Essential definitions for every aspiring analyst. Master the vocabulary before you walk into the room.
Accretion / Dilution
In M&A, whether a deal increases (accretive) or decreases (dilutive) the acquirer's earnings per share (EPS). A deal is accretive when the target's earnings yield exceeds the acquirer's cost of financing.
Bridge Financing
Short-term debt used to finance a transaction until permanent financing can be arranged. Bridge loans are typically more expensive and expected to be refinanced within 12–18 months.
Cap Table
Capitalization table — a spreadsheet showing the equity ownership of a company, including all shareholders, their ownership percentages, and the type and price of equity they hold.
Comparable Company Analysis (Comps)
A relative valuation method that estimates a company's value by comparing it to publicly traded peers using standardized multiples such as EV/EBITDA, EV/Revenue, and P/E.
Debt Covenant
A condition in a loan agreement that requires the borrower to fulfill certain conditions or maintain specific financial ratios (e.g., minimum interest coverage ratio, maximum leverage). Breach triggers a default.
DCF (Discounted Cash Flow)
An intrinsic valuation method that estimates the value of an asset based on its projected free cash flows, discounted back to the present using the weighted average cost of capital (WACC).
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash flow used widely in valuation (EV/EBITDA multiples) and credit analysis (leverage ratios).
Equity Cushion
The amount of equity in a company's capital structure relative to total debt. A larger equity cushion provides a greater buffer for debt holders in the event of financial distress or liquidation.
EV/EBITDA
Enterprise Value divided by EBITDA. One of the most widely used valuation multiples, especially in M&A and leveraged buyouts, as it is capital structure neutral.
Free Cash Flow (FCF)
Cash generated by operations after accounting for capital expenditures. FCF = EBITDA – Taxes – Capex – Changes in Working Capital. The primary input in a DCF valuation.
Goodwill
An intangible asset recorded on the acquirer's balance sheet in an M&A deal, representing the premium paid over the fair value of the target's net identifiable assets. Goodwill is tested annually for impairment.
IRR (Internal Rate of Return)
The discount rate that makes the net present value (NPV) of all cash flows from an investment equal to zero. Used as the primary return metric in private equity to evaluate deals.
LBO (Leveraged Buyout)
The acquisition of a company using a significant amount of borrowed money (leverage) to meet the purchase price. The target's assets and cash flows serve as collateral for the debt.
Mezzanine Debt
A hybrid layer of financing that sits between senior secured debt and equity in the capital structure. Mezzanine is typically unsecured, carries a higher interest rate, and often includes warrants or equity conversion features.
MOIC (Multiple on Invested Capital)
Total value returned divided by total capital invested. MOIC = (Realized Value + Unrealized Value) / Invested Capital. Used alongside IRR to evaluate private equity investment performance.
Net Working Capital (NWC)
Current Assets minus Current Liabilities, typically excluding cash and short-term debt. NWC measures the short-term liquidity of a business and is a key input in FCF calculations.
P/E Ratio (Price-to-Earnings)
The ratio of a company's stock price to its earnings per share (EPS). A common equity valuation multiple — higher P/E implies the market expects higher growth or lower risk.
Precedent Transactions
A relative valuation method that values a company based on multiples paid in comparable past M&A deals. Typically yields higher values than comps because deal multiples include a control premium.
Return on Equity (ROE)
Net Income divided by Shareholders' Equity. Measures how efficiently a company generates profit from its equity base. A key profitability ratio in equity research and commercial banking.
Revolver
A revolving credit facility — a flexible line of credit that a company can draw on, repay, and redraw as needed up to a maximum limit. Typically the most senior and cheapest form of debt.
Senior Secured Debt
Debt that has the highest repayment priority in a company's capital structure and is backed by specific collateral (e.g., assets or receivables). Lower risk to lenders; therefore carries the lowest interest rate.
Terminal Value
The estimated value of a business beyond the explicit forecast period in a DCF model. Calculated using either the Gordon Growth Model (perpetuity growth rate) or an exit multiple applied to final-year EBITDA.
WACC (Weighted Average Cost of Capital)
The blended cost of a company's capital, weighted by each component's proportion in the capital structure. WACC = (E/V × Re) + (D/V × Rd × (1 – T)). Used as the discount rate in a DCF.
Waterfall Distribution
In PE, the order in which profits are distributed among investors and the GP. Typically: (1) return of capital, (2) preferred return to LPs, (3) catch-up to GP, (4) carried interest split (80/20 or 70/30).
Working Capital
The capital required to fund a company's day-to-day operations. In M&A due diligence, working capital peg analysis determines a "normal" level of NWC included in the deal and is a frequent source of post-close disputes.