Ghost (????????????????????????) busters – edition 1
Financial jargon can be so frustrating. It’s one thing talking about the basics of investment analysis etc. but as things get more complicated, you just have to know some of the jargon.
Here’s some jargon to get you started:
Big balance sheet
A balance sheet is simply a statement of all assets and liabilities of a company. You have a personal balance sheet, too. The difference between your personal assets and liabilities would be called your “net worth” and in a company this is called “equity” – basically the value that belongs to the shareholders.
When a company is said to have “big balance sheet” or “has the balance sheet for this” it just means that the company is large and holds significant assets against which it can borrow debt.
Speaking of debt, the term “highly leveraged” is almost always used to describe a company that has a lot of debt on the balance sheet. Why the term “leverage”? Using debt “leverages” up the returns to shareholders.
For example, if all your assets generate a return of 12% and bank debt costs 6%, then as a shareholder you will use the bank’s money to fund as much of the business as possible because you make a significant profit after paying the debt.
This allows you to generate high profits off a smaller investment of your own money. The result? High return on equity.
Sweating those assets
No, this doesn’t refer to your pre-lockdown trips to the gym.
However, this is something almost all companies are doing as a result of lockdown. Sweating your assets means getting the most out of the assets you already have, by cutting costs and running them as efficiently as possible.
This sounds like it may always be positive, but the flip side of this is a company that isn’t investing enough in infrastructure or expansion. Eskom, anyone?
That investor has dry powder
This is one of those classic terms used by bankers to sound clever. It simply means that the investor has access to cash or easily sellable (i.e. liquid) investments, which allows the investor to quickly move on opportunities.
The alternative would be an investor who still needs to raise the cash required to do the deal.
Heard any other terms that you want me to explain? Drop me a mail at firstname.lastname@example.org