Financial Terms Glossary

by John Kind

Financial Terms Glossary: M – O

M

MARGIN OF SAFETY

The difference in activity or output between an organisation’s current level of activity or output and the level producing a break-even result. At break-even, an organisation’s revenues are equal to its total costs.

 

MARGINAL COST and MARGINAL COSTING

Marginal cost is the extra or incremental cost of producing or selling an extra unit of output. For example, the additional material cost.

Marginal costing is a system of costing that focuses on the recovery of direct, incremental or variable costs only. The system should be used with caution.

 

MARKET CAPITALISATION

The stock market value of a company. It is calculated by multiplying the current price per share by the number of issued shares.

 

MINORITY INTEREST

Many subsidiary companies are not fully owned by the parent company (although the parent company will own more than 50 per cent). Such companies are partly owned by minority shareholders; shareholders who hold shares in the subsidiary.

When consolidated or group financial statements are prepared, all the assets, expenses, liabilities and revenues of subsidiaries are included in the group accounts. This is because the group fully controls the subsidiary, even though it does not fully own it. In such financial statements, the subsidiary is amalgamated into the rest of the group, and the capital provided by the minority shareholders is separately recognised as a part of the capital of the group called ‘minority interest’. This will be disclosed in the consolidated or group balance sheet.

In the consolidated income statement, the share of the subsidiary’s profit after taxation owned by minorities is shown as ‘profit attributable to minorities’, or as a deduction from the group profit after taxation before arriving at the profit attributable to group shareholders. The profit attributable to group shareholders is referred to as ‘earnings’.

 

MORTGAGE

A form of borrowing secured against a specific asset such as a building or a piece of land.

 

N

NET ASSETS

Total assets less all creditors. It is equal to equity.

 

NET CURRENT ASSETS

See working capital.

 

NET PRESENT COST

The sum of the negative cash flows for a project discounted at the cost of capital.

 

NET PRESENT VALUE (NPV)

The sum of the negative and positive present values of future cash flows for a project. The present values are calculated by discounting the cash flows at the cost of capital. The NPV at the cost of capital is equivalent to the additional shareholder value created by the project. It is the most important indicator for assessing a project’s economic viability.

 

NET WORTH

Another term for equity.

 

NOMINAL VALUE

The face value of a security. In the case of a share, it is also known as the par value. It may reflect the price at which the shares were originally issued. However, a new share issued later may be issued at a price well above the nominal value. This is called the share premium. Usually, nominal value does not influence the market value at which a share is traded.

 

O

OFF-BALANCE SHEET FINANCING

Potential liabilities which do not appear on the balance sheet of an organisation. Examples include the borrowings of joint ventures and contingent liabilities. Information about off-balance sheet financing will be shown in the notes to the financial statements.

 

OPERATING COSTS

All costs excluding the cost of sales, interest charges and taxation. Examples include advertising and promotional costs, business rates and rent, depreciation, salaries, travel and entertainment.

 

OPERATING MARGIN

See profit margin.

 

OPERATING PROFIT

Revenues less the cost of sales and less operating costs. It is the profit made by an organisation from its day-to-day or trading activities.

Other descriptions for operating profit are profit before interest and taxation (PBIT), earnings before interest and taxation (EBIT), operating income and trading profit.

 

OPPORTUNITY COST

The sacrifice involved in pursuing one course of action rather than another or making a particular decision rather than another. For example, if a new factory is built on land that could otherwise be sold and the factory is built, the opportunity cost is the potential sales proceeds from the land if the land had been disposed of.

Opportunity costs should be included in the financial evaluation of projects.

 

ORDINARY SHARES

Usually the most significant element of the share capital of a company. There may also be preference shares and there can be different classes of ordinary shares, for example, voting and non-voting. The American term for ordinary shares is common stock.

 

OVERDRAFT

Cash owed on a bank current account. A form of short-term borrowing. It is repayable on demand.