31 terms

Earnings quality

Accruals: The difference between reported profit and cash flow, created by recognising revenue and expenses in periods other than when cash moves.
Accruals ratio: Net income minus cash flow, divided by average total assets; a screen for companies whose reported profit is unusually dependent on estimates.
Adjusted EBITDA: EBITDA after management's chosen add-backs: stock-based pay, restructuring, acquisition costs and anything else described as non-recurring.
Allowance for doubtful accounts: A contra-asset reducing receivables to the amount the company actually expects to collect, based on its estimate of customer defaults.
Auditor opinion: The independent auditor's formal statement on whether the financial statements are fairly presented, printed at the front of the annual report.
Capitalised software: Development costs recorded as an asset and amortised over several years instead of being expensed immediately, which raises reported profit today.
Cash conversion: How much of reported profit turns into cash, usually operating cash flow divided by EBITDA or free cash flow divided by net income.
Channel stuffing: Pushing more product to distributors than they can sell, to book revenue now at the cost of future quarters and of returns later.
Contingent liability: A possible obligation that depends on a future event, such as a lawsuit or a guarantee; accrued only when it is probable and can be estimated.
Days inventory outstanding: Inventory divided by cost of goods sold times 365; how long stock sits before it is sold.
Days payable outstanding: Payables divided by cost of goods sold times 365; how long the company takes to pay its suppliers.
Days sales outstanding: Receivables divided by revenue times 365; the average number of days between making a sale and collecting the cash.
Deferred tax asset: A future tax saving already earned, typically from past losses or from expenses deducted for accounting sooner than for tax, carried as an asset.
Earnings quality: How well reported profit reflects sustainable, cash-backed economic performance rather than accounting choices, one-off items and optimistic estimates.
Footnotes: The detailed disclosures behind the headline statements, where accounting policies, estimates, segments, debt terms and commitments are actually explained.
Going concern: The assumption that a company will keep operating for at least the next year; a stated doubt about it is one of the most serious disclosures in accounting.
Inventory: Goods the company holds to sell: raw materials, part-finished production and finished units sitting in warehouses or on shelves.
Inventory costing: The convention that decides which units cost figure moves to COGS when a sale happens: first-in first-out, last-in first-out or weighted average.
Loan loss provision: The charge a bank takes against profit for loans it expects will not be repaid, building a reserve on the balance sheet against the loan book.
Non-cash charges: Expenses that reduce reported profit without any money leaving the business, added back at the top of the cash flow statement.
Non-GAAP measures: Company-defined profit figures that exclude items management considers unrepresentative, always presented alongside a required reconciliation to audited results.
Off-balance-sheet: Obligations or assets that do not appear on the balance sheet but still create real economic exposure, disclosed only in footnotes if at all.
One-time charge: A cost management labels as non-recurring, such as severance, plant closures or legal settlements, and usually excludes from adjusted earnings.
Other income and expense: The catch-all line below operating income for gains, losses and items that do not belong to the core business, such as currency moves and asset sales.
Pro forma: Figures restated as if something had already happened or had never happened, such as a full year of an acquisition or the removal of a disposed division.
Related party transaction: Business done with directors, large shareholders, executives or entities they control, disclosed separately because the terms may not be at arm's length.
Restatement: A formal correction of previously issued financial statements, filed when earlier figures were materially wrong and can no longer be relied upon.
Revenue recognition: The accounting rules that decide when a sale counts as revenue, based on transferring control to the customer rather than on receiving cash.
Risk factors: The section of a filing listing what could go wrong, from generic boilerplate to specific, newly added disclosures that carry real information.
Share count trend: The direction of diluted shares outstanding over several years, which decides whether buybacks are genuinely returning capital or merely offsetting issuance.
Stock-based compensation as a percent of revenue: Share-based pay divided by revenue; a measure of how much of the workforce bill is being settled in equity rather than cash, and of the dilution that follows.

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