What are Leverage Ratios? A leverage ratio is any kind of financial ratio that indicates the level of debt incurred by a business entity against several other accounts in its balance sheet, income statement, or cash flow statement. The leverage ratios provide an indication of how the company’s assets and business operations are financed (using…
What is Cost of Debt? The cost of debt is the return that a company provides to its debtholders and creditors. These capital providers need to be compensated for any risk exposure that comes with lending to a company. Since observable interest rates play a big role in quantifying the cost of debt, it is relatively…
What is the Effective Annual Rate? The Effective Annual Rate (EAR) is the rate of interest actually earned on an investment or paid on a loan as a result of compounding the interest over a given period of time. It is usually higher than the nominal rate and is used to compare different financial products…
What is Equity Multiplier? Equity multiplier is a leverage ratio that measures the portion of the company’s assets that are financed by equity. It is calculated by dividing the company’s total assets by the total shareholder equity. The equity multiplier is also used to indicate the level of debt financing that a firm has used…
What is a Contract for Difference (CFD)? A Contract for Difference (CFD) refers to a contract that enables two parties to enter into an agreement to trade on financial instruments based on the price difference between the entry prices and closing prices. If the closing trade price is higher than the opening price, then the…
What is Macrofinance? Macrofinance targets widespread benefits to a section of the economy or the whole economy. It is tailored to fulfill all the financial obligations of the economy and find solutions to meet the obligations. To achieve said obligations, governments must draft policies, develop plans for subsidies, and engage in multi-year expansion strategies. In…
What is the Market Value of Debt? The Market Value of Debt refers to the market price investors would be willing to buy a company’s debt for, which differs from the book value on the balance sheet. A company’s debt doesn’t always come in the form of publicly traded bonds, which have a specified market…
Financial Analysis Ratios Glossary Below is a glossary of terms and definitions for the most common financial analysis ratios terms. When calculating financial ratios using vertical and horizontal analysis, and ultimately the pyramid of ratios, it’s important to have a solid understanding of basic terms. The below information is taken from CFI’s Financial Analysis Fundamentals…
What is a Rights Issue? A rights issue is an offering of rights to the existing shareholders of a company that gives them an opportunity to buy additional shares directly from the company at a discounted price rather than buying them in the secondary market. The number of additional shares that can be bought depends…
