Net loss, also called loss, refers to a company’s financial position when total expenses exceed total revenues. In other words, net loss is the amount of money the company lost during the period. This is the negative amount of cash that is left over after all the expenses have been paid during the period. If total revenues were greater than total expenses, the company would have net income instead of net loss. Net loss is calculated by subtracting total expenses from total revenues.
Explanation :
Net loss appears at the bottom of the income statement or profit and loss statement after all of the cost of goods sold and operating expenses have been subtracted out. This is why many people call net loss the “bottom line.”
In a nutshell :
- A net loss occurs when the sum total of expenses exceeds the total income or revenue generated by a business, project, transaction, or investment.
- Businesses would report a net loss on the income statement, effectively as a negative net profit.
- Many factors can contribute to a net loss including low revenues, strong competition, unsuccessful marketing campaigns, and increased cost of goods sold (COGS).
Notional value refers to the total net amount of a derivative transaction, usually an interest rate swap, a forward contract, a cross currency swap or an options contract.
Explanation :
Notional value is different from the amount of money invested in a derivative contract. In fact, the notional amount is a reference value for calculating the interest on the transaction, and it expresses how much of the total value the derivative theoretically controls.For instance, in an options contract of 100 shares of an underlying asset, the notional amount is the contract size (100) times the price of the underlying asset. So, if the option is purchased at $3 per share and the price of the underlying security is $24, the notional amount is $3 x 100 x $24 = $7,200.
In a nutshell :
- Notional value is a term often used to value the underlying asset in a derivatives trade.
- Notional value of derivatives contracts is much higher than the market value due to a concept called leverage.
- Notional value is integral in assessing portfolio risk, which can be very useful when determining hedge ratios to offset that risk.
Noncumulative preferred stock is preferred stock that loses the rights to any dividends if the dividends are not declared in the current period. In other words, if dividends are not declared in the current year, noncumulative preferred shareholders do not receive a dividend for that year and can’t try to collect that dividend in future years. These shares are noncumulative, so they do not accumulate unpaid dividends.
Explanation :
Unlike cumulative preferred stock, noncumulative preferred stock does not utilize the dividend in arrears to account for unpaid dividends. Noncumulative preferred stockholders have priority over common shareholders when it comes to dividends that are declared in the current year. All preferred dividends must be paid first, but if no dividends are declared, the noncumulative preferred shareholders don’t get a dividend that year.
In a nutshell :
- Noncumulative stock does not pay unpaid or omitted dividends.
- Cumulative stock entitles investors to missed dividends.
- Cumulative preferred stock is more attractive to investors than noncumulative.
Nominal rate of return represents the revenue of an investment before considering tax and inflation expenses.
Explanation :
The rule of thumb in finance is that the value of money today is higher that the value of money in the future because of interest rates and inflation. When calculating investment returns, analysts determine the difference between the nominal rate and the real return, which adjusts to the current purchasing power. If the expected inflation rate is high, investors expect a higher nominal rate. However, in some cases, the nominal rate is misleading. For example, if an investor holds a corporate bond and a municipal bond with a nominal value of $1,000 and an expected nominal rate 5%, one would assume that the bonds are of equal value. However, corporate bonds are taxed at 30%, whereas munis are tax exempt. Therefore, their real rate of return is completely different.
In a nutshell :
- The nominal rate of return is the amount of money generated by an investment before factoring in expenses such as taxes, investment fees, and inflation.
- The nominal rate of return helps investors gauge the performance of their portfolio by stripping out outside factors that can affect performance such as taxes and inflation.
- Tracking the nominal rate of return for a portfolio or its components helps investors to see how they’re managing their investments over time.
Net realizable value (NRV) is the net asset value that a seller receives for selling an asset after deducting the costs associated with the sale or disposal of the product. The net realizable value formula is calculated by subtracting the cost of making the sale from the sale price. It is essentially the amount of money a company will make from selling an asset after it pays the selling costs. Selling costs could include marketing costs, advertising costs, or even product demonstration costs.
Explanation :
The NRV is used in inventory accounting to estimate the proceeds of a sale or how much the selling price exceeds the costs incurred in the sale of an asset. Usually, when using NRV, analysts employ the lower cost or market (LCM) method, under which the value assigned to inventory is the lower market replacement cost, usually equaling the initial purchase price. NRV is also used when calculating how much of the expected accounts receivable might turn into cash. Both GAAP and IFRS principles require companies to use NRV in inventory valuation.
In a nutshell :
- Net realizable value (NRV) accounts for the value of an asset in terms of the amount it would receive upon sale, minus selling costs.
- NRV is a conservative method used by accountants to ensure the value of an asset isn’t overstated.
- It is a common method used to evaluate accounts receivable and inventory, and is also used in cost accounting.
