Glossary of Terms

Asset efficiency
Improving a company's current equity return through a reduced business investment achieved by less invested in hard assets and a faster cash flow cycle.
Business investment
Cash assets at cost, less any non-interest-bearing obligations.
Capital efficiency
Improving a company's current equity return through capital stack adjustments that optimize OPM and equity use while limiting OPM payments and cost.
Capital stack
The various sources of capital used to finance business investment that bear a cost, including OPM, YOM, and OPM equity, used to finance a business investment.
Cash flow cycle
The time between the beginning of product creation and the collection of cash from the ultimate product sale. Slow cash flow cycles raise business investment through elevated inventory and accounts receivable levels.
Conglomerate
A company having diversified, unrelated business holdings.
Core competencies
Essential skills tethered to the problems and stakeholders that businesses are designed to address.
Cost of capital
The total annual OPM cost, together with the desired annual rate of return for equity investors shown as a percentage of the combined amount of OPM and equity.
EBITDA
Earnings before interest, taxes, depreciation, and amortization.
EBITDAR
Earnings before interest, taxes, depreciation, amortization, and rents on assets you could have otherwise purchased. This variable is generally preferable to EBITDA when computing the V-variable, because it is part of adding into business investment the estimated cost of rented assets that might otherwise have been purchased. By doing this, the estimated percentage of a company funded with OPM will be closer to the truth and the business fundamentals will be easier to compare to peer companies electing to own all of their assets. However, should you be unable to estimate such adjustments, electing to use EBITDA instead, the V-Formula result will turn out just the same.
Equity
Business investment less OPM.
Equity market value added (EMVA)
The amount by which the value of company equity exceeds the company equity investment at cost. Cost-based company equity investments include YOM, OPM equity, and free cash flows that are reinvested in the business.
Fixed-charge coverage ratio
EBITDAR divided by OPM payments. Here EBITDAR is computed before all rents (not just rents on asset you might otherwise have purchased) and OPM payments include all rents.
Maintenance capital expenditures (maintenance capex)
Added business investment made each year to replace worn out assets, together with periodic business investments associated with asset refreshment essential to the maintenance of corporate revenues. To this, one can add periodic losses incurred from poor business investments made. While GAAP requires that research and development (R&D) costs be annually expensed as incurred, to the extent that R&D is expected to have lasting value, V-Formula adjustments are permissible. Operating profit margins can be increased by backing out lasting R&D costs, those costs can instead be added to business investment, with annual R&D maintenance costs included along with maintenance capex.
Market V-Formula
A formula to compute the current equity rates of returns for shareholders having acquired stock in a company for an amount different than the original cost of the equity.
Market value added (MVA)
The amount by which a company's enterprise value exceeds the cost of its creation. Beneficiaries of the value created include lenders and other OPM providers, together with equity investors, who are the prime beneficiaries of the value created.
Marginal Profits
The profits made on the last dollars of sales, which tend to be far higher than the profits made on the first dollars of sales as a result of business scalability.
Operating efficiency
Improving a company's current equity return through operating profit margin elevation achieved through higher sales, product pricing, or reduced operating costs.
Operating leverage
The ability of a company to grow revenues without adding to its business investment.
Operating profit margin
Earnings before interest, taxes, depreciation, amortization, other non-cash expenses and rents on assets you could own, but elect to rent shown as a percentage of revenues. Please note the acronym “OPM” is not used to describe operating profit margin.
OPM equity
Equity in a business that comes from other people.
Opportunity cost
The range of possible future business costs arising from decisions made today. Most often, business opportunity costs are associated with capital stack decisions.
Other people's money (OPM)
The amount a business borrows from third parties, plus the known cost of any assets the business elects to lease.
Payment constant
The sum of OPM payments divided into the amount of OPM obtained.
Scalability
The ability of a company to grow in size to address market opportunities. Scalability commonly accompanies higher marginal profitability where a sizable portion of a company's expenses are effectively fixed.
V-Formula
An equation to compute current corporate pre-tax equity returns.
Wealth creation multiple
The current equity rate of return as a multiple of required investor current equity rate of return.
Your own money (YOM)
Equity in a business coming out of your own pocket.
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