1. Investors
  2. Resources
  3. Common financial terms and what they mean

Common financial terms and what they mean

Page last updated: 18 Nov 2020

Revenue 

What it means - Income the company earned from its business operations, such as the sale of goods and services to customers. This includes the value of work billed but not yet paid for.

Why it matters - comparing revenue (money in) from one year to the next can be a good indicator of how well a company is growing its core business. At the same time, you also need to consider its expenses (money out).

Net profit after tax (NPAT)  

What it means - Also known as the 'bottom line', this tells you how much profit the company made after it paid all its expenses, and tax.  

Why it matters - All companies aim to make a profit, in either the short or long term, so they can continue to pay your dividends, and grow.

EBITDA (earnings before interest, tax, depreciation, and amortisation) 

What it means - The profit the company made before expenses such as interest payments and tax. It also excludes depreciation and amortisation, which are accounting charges used to reflect the falling value of fixed assets as they age.

Why it matters - Companies have different levels of assets and debt. EBITDA enables you to compare the earnings of different companies regardless of their assets and debt. However, it should be considered alongside other factors.

Net cashflow from operating activities

What it means - This tells you how much money the company generated from its core business. It doesn't include money from other activities such as buying equipment or raising money from investors.

Why it's important - Companies need good operating cashflow so they can buy new assets, pay dividends and meet their debts. Otherwise they will need to borrow more money or issue new shares to fund their business.

Dividends on shares

What it means - The amount of company has paid in the past, and may pay in the future, to its shareholders. This is taken out of its profits.

Why it matters - You should focus more on what may be paid, rather than what has been paid in the past. This is the amount you may receive as a return on your investment until you sell your shares.

Total assets

What it means - Assets are anything the business owns. They can be tangible (such as machinery or buildings), or intangible (such as brands or logos).

Why it matters - This shows what the company owns that is of value. The company's aim is to make a good return from these assets.

Total debt

What it means - Any debt a company has to pay interest on, such as loans.

Why it matters - Most companies have some debt, because loans can help them grow, but too much debt might make it difficult to keep up with interest payments.

Total liabilities

What it means - Total debt (see above), plus any other financial obligations it has in the future (for example, bills it needs to pay).

Why it matters - For a company to stay in business, its assets must be bigger than its liabilities. A company with a high level of debt needs strong and steady cashflow. You should also consider the reason the company is listing on the sharemarket, because it may use some of the money it gets from investors to reduce its debt.

Where to get more information

If you’d like more detail about the company you’re investing in, visit the New Zealand Companies Office Disclose Register. This has full financial statements for the past three years.