Leadership Development Program

Commonly Used Financial Terms

Balance Sheet Debt as Percent of Capital

The Balance Sheet is a financial While you need to compare current Debt to an earlier
statement that summarizes a company's assets, time period to be a meaningful metric, Debt as a
liabilities and shareholders' equity at a specific point Percent of Capital provides a current indicator of a
in time. These three sections of the Balance Sheet company’s financial strength.
show investors what the company owns (assets – For example, if a company borrowed $1 million for a
cash, buildings, inventory and equipment), what it new piece of equipment, and therefore has $1 million
owes (debt, accounts payable and other liabilities), in debt, that really doesn’t tell you much because you
and how much has been invested by the don’t know the size of the company. By comparing
shareholders. The sheet must “balance”: Assets = the debt to the company’s capital, we understand the
Liabilities + Shareholders' Equity company’s debt situation much better. The Debt as a
The items on the balance sheet are usually Percent of Capital ratio of a small company ($5
compared to the same items at an earlier point in million in capital) borrowing $1 million would be
time to indicate changes or trends. $1 million/$5 million, or 20%. For a large company
Capital ($500 million in capital), it would be $1 million/$500
The factories, machinery and equipment owned by a million, or .002%.
business. Dilution
Capital Asset The reduction in earnings per share caused by the
An asset that's not bought and sold in the normal actual or assumed exercising of stock options.
course of business and which has a useful life Dividend
greater than one year. The payment of cash or stock to shareholders. The
Capital Equipment amount of dividends on common stock vary with the
The goods of the company not consumed in the company's success and growth potential.
normal course of business that will provide operating Earnings Before Interest and Taxes (EBIT)
benefits over a period of many years, such as The company’s Earnings before we pay any interest
machinery, trucks or furniture. or taxes.
Cash Position EBIT/BIC
This describes whether the company has cash This metric starts with EBIT and divides it by how
available to pay short-term debt and fund operations. much capital was needed to generate those earnings.
When a company is in a “good” cash position, it has a So if company A and company B have the same
sufficient amount of cash on hand and is “liquid.” EBIT, but company A generated those earnings with
When a company is in a poor cash position, it doesn’t much less capital (has a lower EBIT/BIC), then
have cash on hand and may need to take on company A is outperforming company B.
additional debt or sell assets to meet short-term EBIT/BIC is one of the most important financial
needs. metrics Timken uses to measure performance
Current Assets because this ratio is one of the main components in
Items on the balance sheet that could be converted the Annual Performance Award calculations.
into cash within a year or less. This includes cash, Earnings
accounts receivable and inventory. Total revenue minus operating expenses, interest,
Current Ratio depreciation and taxes.
A measure of a company's liquidity. The Current Earnings are the main determinant of a company's
Ratio is the current assets divided by current. share price, because earnings and the circumstances
Debt relating to them can indicate whether the business
Debt is the money that a company borrows from will be profitable and successful in the long run.
financial institutions to help pay for day-to-day Earnings per Share
operations. Most businesses have some debt. As a Earnings minus the dividends paid out to
financial measure, you need to compare debt in the shareholders, and then divided by the number of
current period to an earlier period (usually the shares of Timken stock available. This is a good
previous year) to see if the debt is increasing or indication of how profitable a company is. (Same as
decreasing. Significantly increasing debt could be a Income per Share)
sign that a company is having trouble paying bills
from current operations and needs to borrow money.
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 Leadership Development Program
Commonly Used Financial Terms

Earning Report Margin

A quarterly notification of the financial performance The difference between the price of an item and
of publicly held companies, required by the US the cost to produce it. Sometimes referred to as
Securities & Exchange Commission the markup.
Fixed Assets Net Income
Assets such as land, buildings, machinery and Income minus the taxes and interest the company
other tangibles that our used in the conduct of paid on the income.
business rather than for resale or consumption. Price-Earnings Ratio (P/E)
Fixed assets cannot be converted easily to cash. The market price of common stock divided by its
Gross Profit earnings per share. it's usually computed over the
(See Gross Margin) last four quarters. It indicates the market's
Gross Margin perception of a stock's strength or weakness. In
Net sales minus the cost of goods sold, leaving the general, a high P/E suggests that investors are
profit before deductions for the indirect costs of expecting higher earnings growth in the future
doing business. Also called gross profit. compared to companies with a lower P/E.
Income Revenue
(See Earnings) The money a company receives during a specific
Income from Continuing Operations period for the goods and services sold to our
This figure starts with our total Income (earnings), customers, minus any discounts and deductions
but subtracts our income from businesses or for returned merchandise.
facilities that are no longer part of the company Short-Term Debt
because they were sold or closed. Debt that must be repaid or liquidated within one
Income per Share year.
(See Earnings per Share) Sales
Income per Diluted Share The money a company receives during a specific
This metric refines the Earnings per Share ratio by period for the goods and services sold to our
also considering additional shares of stock in the customers.
calculation, such as stock available through stock Shareholders' Equity
options. This makes the total potential number of A firm's total assets minus its total liabilities.
shares larger. Because there are more shares Shareholders' equity comes from two main
compared to the earnings, it “dilutes” or reduces sources. The first and original source is the money
the income per share. that was originally invested in the company, along
Liquidity with any additional investments made thereafter.
This is the ease with which an asset can be The second comes from retained earnings which
bought, sold or exchanged. The most liquid asset the company is able to accumulate over time
is cash; it can be readily used to buy something. through its operations. In most cases, the retained
Less liquid assets would be buildings or earnings portion is the largest component.
equipment. In order to sell or exchange them, you Working Capital
would need to find an interested buyer and agree Calculated by adding our annual accounts
upon a price. receivable and inventory (current assets), then
When someone says that a company is “liquid,” it subtracting our accounts payable (current
typically means that it has cash or other assets liabilities). Positive working capital means that the
available that can be quickly converted to cash company is able to pay off its short-term liabilities.
and used to buy new equipment or facilities, or pay If a company's current assets do not exceed its
off debt. A company with poor liquidity could be in current liabilities, then it may run into trouble
jeopardy if it suddenly needed cash for some paying back creditors in the short term. The worst-
reason. The company might have to sell assets or case scenario is bankruptcy.
go into debt. Working Capital as a Percentage of Sales
Calculated by dividing working capital by our
annual sales. A lower ratio is better because it
means we had to invest fewer dollars for capital for
each dollar of sales.
14February2011