Basically synonymous with Normalized EBITDA, Adjusted EBITDA is a non-GAAP method of making earnings valuations a little more standardized between companies. Adjusted Earnings is a valuation that has many moving parts in the form of the interest, taxes, depreciation and amortization that might be included there, in addition to the non-GAAP nature of the methods. EBITDA removes all of those moving parts and looks at the Earnings before any of the other arithmetic interferes, hence the name Earnings Before Interest, Taxes, Depreciation, and Amortization. Continue reading...
Adjusted Gross Margin accounts for the cost of maintaining inventory, which regular Gross Margin does not. Gross margin can be calculated offhand as the selling price of a good minus the price paid for the good (cost of goods sold). This is the simplest calculation for profit. The Adjusted Gross Margin takes into account the cost of maintaining an inventory as well, which is a step in the direction of accounting for the expenses of the business operation as a whole. Continue reading...
An accounting convention is an established an agreed-upon method of documenting specific items on a company’s books. The most widely-used accounting conventions are part of the Generally Accepted Accounting Principals (GAAP), which is the only accounting methodology accepted for quarterly 10-Q filings with the SEC in the United States, and has also become the basis for regulatory accounting practices in other countries. Continue reading...
Freddie Mac is a government-sponsored company which purchases mortgages from banks and securitizes them for sales to investment banks or individuals. Freddie Mac is not a government organization, but was established by a congressional mandate in the 1970’s. It’s proper name is the Federal Home Loan Mortgage Corporation (FHLMC). The company’s purpose is to make mortgage debts into marketable securities by purchasing the mortgage risk and cash flow from banks and dividing into tranches which are sold to or through investment banking institutions. The securitized mortgages are known as Collateralized Mortgage Obligations, or CMO’s. Continue reading...
Earnings that are reported in a given year may differ for the same company if different accounting methods were used. Earnings are the revenues of the company minus the cost of good sold, expenses, and investment losses. If that seems like something that’s pretty cut-and-dried, and will look the same no matter who is doing the accounting… well, that’s not entirely correct. Earnings can be made to look different if different non-GAAP or pro-forma methods are used. If non-recurring expenses are ignored or amortized in a pro-forma accounting method, then earnings will not match up to the GAAP-based books. Continue reading...
Adjusted Earnings are also known as pro forma, non-GAAP earnings, and are usually met with some cynicism. Non-GAAP methods of accounting for earnings are something that is not allowed to be used to mislead investors, according to SEC rules. GAAP stands for Generally Accepted Accounting Principles, and they represent the standards and SEC rulebook for a publicly-traded company’s accounting. There are times when it makes sense to use adjusted earnings instead of GAAP earnings because adjusted earnings will ignore non-recurring one-time expenses so that analysts can compare company performance in other areas without being distracted by a large one-time expense. Continue reading...
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...
The non-current assets to net worth ratio will give the analyst an idea of how much of a company’s value is tied-up in non-current assets. As a quick refresher, ‘non-current assets’ are those that most likely will not convert to cash within a year’s time, also known as a long-term asset. Where a company’s non-current asset to net worth ratio lies depends on the industry, but generally speaking a company wants to avoid having that ratio rise above 1 to 1.5. That means the company is highly illiquid, and could be vulnerable in the event of an economic shock. Continue reading...
Earnings Before Interest, Taxes, and Depreciation (EBITD) is one method of viewing the earnings of a company with some of the typical expenses added back into it. It is not to be confused with its close cousin EBITDA, which also adds amortization back in. Amortization is essentially the same thing as depreciation, but amortization applies to intangibles such as debt principal amounts and intellectual property. Continue reading...
There are two main kinds of accounting methods: accrual accounting and cash accounting. Depending on who is speaking, accounting “methods” may also extend to the GAAP vs pro-forma distinction. For the most part, accounting methods can be defined based on the year in which the revenues and expenses are put on the books. In cash accounting, only the revenues and expenses which are collected and paid in the current year or period are documented. Continue reading...
