96 terms from M&A, valuation, funding and real estate, explained in plain English with formulas and examples.
A deal is accretive if it increases the buyer's earnings per share and dilutive if it reduces them. It is a quick test of whether an acquisition adds value for the buyer's shareholders.
Related: Synergies, Earnings per share (EPS)
The return an investment earns above what its risk would predict. Positive alpha means it did better than expected for the market risk it carried. Negative alpha means it did worse.
Alpha = Actual return − [Risk-free rate + Beta × (Market return − Risk-free rate)]
Related: Beta, Capital asset pricing model (CAPM), Sharpe ratio
A snapshot of what a company owns (assets), what it owes (liabilities) and what is left for the owners (equity) on a given date. Assets always equal liabilities plus equity.
Assets = Liabilities + Equity
Related: Income statement (profit and loss), Cash flow statement
A measure of how much a share, or a business, tends to move compared with the overall market. A beta of 1 means it moves with the market. Above 1 means bigger swings, below 1 means smaller swings. For businesses that are not listed, analysts use the average beta of similar listed companies.
Read more: Damodaran: betas by sector (global), Damodaran: betas by sector (US)
Related: Levered and unlevered beta, Capital asset pricing model (CAPM), Cost of equity
The value of a company's assets minus its liabilities according to its accounts. It can differ a lot from market value.
Related: Balance sheet
A model where a private company builds and runs a project for a set period, then hands it to the public owner. A common variant is BOOT (build-own-operate-transfer).
Related: Public-private partnership (PPP), Concession
Buy-side advisers work for the buyer or investor. Sell-side advisers work for the seller or for the company raising money. Their goals differ, so they advise differently.
Related: Mandate
A common way to estimate the cost of equity. It starts with the risk-free rate and adds a premium for market risk, scaled by the business's beta.
Cost of equity = Risk-free rate + Beta × Equity risk premium
Open the cost of equity and WACC calculator
Related: Beta, Equity risk premium (ERP), Risk-free rate
Money spent on buying or improving long-lasting assets such as equipment, buildings or software.
Related: Depreciation and amortisation, Free cash flow (FCF)
The mix of debt and equity a company uses to fund itself.
Related: Leverage ratio (net debt to EBITDA), Weighted average cost of capital (WACC), Debt capacity
Net operating income divided by the property's value or price. It is a quick measure of the income return before financing.
Cap rate = NOI / Property value
Example: NOI of 800,000 on a price of 10,000,000 gives a cap rate of 8%.
Related: Net operating income (NOI), Rental yield
A report showing how cash moved in and out of a business over a period, split into operating, investing and financing activities.
Related: Balance sheet, Free cash flow (FCF)
Valuing a business by looking at the multiples of similar listed companies and applying them to the business being valued.
Related: Valuation multiple, Precedent transactions
The right, usually granted by a government, to build or operate a project for a set period under agreed terms.
Related: Public-private partnership (PPP), Build-operate-transfer (BOT), Special purpose vehicle (SPV)
The extra price a buyer pays to gain control of a company, compared with the price of a small minority share.
Related: Precedent transactions, Discount for lack of marketability (DLOM)
The return shareholders expect for taking the risk of owning the business. It is higher than the cost of debt because owners are paid after lenders. It is often estimated with CAPM.
Related: Capital asset pricing model (CAPM), Beta, Equity risk premium (ERP), Weighted average cost of capital (WACC)
An extra return added when a business operates in a country with higher political, economic or currency risk. It is used when valuing businesses in emerging markets.
Read more: Damodaran: country default spreads and risk premiums
Related: Equity risk premium (ERP), Discount rate
A promise in a loan agreement, such as keeping a ratio above or below a set level. Breaking it can allow the lender to demand changes or repayment.
Related: Debt service coverage ratio (DSCR), Leverage ratio (net debt to EBITDA)
A secure place, usually online, where documents are shared with buyers or investors during a deal so that they can check the business.
