Glossary

Every term introduced across Lessons 1–20, defined the way it was actually taught — using Safaricom PLC and Equity Group Holdings PLC as the running examples. Grouped by topic, not alphabetized, so related terms stay next to each other. Use your browser's find-in-page to jump to a term.

The three statements (L1–L5)

• Income Statement (Statement of Profit or Loss) — answers "did the business make money this year?"; covers a period of time. L1
• Balance Sheet (Statement of Financial Position) — answers "what does the business own, and what does it owe, right now?"; a snapshot at a single date. L1
• Cash Flow Statement — answers "did actual cash move in and out of the business this year?" L1
• Revenue — everything customers paid the company; the top of the income statement "waterfall." L1
• EBITDA — earnings before interest, tax, depreciation & amortisation; revenue minus direct costs and operating expenses, a rough measure of core profitability before equipment wear-and-tear or financing. L1
• Depreciation & amortisation (D&A) — the accounting cost of equipment (towers, fibre, licences) wearing out or being used up over time. L1
• Operating profit — EBITDA minus depreciation & amortisation. L1
• Profit before income tax — operating profit adjusted for financing costs/income and other items. L1
• Profit for the year ("the bottom line") — profit before tax minus tax. L1

The balance sheet (L2–L3)

• Accounting equation — Assets = Liabilities + Equity; always balances. L2
• Assets — everything a company owns. L2
• Liabilities — money owed to others (borrowing). L2
• Equity — owners'/shareholders' own money in the business. L2
• Non-current assets — things used for more than a year (property/equipment, intangibles, right-of-use assets). L2
• Current assets — cash or things turning to cash within a year (cash, receivables, inventory). L2
• Non-current liabilities — debts due in more than a year (long-term borrowings, leases). L2
• Current liabilities — debts due within a year. L2
• Retained earnings — profit built up over the years not paid out as dividends; the literal link between the income statement and the balance sheet, rising when profit is kept rather than distributed. L2, L3
• Dividend — profit paid out to shareholders. L3
• Proposed dividend — a promise to pay a dividend, not yet paid; a balance sheet item, distinct from "dividends paid" (which is cash actually gone, on the cash flow statement). L3
• Non-controlling interests (NCI) — the slice of a subsidiary's profit owned by outside investors, not the parent company's own shareholders. L3
• Attributable to equity holders of the parent — the profit portion that is truly "the company's own" shareholders' profit, after removing NCI's share. L3

The cash flow statement (L4–L5)

• Cash Flow Statement's purpose — strips out non-cash adjustments to show real cash movement; starts from profit and adds back depreciation and other non-cash items. "Profit is an opinion, cash is a fact." L4
• Operating activities — cash from core, everyday business. L4
• Investing activities — cash spent on or received from long-term assets; usually a large outflow for capital-intensive companies. L4
• Financing activities — cash moving between the company and lenders/shareholders (borrowing, repaying debt, dividends). L4
• Capital expenditure (capex) — cash spent on long-lived assets (property, equipment, intangible assets) needed just to keep running or growing. L5
• Free Cash Flow (FCF) — Net cash from operating activities minus capital expenditure; what's left after keeping the lights on. Thin FCF isn't automatically bad — it can reflect heavy reinvestment for growth. L5

Reading a bank (L6–L8)

• Customer deposits — a liability for a bank (money owed back to depositors) — the opposite of typical intuition. L6
• Loans to customers — an asset for a bank (money owed to the bank, plus interest). L6
• Interest income — interest earned on loans and other interest-bearing assets. L6
• Non-interest income — fees, commissions, transaction charges; not interest-based. L6, L19
• Interest expense — interest paid out to depositors/lenders. L6
• Net interest income (NII) — total interest income minus total interest expense; a bank's equivalent of "gross profit," the gap that actually matters, not the size of either gross line. L7
• Total operating income (bank) — net interest income plus non-interest income. L7, L19
• Solvency cushion (simple, beginner-level) — total shareholders' funds ÷ total assets; a rough check on whether equity can absorb a shock. Not an official regulatory capital-adequacy ratio. L8

Profitability & efficiency ratios (L9–L10)

