Window Dressing

What Is Window Dressing? Window dressing is when managers in an organization take measures to make their financial statements appear better than they actually are. The basic idea of window dressing is to mislead shareholders and investors by presenting a favorable picture of the organization’s performance. For example, if a company has many shareholders who lack an in-depth operational knowledge o…

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Enterprise Value

What Is Enterprise Value (EV)? Enterprise value (EV) is an economic measure reflecting the market value of the whole business. It is also called entity value or firm value. EV is the sum of claims of all the security holders (i.e., debt holders, preference shareholders, minority shareholders, common equity shareholders, and others). EV is a fundamental metric in business valuation, financial model…

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Carrying Value or Book Value

What Is Carrying Value? Carrying value or book value is the value of an asset according to the figures shown (carried) in a company’s balance sheet. Carrying value is calculated as the original cost of the asset less any depreciation, amortization, or impairment costs. Formula to Calculate Carrying or Book Value Book Value or Carrying Value = Total Assets – Total Liabilities Tangible Book Value =…

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Indifference Analysis

Indifference Analysis: Definition The so-called debt-equity mix is used to make financing decisions that increase the earnings per share (EPS) of a company. EBIT-EPS analysis involves determining the crossover or indifference EBIT at which the EPS is the same between two financing alternatives. In other words, the use of a financial break-even point (BEP), and the return from alternative financial…

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Combined Leverage

What Is Combined Leverage (CL)? Combined leverage (OL + FL) represents a company’s total risk related to operating leverage, financial leverage, and the net effect on the EPS.  Operating leverage affects the operating risk (i.e., the percentage change in EBIT due to the percentage change in sales), and financial leverage impacts the financial risk (i.e., the percentage change in EPS due to the per…

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Financial Leverage

What Is Financial Leverage? Just as operating leverage results from the existence of operating expenses in the enterprise’s income stream, financial leverage results from the presence of fixed financial charges in the firm’s income stream. In fact, financial leverage relates to financing activities (i.e., the cost of raising funds from different sources carrying fixed charges or not involving fixe…

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Operating Leverage

Operating Leverage: Definition Leverage that is associated with investment activities or asset acquisition is called operating leverage. In fact, the relationship between sales revenue and EBIT is referred to as operating leverage because when the sales level increases or decreases, EBIT also changes. This means that operating leverage measures the relationship between sales revenue and EBIT. Key…

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Leverage

Leverage: Definition Leverage refers to the use of an asset or source of funds for which the enterprise has to pay a fixed cost or fixed return. In other words, it refers to a relationship between two variables. Such variables include cost, output, sales, revenue, earnings before interest and taxes (EBIT), or earnings per share (EPS), among others. Leverage: Explanation Financing decisions are bas…

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DuPont Analysis

DuPont Analysis: A Useful Measure For Investment Decisions Supporters of DuPont analysis believe that measuring assets at gross value removes the incentive to avoid investing in new assets. Explanation During the 1970s, DuPont Corporation developed a unique performance measurement system for its investment projects compared to other business enterprises of the time. The purpose of DuPont’s method…

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Trend Analysis of Financial Statements

What is Trend Analysis of Financial Statements? Trend analysis of financial statements helps information users to discern percentage changes over time in the selected data. For example, users can see whether a firm’s net profit is increasing, decreasing, or stable, or whether there are fluctuations over the years. Explanation Horizontal analysis of financial statements can easily be expanded to in…

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