Financial Terminology

Adding Value

When a company's post tax return on invested capital (NOPAT/Invested capital) exceeds its cost of capital. See economic Value Added (EVA) and weighted average cost of capital.
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AGM (Annual General Meeting)

A meeting held each year by a company to which every shareholder is invited. At the meeting, some members of the board of directors submit themselves for re-election by the shareholders. The report and accounts are presented and any business requiring the approval of the shareholders is discussed, including the level of dividend to be paid. See also extraordinary general meeting.
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Annual Report & Accounts

A report made by the board of directors of a company, summarising its performance over the preceding year. Normally, it will give some indication of the expectations for the year ahead and will carry detailed comments about the company's trading position. Accompanying this will be the financial statements, notably the balance sheet, the profit and loss account and the cash flow statement.
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Associate Company

A company in which a substantial stake (more than 20% but less than 50%, a level above which the company would move from being an associate to a subsidiary) is held by another company and where the owner of that stake is in a position to influence its operations.

When looking at the accounts of companies that have associates, there are rules for how money earned from the investment is recorded.

If 20% is owned, then 20% of the operating profit will be shown together with 20% of any interest paid on borrowings. This does not mean, however, that the associate company hands over 20% of its profits - the only cash that changes hands is in the form of dividends. In the vast majority of cases, the actual dividend paid would be much less than the percentage of profit credited.
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Attributable Profit

Profits, after tax and other charges (for example: minorities and preference dividends) which 'belong' to the ordinary shareholders. Used in the calculation of earnings per share and return on equity.
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Balance Sheet

A statement showing the assets and liabilities that a company has at its year-end. It is essentially a 'snapshot' of a company's position and can and does change, reflecting seasonal factors within the business. The balance sheet is normally prepared at the company's year-end and should always be read together with the profit and loss account and the cash flow statement.
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Beta

This is a measure of the volatility of a share relative to the stock market overall. A share that moves in line with the market would have a beta of 1. A beta of 1.2 would imply that a share should rise 12% for each 10% rise in the market and conversely falls 12% for each 10% drop. A beta of less than 1 normally offers a degree of safety in a falling market as it should fall less rapidly than the stock market overall. Likewise, low beta stocks tend to underperform rising markets; betas are not set in stone, but can - and do - change over time. Generally the beta is influenced by the degree of operational and financial gearing a company has as these affect the sensitivity and volatility of profits. Defensive stocks tend to have a low beta and cyclical, highly indebted stocks a high beta.
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Bonus Issue

An issue of new shares where the intention is not to raise new money for investment but to a) increase the number of shares and correspondingly b) reduce the share price. Normally, the intention is to improve the liquidity and appeal of the shares to investors - if the share price is high (for example, over £10), it may be a deterrent to small investors.

The value of the company doesn't change - if a company has 100 shares trading at £10 each and makes a 1 for 1 issue, the number of shares will double (to 200) but the price will halve (to £5). No new money is being raised so the overall value of the company should be unaltered. Also known as a scrip issue or capitalisation issue as an element of the group's reserves are transferred to the shareholders premium account. See share split
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Book Value

Normally shown on a company's balance sheet, the book value is calculated by subtracting a company's liabilities from its assets. Book value will frequently differ from the share price as the latter is more open to short-term influences such as market sentiment and economic outlook.
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Capital Employed

Shareholders funds plus net debt. The total amount of funds used by a business in its day to day activities. The figure includes shareholders funds and net debt.
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Capitalisation (or Market Capitalisation)

The total value of a company, defined by the value of its ordinary shares (based on the mid-market price) multiplied by the number of ordinary shares in issue.
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Cash Flow Statement

A statement showing the source and destination of all monies received and spent by a company in the course of the financial year. The annual cash flow statement in the annual report & accounts reconciles how a company's cash balances have changed during the financial year. It contains important information on whether the company is actually generating cash.
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Closed Period

The period between a company's year-end (and half year end) and the date of reporting its results. During this period, the management cannot, without a Stock Exchange announcement, disclose new information that would affect the share price.
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Corporate Governance