• Net profit margin — Profit for the year ÷ Total revenue, as a %. Used to compare the same company across years, or same-industry peers — not as a standalone verdict. Can't yet be used to compare a telco to a bank, since a bank has no single "revenue" line the same way. L9
• Percentage points vs. percent — a drop from 16.9% to 12.2% is "4.7 percentage points," not "4.7%" — a distinction worth keeping straight when comparing two percentages. L9
• Return on Equity (ROE) — Profit for the year ÷ Total shareholders' equity, as a %. The first ratio that lets a telco and a bank be compared, since both report shareholders' equity. High ROE can also reflect heavy reliance on borrowed money rather than a stronger underlying business. L10

Liquidity & solvency (L11–L12)

• Liquidity — can the company cover bills due soon (within a year) using assets convertible to cash soon? A short-term question. L11
• Solvency — is total debt manageable relative to what owners have put in? A long-term, structural question. L11
• Current ratio — Current assets ÷ Current liabilities. Below 1.0 isn't automatic panic for a company with strong, steady operating cash flow that can refinance or pay from ongoing cash generation. L11
• Debt-to-equity ratio — Total borrowings ÷ Total equity. "Good" or "bad" depends entirely on industry norms — it only means something when comparing like with like (telco vs telco, bank vs bank). For a bank with no separate "borrowings" line, use Total liabilities ÷ Total equity as a proxy instead. L11, L12

Real growth vs paper growth (L13–L14)

• Hyperinflationary monetary gain — a non-cash accounting adjustment required under IAS 29 when a company operates in a hyperinflationary economy (e.g. Safaricom's Ethiopian operation); a paper gain or loss from restating results for rapid currency devaluation — not revenue, not cash from customers, but a legitimate, audited item. L13
• Red flag — a question, not a verdict; a signal that something is worth investigating before accepting a headline number at face value. L14
• Red flag 1 — profit falls while revenue rises — signals some cost line grew faster than revenue; go find which one. L1, L14
• Red flag 2 — profit diverges sharply from operating cash flow — the concerning direction is profit strong while cash is weak, flat, or negative (not the reverse, which is reassuring). L4, L5, L14
• Red flag 3 — profit boosted by large non-cash, non-operating gains — e.g. fair value adjustments, one-off gains, currency/hyperinflation adjustments; ask how much profit would be left without it. L13, L14

Per-share & valuation (L15–L17)

• Earnings Per Share (EPS) — Profit for the year ÷ Number of shares outstanding. Bigger EPS doesn't mean a more profitable company — it depends on an arbitrary share count, and a stock split can halve it overnight with no change to the business. Useful for tracking one company's trend over time, and as a building block for P/E. L15
• P/E ratio (Price-to-Earnings) — Share price ÷ EPS. Only meaningfully compared within the same industry. Kenyan market rule of thumb: below ~10x often "low," above ~20x often "expensive" — but low can mean cheap or trouble ahead, and high can mean expensive or expected growth. L16
• Capital gain — return earned from a share's price appreciation, as opposed to its dividend. L17
• Dividend yield — Dividend per share ÷ Current share price, as a %. Reflects history, not a promise — a dividend can be cut. A higher yield can mean genuine generosity/health, or simply a falling share price mechanically inflating the ratio. L17
• Payout ratio — the proportion of profit paid out as dividends rather than retained. A high payout ratio leaves less room to sustain the dividend if profit dips. L17

Putting it together (L18–L20)

• Five-step company walkthrough — (1) check the profit trend for red flags, (2) check profit is backed by cash, (3) check margins and returns, (4) check leverage, (5) only then check what the market price implies. L18, L19
• Five-question investment decision framework — (1) Is the business actually profitable, and is that profit real cash? (2) Does growth survive the red-flag checklist? (3) How efficiently is the company using what it owns? (4) Is the balance sheet sound? (5) Only now — does the price make sense? Order matters: running these out of order is how wishful thinking sneaks in. L20

Red flags that are not red flags

Explicitly taught as things that look alarming but usually aren't, on their own:

• Operating cash flow much higher than profit (reassuring — usually non-cash D&A add-back).
• A bank's very high total-liabilities-to-equity ratio (deposits are the business model).
• A telco's current ratio below 1.0, when cash generation is strong and steady.
• Heavy capex / thin free cash flow, when it reflects reinvestment for growth rather than distress.
• A hyperinflationary monetary gain itself — it's a real, required, audited adjustment; the flag is only about not conflating it with operating performance.

Looking for the worked formulas and figures instead of definitions? See the ratio reference alongside this glossary, or ask your teacher to walk a specific lesson's numbers again.