a company is to overall cash flow. If a company has high operating leverage, it means that it relies on fewer sales with very high gross margins, versus a company with low operating leverage that experiences higher levels of sales with lower gross margins. As an example, a convenient store has less operating leverage than a business that sells yachts. Continue reading...