The most debt a business can carry while still meeting its payments comfortably. It depends on cash flow, the interest rate, the repayment period and the lender's rules.
Open the debt capacity (DSCR) calculator
Related: Debt service coverage ratio (DSCR), Leverage ratio (net debt to EBITDA), Capital structure
Setting loan repayments for each period to match the cash the project produces, so that the DSCR stays steady instead of rising and falling.
Related: Debt service coverage ratio (DSCR), Project finance
Cash available to pay lenders, divided by the loan payments due (principal plus interest) in the same period. A ratio of 1.0x means there is just enough cash to pay the lender. Lenders usually want a cushion above that, often somewhere between 1.2x and 1.5x depending on the sector and the risk.
DSCR = Cash flow available for debt service / (Principal + Interest)
Example: A property earns 1,600,000 a year after costs and its loan payments are 1,280,000 a year. DSCR = 1,600,000 / 1,280,000 = 1.25x.
Open the debt capacity (DSCR) calculator
Related: Debt capacity, Loan life coverage ratio (LLCR), Interest cover
A cash reserve kept to pay lenders if the project's cash flow falls short for a period. It is often sized at several months of debt payments.
Related: Debt service coverage ratio (DSCR), Project finance
Obligations that are not bank loans but are treated like debt when the price is set, such as unpaid tax, overdue supplier payments or employee end-of-service provisions, depending on the deal.
Related: Net debt, Locked box and completion accounts
Total debt divided by equity. It shows how much of a company's funding comes from lenders compared with owners.
Debt-to-equity = Total debt / Equity
Related: Capital structure, Leverage ratio (net debt to EBITDA)
The spreading of the cost of a long-lasting asset over its useful life. Depreciation applies to physical assets and amortisation to intangible ones. They reduce profit but do not use cash in the year.
Related: Capital expenditure (capex), EBITDA
The reduction in an existing owner's percentage when new shares are issued to new investors.
Related: Pre-money and post-money valuation
A reduction in value because shares in a private company are harder to sell than shares in a listed company.
Related: Control premium
The yearly rate used to convert future cash into today's money. A higher rate means future cash is worth less today. It reflects the time value of money and the risk of the cash flows.
Related: Weighted average cost of capital (WACC), Cost of equity, Discounted cash flow (DCF)
A valuation method that estimates a business's future free cash flows and converts them into today's money using a discount rate. The total is the value of the business today.
Related: Discount rate, Weighted average cost of capital (WACC), Terminal value, Free cash flow (FCF)
Dividend yield is the yearly dividend divided by the share price. The payout ratio is the share of profit paid out as dividends.
Dividend yield = Annual dividend per share / Share price
Related: Earnings per share (EPS)
The investigation a buyer or investor carries out before completing a deal, to check that what they were told is true. It can cover financial, legal, tax, commercial and technical matters.
Related: Financial due diligence (FDD), Data room
Part of the price that is paid later and depends on how the business performs after the sale.
Related: Locked box and completion accounts, Escrow
Net income divided by the number of shares. It shows how much profit belongs to each share.
EPS = Net income / Number of shares
Open the intrinsic value calculator
Related: Price-to-earnings ratio (P/E), Net income
Earnings before interest and tax, often called operating profit. It shows what the business earns from its operations after depreciation but before financing costs and tax.
Related: EBITDA, Interest cover
Earnings before interest, tax, depreciation and amortisation. It is a quick way to compare how much operating profit businesses make before financing choices, tax and accounting charges. It is not the same as cash flow.
EBITDA = Operating profit (EBIT) + Depreciation + Amortisation
Related: EBIT, Normalised EBITDA (adjusted EBITDA), EV/EBITDA
The value of the whole business, including the part funded by lenders and the part funded by owners. It is what a buyer would pay for the operations, before deciding how to fund the purchase.
Enterprise value = Equity value + Net debt
Example: A company has equity value of 700 and net debt of 300. Its enterprise value is 1,000.