Following earlier work done by committees chaired by Cadbury, Hampel and Greenbury, a Combined Code on Corporate Governance was issued in 1998. The essence of corporate governance is to ensure that management are acting in the best interests of shareholders. Examples of issues involved include the role and composition of the board, the number of non-executive directors, a clearly defined separation between the chairman (who should be non-executive) and the chief executive, and levels of executive pay, length of contract, share options and so on. A statement made by the board of directors of a company confirming that they have complied with agreed & accepted standards of best practice in their day-to-day management activities should be contained in the group's report and accounts
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Cost of Capital

A company will normally fund its business activities using a combination of debt and money from shareholders. The cost of capital then simply becomes the 'weighted' average of the cost of debt and the cost of equity (ie. in proportion to the equity/debt funding of the business). See weighted average cost of capital.
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Cost of Debt

The cost of the debt is very straightforward to appreciate and to calculate - if the company can borrow from the bank or in the debt markets for, say, 8%, this tells you the cost of servicing the company's debt. Importantly, the interest payments are tax deductible which makes the debt even cheaper relative to equity. So in this case the cost of debt would be 8% x 0.7 or 5.6% (ie deducting the 30% tax charge).
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Cost of Equity

The equity component, however, is somewhat more difficult, but nonetheless crucial to assess. Essentially, the cost of equity must reflect what rate of return an investor requires to compensate for the risks attaching to shares in general and a particular company (which may be more risky than the stock market overall).

Reflecting these considerations, it is calculated by reference to 1) the risk-free rate of borrowing, which is normally based on the interest on a government bond, 2) an equity risk premium to allow for the risks associated with investing in shares and 3) the volatility of the individual share which is measured by its beta. The cost then becomes 1+ (2x3). If the risk-free rate is 6% and the equity risk premium is 4%, a stock with a beta of 1.2 would have a cost of equity of 10.8% (i.e. 6+(4x1.2). As can be seen from this example, the cost of equity is significantly higher than the cost of debt - essentially reflecting the higher risks associated with shares.
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Credit Rating

An indicator of the financial strength of a company. A number of factors are taken into account when establishing a credit rating, such as overall assets and liabilities, the debt/equity ratio known as gearing, interest cover and cashflow profile. The rating is set by credit rating agencies such as Moody's and Standard & Poor's.
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Current Assets

Short term assets such as stock, short term debtors and cash. Used to establish short term solvency. How quickly stock can be converted into cash varies enormously from sector to sector. A food retailer will be able to "turn" its stock very rapidly into cash. For manufacturers the process is likely to be much longer subject to the production cycle.
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Cyclical Stocks

Companies whose shares are directly linked to the business cycle - these stocks are influenced by outside factors such as the overall business climate, interest rates, commodity prices and trends in the global economy. Cyclical stocks tend to be the heavier, more traditional industries such as construction, chemicals, engineering, motor manufacturers, paper & pulp and steel - though clearly some service sector activities can also be cyclical, eg. media and advertising, pubs, hotels and restaurants. Profits in these industries are very sensitive to changes in volume and price as operational gearing is high.
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Defensive

A defensive stock is one with a low beta believed to offer a safe haven in difficult economic circumstances. Food manufacturers and retailers, and utilities would tend have these characteristics.
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Depreciation

Reduction in the value of an asset. Most commonly applied in company accounts where the initial value of an asset is reduced each year to reflect the wear and tear and/or obsolescence of the asset. The reduction is called the 'depreciation charge' - a cost incurred in running the business deducted before arriving at operating profit. However, it is not a cost that involves spending additional money - the book value of the asset is merely written down. Therefore, this charge to the profit and loss account is referred to as a "non-cash cost".

