Sigma Analytics Glossary

Financing Activities

These activities produce changes in the size and composition of the entity's equity and the loans it has taken.

Investment Activities

These activities involve acquiring and disposing of long-term assets, and making other investments that are not included as cash or cash equivalents.

Operating Activities

These activities are the main source of the entity's operating income and include all other activities that can not be classified as investment or financing.

Assets

These assets include tangible items (such as vehicles, machinery, furniture, technological equipment, etc.) and intangible rights (such as brand patents and software licenses). Therefore, they represent the resources that a business has or can give, investing in them to generate future benefits through their sale, use, or consumption in the organization's operations.

Balance Sheet

It is a financial statement provides a detailed view of a company's financial and economic status on a specific date, representing a true view of its financial condition. Periodically, it permits one to know the company’s assets, liabilities, and equity, offering a comprehensive overview of its financial position.

EBIT

It is a financial indicator (an acronym for Earnings Before Interest and Taxes) that measures a company's profitability before accounting for interest expenses and taxes. It reflects the company's earnings from its core operations, excluding the impact of financial costs and tax obligations. For business owners and investors, it provides knowledge of the company's ability to generate profits from its operations, manage costs, and produce cash flow.

EBITDA

It is a financial indicator known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) that shows a company's profit before deducting interest expenses on debt, business taxes, depreciation, and amortization of investments. EBITDA aims to provide a clear image of the company's earnings or losses from its core operations, offering an accurate view of its operational performance without the effects of financial and accounting adjustments.

Statement of Cash Flows

It is the financial statement that details all changes in cash and cash equivalents that have occurred within a company over a specific period. This information is divided into three categories: operating activities, investing activities, and financing activities. In this way, the sources of cash and its impact on the company can be analyzed.

Income Statement

Also known as the Profit and Loss Statement, it presents all the income and expenses that have been produced by a company over a specific period, providing a clear view of the organization's financial performance and liquidity.

Comprehensive Income Statement

It is the one that corresponds to the profit or loss for the period plus the other income and expenses recognized in equity.

Cash Flow from Investing Activities (CFI)

These are the investments made by the business over a specific period. It reflects the income and expenses derived from investments, providing receipts from non-current assets and the expenses associated with them.

Financial Cash Flow (FCF)

It reflects the income from issuing shares or debt and the expenses related to paying dividends to shareholders over a specific period.

Operating Cash Flow (OCF)

It reflects the cash flows that come in and out of the business from its operations or commercial activities. This includes revenue from sales and expenses related to providing services, maintaining inventory, and payments to suppliers and employees.

Working Capital

It is the ability of a company to fulfill its short-term payments and obligations while making investments or purchases necessary for its business activities. Therefore, it is a fundamental concept in assessing the financial health of a business.

Free Cash Flow

It is the result of operating cash flow minus capital expenditures (expenses incurred to afford productive assets such as vehicles, machinery, equipment, etc.). This remaining money is available for expansion projects, acquisitions, or maintaining financial stability during difficult times.

Operating Income

These are the revenues derived from the company's primary business activities.

Insolvency

It is the inability of an individual or company to pay its financial obligations or debts on time. Although the reasons for this situation can vary widely, it often results from financial mismanagement.

Net Margin

It is the proportion of a company's net profit relative to its total revenues, calculated as the percentage of net profit over revenues after deducting all operating costs, taxes, and other expenses. In other words, it indicates how much profit you actually make compared to what you sell. The net profit margin shows how much remains after subtracting all expenses, such as salaries, taxes, and other costs

Valuation Multiples

These allow us to estimate a business's value by comparing its results with similar businesses. Additionally, financial multiples compare the price with a financial component of the company, and they offer the advantage of being intuitive and easy to calculate.

Need for Negotiable Resources

It arises when there is a working capital surplus over the Net Operating Funds (NOF).

Operational Fund Needs

It is the amount of money a company needs to finance its daily expenses, such as salary payments and supplier costs. These needs are calculated by subtracting the company’s income from its operating expenses.

Liabilities

It consists of short- and long-term obligations and debt. Therefore, funds that the company uses but does not own, as they must be repaid to third-parties.