Related: Equity value, Net debt, EV/EBITDA
The extra return investors expect from shares compared with a risk-free investment. It pays for the extra risk of owning shares.
Read more: Damodaran: implied equity risk premium (US), Damodaran: country risk premiums
Related: Capital asset pricing model (CAPM), Country risk premium, Risk-free rate
The value that belongs to the owners after debts are taken out. For a listed company it is the share price multiplied by the number of shares.
Equity value = Enterprise value − Net debt
Related: Enterprise value (EV), Net debt
Money held by a neutral third party until agreed conditions are met, for example to cover possible claims after a sale.
Related: Earn-out
Enterprise value divided by EBITDA. It shows how many years of EBITDA the market pays for the whole business. It is widely used because it ignores differences in debt and tax.
EV/EBITDA = Enterprise value / EBITDA
Read more: Damodaran: EV/EBITDA multiples by sector
Related: Enterprise value (EV), EBITDA, Valuation multiple
A review of a company's financial information to confirm its earnings, cash flow, debt and risks. It supports price negotiation and helps the buyer avoid surprises.
Related: Quality of earnings, Normalised EBITDA (adjusted EBITDA), Net debt
The cash a business generates after paying operating costs, tax and the investment needed to keep it running and growing. It is the cash that could be paid out to lenders and owners.
Free cash flow = EBIT × (1 − tax rate) + Depreciation and amortisation − Capital expenditure − Increase in working capital
Related: Discounted cash flow (DCF), Capital expenditure (capex), Working capital
The amount paid for a business above the value of its identifiable assets. It is recorded on the buyer's balance sheet after an acquisition.
Related: Balance sheet
A simple formula from the investor Benjamin Graham that estimates intrinsic value from earnings per share, expected growth and the current yield on high-grade bonds. It is a rough guide, not a full valuation.
Intrinsic value = EPS × (8.5 + 2 × growth rate) × 4.4 / AAA bond yield
Open the intrinsic value calculator
Related: Intrinsic value, Margin of safety, Earnings per share (EPS)
International Financial Reporting Standards: accounting rules used in many countries, including by listed companies in the European Union and across much of the Middle East. India uses Ind AS, which is closely aligned with IFRS.
A report of revenue, costs and profit over a period, such as a year.
Related: Balance sheet, Net income
A detailed document describing a business, its market, its numbers and its plans, given to serious buyers or investors. It is also called a confidential information memorandum.
EBIT divided by interest expense. It shows how comfortably a business can pay its interest.
Interest cover = EBIT / Interest expense
Read more: Damodaran: ratings, spreads and interest cover
Related: EBIT, Debt service coverage ratio (DSCR)
The yearly return an investment earns, taking into account when cash goes in and when it comes out. Technically it is the discount rate that makes NPV equal to zero. Compare it with the return you require and the risk you take.
Related: Net present value (NPV), Multiple on invested capital (MOIC)
An estimate of what a business is worth based on its fundamentals, such as earnings and cash flow, rather than its current market price.
Open the intrinsic value calculator
Related: Graham formula, Margin of safety, Discounted cash flow (DCF)
A business set up and owned together by two or more companies for a shared purpose.
Related: Post-merger integration
A usually non-binding letter that sets out the main terms a buyer is prepared to offer, such as price and conditions, before detailed work and contracts begin.
Related: Term sheet, Share purchase agreement (SPA)
Net debt divided by EBITDA. It shows roughly how many years of EBITDA it would take to repay the debt. Lenders watch it closely.
Leverage ratio = Net debt / EBITDA
Related: Net debt, Interest cover, Debt capacity
Buying a company with a large amount of borrowed money, which is then repaid from the company's own cash flow.
Related: Leverage ratio (net debt to EBITDA), Internal rate of return (IRR)
A levered beta includes the effect of the company's debt. An unlevered beta removes it, so you can compare businesses with different debt levels and then apply the debt level you expect for the business you are valuing.