The life of an asset will vary - this may be very short and so annual depreciation charges are commensurately high where technological change is very rapid (such as computers); or much longer for assets such as a cement kiln or land & buildings. The shorter the period the assets are written down, the more financially conservative the company (and the greater the short-term negative impact on profits).
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Derivatives

Essentially, these are financial instruments that derive their value from the price of an underlying security (such as a share or a bond) or commodity. Derivatives are used by investment professionals to manage risk, as they offer a way to limit losses on other investments, and also to get greater exposure to a company than that available by going solely down the ordinary share route. The most commonly encountered types of derivative are options and futures.
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Dilution

This refers to the impact on ordinary shareholders of a transaction. It is normally calculated as the impact on earnings per share of a transaction. So if a company announces a takeover, the new earnings per share number will be calculated to see how the new earnings number compares to the situation before the deal. The deal is dilutive if earnings are below the pre-deal number. It is normally expressed as a percentage and will depend on how the deal has been financed (ie. shares or debt) as well as the price paid for the deal.

It may sometimes be used to refer to the dilution of the shareholders' holding in a company. This may occur, for example, in a refinancing involving equity for bond swap. Ordinary shareholders may find they have been "diluted" from owning all the company to holding a very small percentage.
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Discounted

When the prospects for a company are fully known by the market and therefore reflected in the share price. Phrases such as "in the price" or "fair value" are also sometimes used. A company may be well run, highly regarded with excellent prospects but the share price is on such a premium to its sector/market that it is fully "discounting" its qualities. Therefore, the shares will not make money unless the prospects turn out to be even better than first thought. Conversely, a very poor company, in a weak financial position and a difficult outlook may be very lowly valued. Again it is "in the price"
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Discounted Cash Flow

One of the key fundamental valuation techniques (though not the easiest for private investors to use). The operating free cash flow (cash generated by the business, operating profit after tax plus depreciation and amortisation less cash invested in the company and working capital needed as it expands) of the business is projected out into the future. It is then 'discounted' back using the company's cost of capital to generate a present value of the income stream. Lots of "assumptions" are made which are both subjective and highly susceptible to both change and significant error.
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Discount Rate

The rate at which future cash flows are "discounted" to a present value. This rate is normally the company's weighted average cost of capital which is a composite of the cost of debt and cost of equity.
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Dividend

A payment made by a company to its shareholders. Usually dictated by overall level of profitability. Many companies do not pay a dividend at all if trading conditions have been particularly poor or if the company is in a start-up situation and can use the cash more effectively in the development of the business. See interim dividend and final dividend.
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Dividend Cover

EPS/DPS. The number of times a company's dividend is covered by the earnings it generates. It is normally expressed as a multiple. The higher the level of cover, the more sustainable the pay-out and the better the scope for future dividend growth. Low level of cover raises the possibility that the dividend is not sustainable and maybe cut (depending on other aspects of the company's financial profile and need for capital within the business).
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Earnings

Profits attributable to ordinary shareholders. Therefore, earnings are post tax and after minority or preference dividend charges. Care needs to be taken to ensure consistency of use - ie prospective or historic, pre or post exceptional and amortisation charges.
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Earnings Momentum

This is the trend in both the reported and projected earnings of a company. Where a company's reported earnings beat market expectations and profit forecasts are upgraded, the earnings momentum is described as positive. This can be a critical factor in the shares outperforming the market as the improving earnings momentum reflects a better performance of, and outlook for, the company in question. Clearly, where a company reports earnings that are below expectations and profit forecasts are downgraded, the shares are likely to underperform the market. See momentum investing.
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EBIT

Earnings before interest and tax. Also commonly known as operating profit.

EBITDA

Earnings before interest, tax, and depreciation. A measure of performance used in valuation. The advantages of this measure are that it takes the whole funding structure of a business into account (equity and debt) unlike the P/E and allows comparisons of companies with different accounting policies towards depreciation and amortisation. It also ignores exceptional charges. It has become increasingly controversial as a method of valuation as many companies have promoted it as all other performance measures were disappointing and they have run into serious financial trouble. Similarly there has been a focus on the growth of Ebitda at the expense of returns. Another problem is that depreciation is a real cost of doing business and needs to be taken into account.
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Economic Value Added (EVA)

NOPAT - wacc x capital invested. A critical way of assessing the performance of management in its use of assets. Value is added when the post tax return on capital employed (normally done as net operating profit after tax divided by the amount of capital invested in the business) exceeds the 'weighted average cost of capital'. The cost of capital reflects the risks shareholders undertake - risks that need to generate an appropriate reward. A very useful way of assessing the success of capital investment and mergers and acquisitions.
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Enterprise Value