Net exports are defined as the difference between the exports and the imports realized by an economy. The value of net exports is positive or negative depending on whether a country is an importer or an exporter, respectively.
Explanation:
These goods and services serve as a measure of an economy’s exports to foreign countries and are usually expressed as a percentage of a country’s Gross Domestic Products (GDP). In that way, governments can quantify the exports into a percentage of domestic goods and services, which are purchased by the foreign sector. The value of net exports is calculated by deducting the total value of the goods that an economy imports from the total value of the goods that an economy exports during a specified period, usually a year. When the total value of exports is greater than the total value of imports, an economy has a positive trade balance. Conversely, when the total value of imports exceeds the total value of exports, the economy has a negative trade balance.
In a nutshell :
- A nation’s net exports are the value of its total exports minus the value of its total imports.
- A positive net export number indicates a trade surplus, while a negative number means a trade deficit.
- A weak currency exchange rate makes a nation’s exports more competitive in price.
- Countries with comparative advantages and access to natural resources tend to be net exporters.
- Examples of net exporters are Australia and Saudi Arabia.
A net debt is a financial metric used to analyze the liquidity of a company by comparing a company’s current assets and total liabilities. It shows a company’s ability to pay off its obligations if they all become due today.
Explanation :
It’s an indication of a company’s ability to pay off its debts only using cash and equivalents in the event that the company has to shut down. Although this shut down concept is rarely a reality, it demonstrates an important point about the company’s liquidity. It shows how leveraged the company is and also shows how much cash the company keeps on hand. Both of these concepts are important.If a company has a regular amount of liabilities and a low amount of cash reserves, its metric would be high. This doesn’t necessarily mean the company is over leveraged. It simply means the company doesn’t keep much cash in its bank account. For example, the company might simply use a high percentage of its cash to reinvest in inventory or capital assets.
In a nutshell :
- Net debt is a liquidity metric used to determine how well a company can pay all of its debts if they were due immediately.
- Net debt shows how much cash would remain if all debts were paid off and if a company has enough liquidity to meet its debt obligations.
- Net debt is calculated by subtracting a company’s total cash and cash equivalents from its total short-term and long-term debt.
An opportunity cost is the economic concept of potential benefits that a company gives up by taking an alternative action. In other words, this is the potential benefit you could have received if you had taken action A instead of action B.
Explanation :
Each business transaction and strategy has benefits related to it, but businesses must choose a specific action. By choosing one alternative, companies lose out on the benefits of the other alternatives. In other words, opportunity costs are not physical costs at all. They are theoretical costs or missed opportunities.
In a nutshell :
- Opportunity cost is the forgone benefit that would have been derived from an option not chosen.
- To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others.
- Considering the value of opportunity costs can guide individuals and organizations to more profitable decision making.
Operating expenses (OPEX) are costs not directly associated with the production of the goods or services but commonly incurred during regular business activities. In other words, these are day-to-day expenses that cannot be classified as costs of producing the company’s goods or services or costs of purchasing assets.
Explanation :
OPEX are costs incurred while developing regular business activities. Such expenses can vary widely depending on the industry and the nature of the business itself, but most of the operating expenses can be classified in these categories: rent, payroll, marketing, research, maintenance, subscriptions, utilities, legal fees, among others. These expenses are normally listed separately in financial statements to determine the company’s operating profit, which is sometimes referred to as EBIT or EBITDA depending on the purpose of the calculation. They are normally classified under three big categories: administrative expenses, sales expenses, and general expenses.
In a nutshell :
- An operating expense is an expense a business incurs through its normal business operations.
- Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development.
- The Internal Revenue Service (IRS) allows businesses to deduct operating expenses if the business operates to earn profits.
- By contrast, a non-operating expense is an expense incurred by a business that is unrelated to the business’s core operations.
Operating income, also referred to as earnings before interest & taxes (EBIT), is the bottom line profit recorded on the income statement, and it is generated by the operational activity of an organization.
Explanation :
The income statement of any organization is directly impacted by two major factors: revenues and expenses. Revenue is generated from the sale of products, while expenses are generated by the funding of operational activities. In general, when the gross profit of an organization (sales – cost of sales) exceeds the operating expenses (including depreciation and amortization), the organization is said to have generated income from operations. In the case of for-profit, public companies, the EBIT is a critical financial statement figure.Income from operations is a benchmark used by financial statement users to determine the competency of management and the efficiency of the company’s operations. While many external factors can influence the sales revenue of an organization, the changes in EBIT highlight management’s ability to effectively react to the external forces.
In a nutshell :
- Operating income reports the amount of profit realized from a business’s ongoing operations.
- Operating income is calculated by subtracting operating expenses from a company’s gross income.
- Analyzing operating income is useful because it doesn’t include one-off items such as taxes that may skew a company’s profit in a given year.