Wealth

It is the wealth in the form of money and other assets owned by an individual or organization.

PER

It is a financial indicator, known as the Price-Earnings Ratio (PER), that analyzes the price-to-earnings relationship of a company. It is an indicator that helps assess a company's value and is used by investors to decide whether or not to invest in a particular company.

Financial Ratio or Indicator

The mathematical relationship between two financial variables provides information about an organization's financial situation and performance. These financial ratios are primarily used to analyze a balance sheet, offering a clear and quantitative view of various financial aspects of a company.

Resources Forced to Use

These happen when a company's negotiated resources exceed its actual needs, therefore The company is forced to use other unplanned resources, such as delaying payments to suppliers or using more cash reserves than initially anticipated.

Short-Term Liquid Resources

These financial instruments can be bought or sold on a stock market or through other forms of trading. These instruments represent an investment and grant economic rights, sometimes political or control rights, over the issuing entity.

Financial Risk

It refers to any business activity involving uncertainty that could potentially lead to negative financial consequences for the organization.

Profitability

It measures the profit that shareholders earn from the capital they invest in the company, allowing them to assess whether their money is being used effectively

ROIC

It is a financial indicator (acronym for Return on Invested Capital) that measures the profitability relative to the capital invested. The ROIC ratio seeks to quantify the financial performance that a company generates from the capital

Net Income

It refers to the profit obtained from selling a product or service after subtracting production, logistics, and distribution costs, along with taxes, commissions, operating expenses, and other associated costs. To calculate net income, it is essential to know about all costs of the company, including operational expenses, taxes, commissions, and other charges.

Liquidity Indicators

These ratios measure a company’s ability to meet its short-term obligations. They assess how easily a company can convert its current assets into cash to pay off its current liabilities. Essentially, they determine the company's capacity to cover all its obligations within the next year.

Current Ratio

It is a liquidity indicator that shows a company’s ability to meet its short-term obligations, influenced by the composition of its current assets and short-term debts. Regular analysis of this ratio helps prevent liquidity issues and potential insolvency. A higher ratio indicates a greater ability for the company to meet its short-term payments

Quick Ratio

It is a liquidity indicator that assesses a company's ability to verify its current obligations without relying on the sale of its inventory. Additionally, it measures the company's ability to cover its short-term liabilities using cash, accounts receivable, temporary investments, and other easily liquidated assets, excluding inventory.

Solvency Ratios

These measure the extent and manner in which creditors contribute to the company's financing. They also assess the risk faced by both creditors and owners of the company, as well as the suitability or unsuitability of the company's debt levels.

Asset Debt Ratio

It is a solvency indicator that shows how financially independent a company is. A high ratio means the company relies a lot on its creditors and has limited room to take on more debt, suggesting it is becoming undercapitalized and has a riskier financial setup. On the other hand, a low ratio indicates the company is more independent from its creditors

Equity Debt Ratio

It is a solvency indicator that measures the extent to which the company's equity is committed to its creditors. It should not be understood as suggesting that liabilities can be paid with equity, as both represent obligations for the company. This ratio of dependence between owners and creditors also helps assess the company's credit capacity and determine whether the company is primarily financed by its owners or creditors. It reveals the source of the funds the company uses, whether they are from its own capital or external sources, and indicates if the capital or equity is sufficient.

Fixed Asset Debt Ratio

It is a solvency indicator that shows the amount of equity available for each unit invested in fixed assets. If the ratio is equal to or greater than 1, it means that the entire fixed asset investment could have been financed with the company's own equity, without the need for external loans.

Leverage Ratio

It is a solvency indicator that measures the amount of assets obtained for each unit of equity. In other words, it determines how much the company relies on external resources compared to its own internal resources. This reliance is beneficial if the return on invested capital exceeds the cost of borrowed capital; in this case, the return on equity is enhanced by what is known as the 'leverage effect.' Generally, in a company with high leverage, a small decrease in asset value could significantly erode equity, while a small increase could lead to a substantial appreciation of that equity.