The Enterprise value is the sum required to secure 100% of the company's cash flows/acquire all its liabilities. It takes into account its funding structure and any cross shareholdings that might exist. Importantly it takes all provisions into account. In effect it is the sum of all the company's liabilities. Normally calculated by adding market capitalisatio, average debt, provisions and subtracting peripheral or non-core assets.
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EPS (Earnings Per Share)

Attributable profit/number of shares. The amount of profit attributable to each ordinary share in issue. For example, if the company's attributable profit is £1,000,000 and there are 1,000,000 shares in issue, then the EPS would be £1. The attributable profit is post tax and is struck after any preference dividends or minorities have been deducted. See also Price/Earnings (P/E) Ratio.
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Equity Risk Premium

The return required by investors over and above the return on risk-free investments such as government bonds to compensate for the additional risks involved in equity investment. This is normally calculated by looking at the historic return of equities compared to government bonds, with the difference being deemed the premium required for investing in shares. However, investing in shares is forward looking which creates a problem. Generally the Equity risk premium is thought to be between 3% and 6%. See also cost of capital
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Exceptional Items

Items in a company's profit and loss account that are deemed to be 'one off'. Examples may include a profit or loss on the disposal of fixed assets or business operations, large redundancy charges as a result of restructuring, costs associated with the integration of acquired companies or bid defence costs. Some definitions of exceptionals only treat as exceptional those items of a financial or capital nature (eg disposals) while excluding those items that relate to the core business.

EPS numbers in the UK are normally quoted before the impact of these one-off exceptional charges, as this gives a truer measure of the underlying performance of the business. However, exceptional costs that appear frequently (e.g. redundancy costs) or relate to the company's core operations, should be scrutinised to ensure that they are not in fact a normal cost of doing business and therefore should not be treated as exceptional.
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Ex-dividend

When a stock or share price is quoted as being ex-dividend, the purchaser will not receive the most recently declared dividend. See also cum-dividend.
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Final Dividend

The dividend payable by a company after its year-end . Normally this dividend is higher than the interim and typically represents anywhere between 60% and 75% of the year's total. This is because the interim dividend (declared at the half year stage and on unaudited numbers) carries more question marks.
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Fixed assets

Tangible and intangible assets the business requires to generate turnover. The tangible assets may include land, plant and machinery. The intangible assets might consist of goodwill relating to brands or patents. Intangible assets are amortised while tangible assets are depreciated.
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Fundamentals

The most basic aspects of a company that need to be examined before making an investment decision - essentially what a company does, how well it does it and how much money it makes doing it. Key factors in this assessment include type of company, market position, efficiency, financial position, cash generation ability, management record, past profitability and future outlook. An examination of these issues is referred to as 'fundamental analysis'.
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Gearing

1. Net debt/equity. A measure of the level of debt carried by a company related to its shareholders' funds, normally expressed as a percentage. See also interest cover.
2. The performance of an investment, especially warrants or options which move in a very sharp manner relative to the underlying security.

See also Operational Gearing
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Goodwill

The premium over net assets a company pays when acquiring another company. Obviously, in service or brand based businesses, where there are few tangible (or physical) assets, the goodwill element of the amount paid can be very significant.
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Goodwill Amortisation

Following changes in accounting standards, any goodwill paid on acquisition of a company must be written off, or amortized, over the useful economic life of the assets acquired (this time period can vary quite significantly, depending upon the type of assets acquired) and charged to the profit and loss account (See depreciation).
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Growth Investment

An investment strategy where the main objective is to identify companies with the potential for high, long-term growth in sales, earnings and dividends. Ideally, these companies should be growing at a rate well in excess of the stock market average and should also be able to demonstrate good growth rates even when the economy slows down.
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Hedge Fund

