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What are My Self-Employed 401(k) Investment Options?
As with other retirement plans, this will mostly depend on the options available to you through your custodian. Solo 401(k)s will have an array of asset exposure available to you, but it may come only in the form of mutual funds. This is not unlike many larger 401(k)s. The way these plans are bundled as simple and straightforward products, without so many bells and whistles that they will attract the attention of the IRS, may cause them to be slightly more plain vanilla than the options available in some 401(k)s. Continue reading...
What is an Operating Expense?
Operating expenses are the costs a company incurs as a part of everyday business operations. The goal of most every management team is to figure out how a company can minimize operating expenses while maximizing production and profitability. Operating expenses can involve buying inventory, the cost of running machines, rent, payroll, and so on. What it costs a company to undergo normal business operations and output. It is sometimes referred to as OPEX. 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 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...
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 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 does 'short covering' mean?
When a security is sold “short,” it means that the investor did not own the security, to begin with, and the broker can require that the investor return the shares in what’s known as ‘short covering.’ Covering a short position means to acquire the securities which were sold short, and returning them to the custodian/broker that facilitated the short sale. Imagine a shopkeeper who allows a customer to lock-in a certain price for a widget, even though the shopkeeper does not have the widget in inventory. 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 Accounts Receivable Financing?
Financing companies can step in and take over the accounts receivables of a company who no longer wants to wait to be paid on their receivables. Financing companies, who are sometimes called Factoring Companies or Factors, will pay about 75% of the amount due to companies who want to offload or outsource their Receivables. The factoring company will then take over the task of collections, and will transfer most of the money received back to the original company, after their fees have been deducted from the proceeds. 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 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 are currency futures?
Currency futures are derivative contracts that trade on regulated exchanges around the world. Like forward contracts, they name a specific amount of one currency which is to be exchanged for a specific amount of another currency at a future date. Futures name a specific amount of one currency which will be exchanged for a specific amount of another currency at a future date. Like other derivative contracts that trade on exchanges (e.g., options), futures are transferable and are traded as the market calls for up until their expiration. Investors can short them (sell to open) and hold them long (buy to open), and can close their positions as they see fit without riding out the contract to the expiration date. 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 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 is Cash-Flow Financing?
Cash flow financing is an alternative method of securing a loan, in which cash flows are the collateral, not assets. In cash flow financing, also known as cash flow loans, a lending institution will base their decisions regarding the size of the loan and the loan repayment schedule on future expected cash flows of the company. The cash flows serve as collateral instead of assets, as in an asset-backed loan. Continue reading...
What is a Security?
A security is a marketable ownership contract which entitles the owner to the right to use the contract as a type of currency backed by a specific asset, which could be partial ownership in a company, a debt (bond), or a derivative interest. Securities are broadly categorized into debt securities (e.g., bonds), equity securities (e.g., stock), and derivatives (e.g., futures, options, etc.). They will generally be issued by a company or government entity and will entitle the owner of the contract the right to trade the ownership interest for value in the open market. Continue reading...
What is a Buying Hedge?
Hedging against future price risk was the main reason Futures contracts came into being. If an investor or a business knows that they need to acquire an asset or security at a future date, they might go ahead and agree to a price and have it in writing on a Futures contract. A futures contract means that an item has been sold at a stated price, and only awaits settlement at a future date. This will protect them from the risk that the price will move unfavorably in the future, and it will allow them to balance books and plan a budget with more certainty. Futures contracts are standardized and traded on exchanges. Continue reading...
What are forward contracts?
Forward contracts are agreements to exchange specific assets on a specific date, at a price determined at the outset. Forward contracts are similar to futures contracts, but they are over-the-counter private contracts drafted for specific purposes, quantities, and dates that satisfy the specific needs of the counter-parties. These contracts are mostly entered into by institutional investors seeking a hedge against risks such as interest rates and exchange rates. Continue reading...
What is a foreign currency swap?
These are generally referred to as currency swaps or cross-currency swaps , since “foreign” is a little redundant (currencies are from different countries anyway). Central banks and large institutions sometimes swap principal amounts and loan interest in their domestic currency in exchange for a foreign currency, to provide liquidity and a hedge. Currency swaps are where banking institutions, particularly central banks, exchange a loan in one currency for a loan in another currency. Continue reading...
What is a short position?
A short position is a sale made by an investor for a security which he or she will deliver to the buyer in the near future, but which he or she is hoping will go down in price in the near future so that a profit can be retained from the price collected in the short sale. A short position is a bearish play on a security which an investor believes will decrease in price in the near future. The investor offers shares for sale, and collects the current market price for the shares from the buyer. Continue reading...