Financial Leverage

It is a solvency indicator that shows how using debt affects a company’s profitability. It helps understand the impact of borrowing costs on profits. As interest rates on debt increase, it becomes harder for companies to benefit from borrowing. This indicator compares the company’s earnings before interest and taxes to the cost and amount of its debt. Generally, a ratio above 1 means that borrowing helps increase the company’s profitability compared to using only its own funds. A ratio below 1 indicates that borrowing is not beneficial, while a ratio of 1 means borrowing has no impact on profitability.

Management Indicators

These indicators aim to measure how efficiently companies use their resources. They assess how well a company manages its asset turnover, collects receivables, and pays obligations. They also evaluate the efficiency of asset use by looking at how quickly investments in assets are recovered, as well as the proportion of various expenses relative to the income generated from sales.

Accounts Receivable Turnover

It is a management indicator that shows how many times, on average, accounts receivable from sales are collected over a specific period, usually a year.

Fix asset Turnover

It is a management indicator that measures the amount of revenue generated for each unit of currency invested in fixed assets. This indicator helps identify potential shortfalls in sales, as sales should match the level of investment in plant and equipment. Otherwise, profits will be reduced because they would be affected by the depreciation of surplus or overpriced equipment, interest on loans, and maintenance expenses.

Sales Turnover

It is a management indicator that measures how efficiently total assets are used. Sales turnover shows how many times assets are utilized at a given sales level. Known as the 'managerial efficiency ratio,' it reflects how effectively the management utilizes its resources. The higher the sales generated per unit of investment, the more efficient the management of the business.

Average Receivables Period

It is a management indicator that measures the liquidity of accounts receivable in terms of days, reflecting the company's management and operational efficiency. In practice, this indicator can impact the company's liquidity, especially if there is a long period between invoicing sales and receiving payment

Average Payment Period

It is a management indicator that shows the number of days it takes for the company to pay execute its inventory obligations. This indicator becomes more meaningful when compared with liquidity ratios and the average collection period. Long payment periods to suppliers are often a result of slow inventory turnover, extended collection periods, or insufficient financial strength.

Impact of Administrative and Sales Expenses

It is a management indicator that monitors the presence of significant operational expenses (administrative and sales) which can lead to a lower operating margin and reduced net profits, affecting the company's growth prospects.

Impact of Financial Burden

It is a management indicator that shows the percentage of financial expenses relative to sales or operating income for the same period. This indicator helps determine the impact of financial costs on the company’s income. Generally, it is advised that the impact of financial expenses should not exceed 10% of sales, as few companies report an operating margin above 10% sufficient to cover these costs. The acceptable level of this indicator should be related to the company's reported operating margin.

Profitability Indicators

These indicators measure how effectively a company’s management controls costs and expenses to turn sales into profits. From an investor's perspective, the key is to analyze how well the company generates returns on invested capital (return on equity) and total assets (return on assets).

Net Asset Profitability (Du Pont)

It is a profitability indicator that measures the ability of assets to generate profits, regardless of how they are financed, whether through debt or equity

Gross Margin

It is a profitability indicator that shows how well the company can turn sales into profits before accounting for expenses and taxes. It assesses the profitability of sales in relation to the cost of sales. For manufacturing companies, this cost includes both the production costs and the value of finished goods inventory.

Operating Margin

It is a profitability indicator that shows whether the business is profitable on its own, regardless of how it is financed. This ratio can be negative, as it does not account for non-operational income, which might be a key source of revenue that contributes to the company’s overall profitability.

Net Sales Profitability (Net Margin)

It is a profitability indicator that shows the profit generated by the company for each unit of sale.

Operational Return on Equity

It is a profitability indicator that measures the return on equity for shareholders based on the capital they have invested in the company, excluding financial expenses, taxes, and employee profit-sharing.

Financial Profitability

It is a profitability indicator that measures the net profit (after deducting financial expenses, taxes, and employee profit sharing) generated in relation to the owners' investment in the company. It also reflects the shareholders' or partners' expectations, which are often represented by the so-called opportunity cost, indicating the profitability they forgo by choosing not to pursue other risk investment alternatives.