A collective investment that tries to make money for its investors in absolute, not relative terms. So they will try to make money when share prices go down as well as up. It does this by shorting stocks and by buying put options as well as simply buying (or "going long") of stocks (the traditional investment management route sometimes referred to as "long-only funds"). Allied to this, hedge funds usually "gear up" (sometimes alarmingly so) to fully exploit market opportunities. For a traditionally run investment fund, it's hard to make money in bear markets; for hedge funds, bear markets are a key opportunity. With opportunity comes risk and hedge funds are not for the financially conservative. In addition, charging structures are high.
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Illiquidity

1. The inability to deal quickly in a reasonable size in certain classes of security, especially in volatile markets.
2. Where there is little or no cash available for investment, either at hand or within a portfolio.
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Interest Cover

Operating profit divided by interest paid. This is an important measure of a company's financial strength as it reflects the company's ability to service its debt. This measure may be a more relevant indicator of financial strength than the debt/equity ratio (gearing) for companies such as those involved in service industries that have very few assets on the balance sheet.
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Interim Dividend

When companies pay dividends twice a year, the interim dividend is declared for the first half of the company's year at the time the interim results are announced. See also Payment Date..
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Interim Report

Companies that are listed on the Stock Exchange are required to submit trading figures twice a year. The interim figures give the company's trading position at the end of the first half of the financial year; the Final Report (or Preliminary Report) show the position at the close of the year as a whole.
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Investment Bank

As distinct from a clearing (or high street) bank, an investment bank is generally involved in larger, corporate-style banking, providing finance for takeovers, overseas expansion and so on. They also frequently act as advisors for companies seeking a listing on the stock exchange. Sometimes referred to as merchant banks, investment banks tend to be integrated in the sense that they carry out a full range of activities including corporate finance, stockbroking, market-making and fund management. This has recently led to concerns over conflicts of interests and this integrated structure is being questioned.
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Liquidity

1. The level of cash either held in a portfolio or available for investment
2. The ability to deal easily in a class of asset or share
3. The amount of cash and funds that are easily accessible in the economy generally
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Minorities (or Minority Interests)

This is the deduction of the share of profits that outside interests have in a partially owned subsidiary. For example, if an 80% owned subsidiary is consolidated, 20% of its after-tax income would be due to the owners of the remaining 20% of the company. Minority charges are deducted before calculating the profit attributable to ordinary shareholders - and hence determining earnings per share and retained profit.
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Multiple

A term used in describing the valuation of a share. The shares may be said to be on a multiple of 15x earnings. The term is used with any valuation measure used, eg sales multiple, EBIT multiple or EBITDA multiple.
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Momentum Investing

This refers to the practice of buying shares that are showing an upward trend relative to the stockmarket overall. This may reflect positive earnings momentum or may simply reflect a trend/fashion towards a particular sector or share. Naturally, if a sector or share is doing well, this will generate interest from investors. See also Technical Analysis.
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Net Asset Value (NAV)

The value of a business as defined by the difference between the value of its assets and liabilities. Sometimes, this is expressed on a 'per share' basis, that is, where the NAV is divided by the number of shares in issue. This is a useful way of assessing the relationship between a company's share price and its NAV. For example, investment trust and property shares are valued in this way by referring to the discount/premium to NAV the shares are trading at. In addition, value stocks can also be assessed in this way.
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NOPAT

Net operating profit after tax. A key component of DCF and also used to assess the post tax returns on capital. (Nopat/Invested capital)
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Operating free cash flow

NOPAT +depreciation + amortisation - maintenance capex.
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Operating Loss

Losses incurred by the core operations of a company before taking into account any interest charges/credits or the contribution from associated companies.
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Operating Margin

Operating profit/sales. This is a useful measure of a company's profitability and management efficiency. It is perhaps most useful when comparing operating performance with companies in the same sector. Operating margins should vary directly with the capital intensity of the business (ie the greater the amount of capital the higher the margin). A key driver of sales valuations.
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Operating Profit

Profits made by the core trading operations of a company before taking into account any interest charges/credits, asset disposals or the contribution from associated companies
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Operational Gearing