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization, and is used as a ballpark figure for where the company’s earnings are without these expenses. It gives a picture of the total operating revenue of a company with the expenses that are related to financing decision and the tax environment left out. Accountants can calculate EBITDA by taking net income (earnings, or operational earnings) and adding interest payments, tax obligation, depreciation of hard assets, and amortization of intangibles back into it. Continue reading...
EBIDA is one of the family of earnings metrics which give the analyst, investor, or accountant an opportunity to view earnings, which is synonymous with net income, with a few factors added back into it. In this case, interest payments on debt, depreciation of hard assets on the standard IRS schedules, and amortization of principal debts are all added back into the earnings of the company for the current period. Not to be confused with EBITDA, its more popular counterpart. Continue reading...
An accounting period is a specific time frame from which documents and records have been used by accountants to arrive at reported balances and statements. An accounting period can be a fiscal year, quarter, or month, or any other time frame for which reporting is being done. At any given time, there may be different accounting periods running. Books are kept and reports are made for different tiers of accounting periods. Continue reading...
Accrual accounting is the counterpart to cash accounting, and the accrual method puts expenses and revenues on the books as soon as they are contractually agreed-upon. Accrual accounting is required by GAAP conventions for all publicly traded companies who have over $5 million in annual revenues. This method is the counterpart to cash accounting, which may be more useful to smaller businesses. In accrual accounting, the expenses and revenues which are agreed upon are written onto the business’s ledger at the current time, regardless of when payment will actually settle on the transaction. When a sale is made or service is performed, the revenue from the activity is documented, even if no cash is received in the current period. Continue reading...
Accounting standards are the practices which make financial information uniform and normalized between various businesses and accounting firms. Accounting standards constitute what is known as GAAP: Generally Accepted Accounting Principles. These may apply to how revenue is recognized, how assets are classified, acceptable methods of depreciating assets, and so on. Some of these are based on IRS opinions and the jurisprudence of the law, some are just industry best-practices that are widely used. Continue reading...
Accounting Methods are the overarching style of accounting and bookkeeping which determine the practices, procedures, systems, and controls which should be put in place. There are two main methods of accounting that businesses and individuals can use to approach their accounting, and these are known as cash basis and accrual basis. The IRS expects businesses to choose early one which method they will use, and it can be difficult to change accounting styles later on. Continue reading...
Earnings are the net revenue of a company after expenses and, sometimes, taxes. Also known as profit. Corporate earnings are an important metric for individual companies and the economy as a whole, because it shows how much money has been made. Revenue is the inflow of money to a company, and earnings are the net revenue, or profit, after expenses have been taken out. Of course there is also EBITDA, which is Earnings Before Interest Taxes Depreciation and Amortization, but this is a non-GAAP method. Earnings are usually calculated on a quarterly basis. Continue reading...
The Cost of Goods Sold, or COGS, represents the overhead associated with the materials and labor, which were needed to produce the goods sold during a given period. The COGS calculation is only concerned with the production costs of a good, and does not take distribution and sales force costs into account. It will always include the direct materials cost and direct labor cost for each item, but indirect overhead associated with production, such facility costs, are distributed between Inventory and COGS, according to Generally Accepted Accounting Practices (GAAP). Continue reading...
Income inequality is the difference in the average income of the lower/middle class and the upper class. Naturally the high income of very rich people in the country, which constitute a very small percentage of the population, will dwarf the average income of those who are not very rich. The worrisome thing is when the gap between them widens at an accelerating rate and the lower classes are not able to break through to the upper classes. Continue reading...
An earnings call is when a company opens up a teleconference line or webcast that the public can join to hear the company management talk about how the company performed recently, their plans for the future, and the market forces that exist in the current environment. Most publicly traded companies today have adopted this practice. Earnings calls may take place once a year or during earnings seasons after the quarterly earnings have been announced in a press release. Companies often have one executive whose job is to interface with the shareholders in such settings, but various executives are often given a chance to present some thoughts. Continue reading...