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Five Must Know Terms in Everyday Finance

January 21, 2016

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In 2015, North American mid-market merger and acquisition deals were estimated to be valued at approximately $132.9 billion US[1]. In light of this, we have dedicated this week’s blog post to illustrate five commonly used terms in everyday finance and transaction deals:


  • EBITDA – acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. Effectively, EBITDA takes the net income and adds back any interest expense, income taxes, depreciation and amortization deducted in the income statement. EBITDA measures a company’s operating profitability.
  • Current Ratio – calculated as current assets divided by current liabilities. This financial ratio measures a company’s liquidity and its ability to pay back its short-term obligations (e.g., accounts payable, short-term debt).
  • Working Capital – can also refer to non-cash working capital. It is calculated as a company’s current assets less current liabilities. Current assets are liquid assets in a company, including receivables, inventory and prepaid expenses. Current liabilities include current payables and deposits received. Working capital measures the company’s efficiency in its day-to-day operations, as well as the company’s short-term financial health.
  • Debt Service Ratio – is a company’s annual cash flow divided by annual debt obligations (e.g., interest, principal, lease payments). Debt service ratio is a benchmark used to measure a company’s ability to use its cash to service debt payments.
  • Cost of Capital – is a rate of return that investors require to make a given investment. The cost of capital reflects the true cost of securing funds that a business uses to pay its asset base. The funds can either come from debt or equity; for most companies financing will come from a mix of both debt and equity.

[1] Mid-Market: North American M&A 2016 Outlook, December 2015, Firmex and Mergermarket

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