The impact of a percentage change in revenues on the operating profit of a business. It is determined by the relationship between fixed and variable costs - the higher the fixed costs the greater the operational gearing. It will also be affected by whether the revenue reduction is driven by a fall in price or volumes with the greater impact coming from price movements.
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Overweight

An overweight position is one where a fund has more invested in a stock or sector than the proportion in the relevant index/benchmark. For example, if a share represents 5% of the All Share index and the fund has 8% of its investments in that share, the fund is said to be overweight. (In this case, 60% overweight).
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Pre-exceptional Profit

Profits before any exceptional charges (credits) have been deducted (credited).
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Pre-exceptional Pre-amortisation Profit

Profits before both any exceptional items or any goodwill amortisation is taken into account.
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P/E Ratio

See price/earnings ratio.
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P/E Relative

This is a measure of how the company's P/E relates to that of the market overall. This is normally expressed as a percentage. For example, if a company is on a P/E of 20x and the market is trading on 25x, the P/E relative is 80%.
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Preference Shares

In return for receiving a fixed rate of return (even if the company prospers dramatically in the future), preference shareholders have a certain level of protection in that, if the company goes bankrupt, they will receive their money back (if there is any left to give) before the Ordinary Shareholders. There are a variety of preference shares which can include those that are redeemable (where the initial investment is repaid) and/or convertible into ordinary shares. For example, a 'cumulative convertible redeemable preference share' offers the following characteristics:

1. It is cumulative in the sense that, if the preference dividend is not paid in any one year, it 'rolls up' in subsequent years (during this time, ordinary dividends cannot be paid)
2. It is convertible into ordinary shares on an agreed basis
3. It may be redeemed at par at the end of the agreed period if not converted
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Price/Earnings (P/E) Ratio

This is the share price divided by the earnings per share of the company, and provides a simple and often effective way of valuing a share price. In effect, this tells you the number of years that the investment takes to pay for itself. It is normally expressed as a multiple eg. the shares are on 12x earnings. This 12x ratio is also referred to as the rating on the shares. The P/E may be for the company's last financial year (this is referred to as 'historic') or for future financial years (referred to as 'prospective'). Prospective P/Es are generally used by analysts. Normally, a high P/E reflects a high degree of confidence in the company's growth profile and/or the sustainability of those earnings (this is often referred to as the 'quality of earnings'). A low P/E will normally reflect a combination of much lower than average growth, high cyclicality of earnings and 'low quality' earnings. Sometimes, a high P/E can be the result of very low earnings eg a cyclical stock which suffers from the impact of falling demand and prices at the bottom of the cycle (in these circumstances the shares may be attractive despite the high multiple as the shares are at the bottom of the cycle).
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Profit & Loss Account

An integral part of a company's Annual Report and Accounts, this is a statement that outlines the company's income, costs and profitability (or lack of it) in the period to which it relates.
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Rating

This describes the valuation put on a share. The shares may be said to be on a rating of say 15x earnings - but the term can be used to describe any of the valuation measures used, eg. sales, EBIT or EBITDA. In investment terms the key is to determine whether the rating is fair given the quality and outlook for the business. If the shares are cheap, then investors may buy them on the basis that they will be re-rated (ie. the multiple increases). Conversely a high growth company that does not meet the expectations placed on the shares will see their rating fall ie. de-rated.
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Retained Profit

When a company makes a profit, some of this is normally distributed to shareholders in the form of a dividend. The remainder, the Retained Profit, is transferred to the company's reserves and may be applied to the expansion of the business.
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Return on Equity

Attributable profits/shareholders funds. This is a key measure of how hard the share capital is being made to work and how efficient the management is being.
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Return on Invested Capital

Operating profit/shareholders funds + debt + goodwill (and other asset) write offs. Goodwill on acquisition is often deducted from shareholders funds and therefore reduces the amount of capital employed. The invested capital focuses on how much the company actually spent (invested) not the book value of assets employed. Accordingly, a more comprehensive and preferred way of gauging how efficiently the company allocates resources.
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Rights Issue