Unlevered beta = Levered beta / [1 + (1 − tax rate) × Debt / Equity]
Read more: Damodaran: betas by sector (global)
Related: Beta, Capital asset pricing model (CAPM)
The present value of the cash flow available over the life of the loan, divided by the debt outstanding. It shows whether the project can repay the whole loan, not just next year's payment.
LLCR = Present value of cash flow available for debt service over the loan life / Debt outstanding
Related: Debt service coverage ratio (DSCR), Project finance
Two ways to set the final price. With a locked box the price is fixed using a past balance sheet and is not adjusted later. With completion accounts the price is adjusted after closing, based on the actual accounts at the completion date.
Related: Net debt, Working capital
The agreement under which an adviser is hired for a specific task, such as selling a business or reviewing a deal.
Related: Buy-side and sell-side
Buying only when the price is well below your estimate of value, so that errors in your estimate do not lead to a loss.
Related: Intrinsic value, Graham formula
The market value of a listed company's shares: the share price multiplied by the number of shares.
Market cap = Share price × Number of shares
Related: Enterprise value (EV), Equity value
Funding that sits between debt and equity. It costs more than senior debt, but it is usually cheaper than equity and often gives away less ownership.
Total money returned divided by money invested. A MOIC of 2.0x means you got back twice what you put in. Unlike IRR, it ignores how long it took.
MOIC = Total proceeds / Total invested
Related: Internal rate of return (IRR)
Total borrowings minus cash. It is what the business owes to lenders after counting the cash it holds.
Net debt = Total borrowings − Cash
Related: Enterprise value (EV), Debt-like items, Leverage ratio (net debt to EBITDA)
The profit left after all costs, interest and tax. It is the bottom line of the income statement.
Related: Earnings per share (EPS), Income statement (profit and loss)
Rental income minus the costs of running a property, such as maintenance, insurance and management, before loan payments and tax.
NOI = Rental income − Operating costs
Related: Capitalisation rate (cap rate), Rental yield
The value today of all the future cash flows from an investment, minus the amount invested. A positive NPV means the investment earns more than the return you required.
NPV = Sum of [Cash flow in year t / (1 + r)^t] − Initial investment
Related: Internal rate of return (IRR), Discount rate
EBITDA after removing one-off or unusual items, such as a single legal settlement or one very large sale, so that it reflects what the business normally earns. Buyers and lenders usually value a business on normalised figures.
Related: EBITDA, Quality of earnings, Financial due diligence (FDD)
The work of combining two businesses after a deal closes, including systems, people, processes and reporting. Poor integration is a common reason deals fail to deliver the value expected.
Related: Synergies, Joint venture
Pre-money is a company's value before new investment. Post-money is its value after the new money is added.
Post-money valuation = Pre-money valuation + New investment
Example: Pre-money value of 8 million and a new investment of 2 million give a post-money value of 10 million. The investor owns 2 / 10 = 20%.
Related: Dilution, Term sheet
Valuing a business by looking at the prices paid in past deals for similar companies. These prices usually include a premium for control.
Related: Comparable company analysis (comps), Control premium
Share price divided by earnings per share. It shows how much investors pay for each unit of profit.
P/E = Share price / Earnings per share
Read more: Damodaran: PE ratios by sector
Related: Earnings per share (EPS), Valuation multiple
Funding a large project mainly from the project's own future cash flow, rather than from the owners' wider balance sheet. It is common in infrastructure, energy, utilities and large property developments.
Related: Special purpose vehicle (SPV), Debt service coverage ratio (DSCR), Loan life coverage ratio (LLCR)
An arrangement in which a government body and a private company share the funding, building or running of a public service or infrastructure project.
Related: Build-operate-transfer (BOT), Concession
An assessment of how reliable and repeatable a company's profits are. It adjusts reported profit for one-off items and accounting choices.
Related: Normalised EBITDA (adjusted EBITDA), Financial due diligence (FDD)
A company or fund that owns income-producing property and shares its income with investors. Many are listed on stock exchanges, so their shares can be traded.