Where a company seeks to raise additional money from its shareholders. The shareholders will be offered the opportunity to buy new shares at a given price and in proportion to their existing holdings (eg: one new share for every four shares held); the rights to buy them at this price then become tradable in their own right.
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ROCE (Return on Capital Employed)

Operating profit / shareholders' funds plus net debt. This is a very important measure of the company's profitability and ability to use all the funds available to the management efficiently. It is important to be clear whether the number is pre or post tax. The post tax number is used when calculating whether the company is adding value ie whether the returns are exceeding the cost of capital.
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Sector

Shares that have common characteristics and are grouped together. The FTA All Share Classification consists of a number of clearly defined sector groupings, for example: Resources, General Industrials, Cyclical Consumer Goods and Information Technology. These broad sector groupings break down further into individual sectors such as Chemicals, Health, Pharmaceuticals and Telecommunication Services.
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Share Buyback

When a listed company buys back shares in the open market for cancellation. When the balance sheet is very strong (the company may have cash in hand or have very low levels of debt) and the management believe that the stock market is failing to value the company properly, the company may seek to remedy the situation by using the surplus money to purchase what it believes to be its undervalued shares. This has the effect of reducing the number of shares in issue and reduces the cost of servicing the dividend and may improve the earnings per share figure. Companies often do this in order to reduce the cost of capital.
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Shareholders' Funds

The net assets of a company belonging to ordinary shareholders, ie. the balance of assets and liabilities.
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Shares

Shares, also known as ordinary shares (as opposed to preference or convertible shares) represent ownership of a company. Shareholders are entitled to receive dividends (if the board of directors decide to pay one) and to vote at the company's AGM. See also preference shares.
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Share Split

This is done for the same reasons as a bonus/scrip issue, ie. to improve liquidity and reduce a heavy share price. It differs from a bonus issue as it involves reducing the nominal value of the company's shares. For example, a five for one split would see the shareholder holding five new shares for every one held but the nominal value would fall from, say, 25p to 5p. No adjustment takes place to the company's balance sheet.
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Shorting

The act of selling a share you do not own in the expectation that it will fall in price. As you do not own the shares concerned it is referred to as going short of the shares.
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Technical Analysis

As opposed to fundamental analysis, technical analysis attempts to predict the future direction of share prices (or markets and other assets) by examining the trend in the share price represented in chart form (hence sometimes called Chartism). Certain key patterns are held to be predictive because of historical repetition.
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Trading Statement

A review of how a company has performed over the half or full-year trading period. These statements are normally issued either immediately before or after the trading period in question. The review is normally phrased with respect to the market's expectations for the company. They are useful as they provide investors with an assessment of its performance before it enters its closed period.
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Value Investing

A fund management style that focuses on the selection of value stocks. Normally, a screening process will be adopted to identify those shares which meet the preferred criteria. For example, the shares may have to be on a certain P/E discount to the market, yield premium to the market or discount to net asset value to be considered worth adding to the portfolio. Historically a very important and successful method of investing which has returned to favour over recent years following the fall from grace of growth stocks post the TMT bubble. By contrast, growth investments have performed poorly.
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Value Stock

A share that appears cheap on a combination of the following criteria (among others):

1. A significant p/e discount to the market and/or its sector
2. A high yield relative to the market
3. A discount to its net asset value
4. Undervalued cash flow stream

While a share may be cheap on one or, indeed, all of these criteria - there can be good reasons why this low valuation is appropriate - normally reflecting a combination of poor outlook, poor financial position, poor management.
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Variable Costs

Costs, such as fuel and raw material costs, that vary with the level of production.
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Weighted Average Cost of Capital

The weighted average cost of capital is the cost of equity multiplied by the proportion of funding that is made up by equity (the market cap/market cap + debt ) added to the cost of debt multiplied by the proportion of funding made up by debt (debt/market cap + debt). See cost of capital
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Working Capital

Stocks +trade debtors-trade creditors.
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Yield

Dividend / share price expressed as a percentage. Sometimes the yield will be expressed in prospective terms, that is, the yield for the current financial year, taking into account any dividend growth that may be projected. In the case of a bond, the yield is determined by the coupon payable divided by the price paid for the stock.
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