Related: Capitalisation rate (cap rate), Rental yield
Annual rent as a percentage of the property's price. Gross yield uses total rent. Net yield uses rent after running costs.
Related: Capitalisation rate (cap rate), Net operating income (NOI)
The return on an investment with almost no chance of default, usually the yield on a long-term government bond in the same currency as the cash flows.
Testing results under complete sets of assumptions, such as a base case, a better case and a worse case.
Related: Sensitivity analysis
Senior debt is repaid first and is usually cheaper. Subordinated debt is repaid after senior debt, so it carries more risk and costs more.
Related: Mezzanine finance, Covenant
Testing how a result, such as value, changes when one assumption changes, for example the discount rate or sales growth.
Related: Scenario analysis
The legal contract for buying shares in a company. It sets out the price, the guarantees given by the seller and the conditions to complete.
Related: Shareholders' agreement (SHA), Term sheet
A contract among owners that sets out how the company is run and how owners may sell or transfer their shares.
Related: Share purchase agreement (SPA), Term sheet
A measure of the extra return an investment earns for each unit of risk taken, where risk is volatility. A higher ratio means more return for the volatility endured.
Sharpe ratio = (Return − Risk-free rate) / Standard deviation of returns
Related: Alpha, Volatility (standard deviation), Beta
A table showing where the money for a deal comes from (sources, such as new debt and equity) and where it goes (uses, such as the purchase price and fees). Sources must equal uses.
Related: Leveraged buyout (LBO), Capital structure, Leverage ratio (net debt to EBITDA)
A separate company created to own and run one project, so that its debts and risks are kept apart from the owners' other businesses.
Related: Project finance, Concession
Benefits that come from combining two businesses, such as cost savings or extra sales, that neither would achieve alone. Buyers often overestimate them, so they should be tested carefully.
A short, anonymous summary of an opportunity, sent to likely buyers or investors to see whether they are interested.
Related: Information memorandum (IM or CIM)
A short summary of the key terms of an investment or deal, such as price, ownership share and conditions. Most points are not legally binding, but it sets the direction for the contracts.
Related: Letter of intent (LOI), Share purchase agreement (SPA), Shareholders' agreement (SHA)
The steady yearly growth assumed for cash flows after the forecast period. It should be modest and should not be higher than the long-run growth of the economy the business operates in.
Related: Terminal value, Discounted cash flow (DCF)
The value of a business beyond the years you forecast in detail. It is usually found by assuming cash flows grow at a steady rate forever, or by applying a multiple. In many DCF valuations it is more than half of the total value, so it deserves care.
Related: Terminal growth rate (perpetual growth rate), Discounted cash flow (DCF)
The share of time or space in a property that is not rented. It reduces the income you can expect.
Related: Net operating income (NOI)
A value divided by a measure of performance, such as enterprise value divided by EBITDA. Multiples are a fast way to compare a business with similar ones.
Related: EV/EBITDA, Price-to-earnings ratio (P/E), Comparable company analysis (comps)
How much an investment's returns vary around their average. Higher volatility means bigger ups and downs.
Related: Beta, Sharpe ratio
The blended return that lenders and owners together require from a business. It weights the after-tax cost of debt and the cost of equity by how much of the business each one funds. It is often used as the discount rate in a DCF.
WACC = [E / (D + E)] × Cost of equity + [D / (D + E)] × Cost of debt × (1 − tax rate)
Example: With 70% equity at 9.5% and 30% debt at 6% before tax, and a 20% tax rate: WACC = 0.7 x 9.5% + 0.3 x 6% x 0.8 = 8.09%.
Open the cost of equity and WACC calculator
Read more: Damodaran: costs of capital by sector
Related: Cost of equity, Capital asset pricing model (CAPM), Beta, Discount rate
The money tied up in day-to-day operations: mainly receivables and inventory, minus payables. A business needs enough of it to run smoothly.
Working capital = Receivables + Inventory − Payables
Read more: Damodaran: working capital by sector
Related: Net debt, Free cash flow (FCF)
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