Category: Business – This Explainer

Return on equity compares net income with shareholders’ equity, showing accounting profitability while remaining sensitive to leverage and capital structure.

Return on assets relates earnings to the resources recorded on a company’s balance sheet, helping readers assess asset use within the right industry context.

The debt-to-equity ratio compares borrowed funds with owners’ book capital, offering a leverage signal that depends on definitions, industry, and repayment capacity.

Liquidity ratios compare near-term resources with near-term obligations, helping assess payment capacity while leaving important questions about asset quality and timing.

The quick ratio compares cash, short-term investments, and receivables with current liabilities, offering a stricter liquidity test than the current ratio.

Net present value converts expected future cash flows into today’s dollars and subtracts the initial investment to estimate whether a project creates value.

Internal rate of return is the discount rate that makes a project’s net present value zero, offering an intuitive percentage with important comparison limits.

Cost of capital is the return investors require for supplying funds at a given level of risk, making it a benchmark for investment and valuation decisions.

Weighted average cost of capital blends debt and equity funding costs into a hurdle rate for company-level cash flows, using current weights and risk assumptions.

Opportunity cost is the value of the best alternative given up when a choice is made, including important benefits that may never appear in accounting records.

A sunk cost has already been incurred and cannot be recovered, so the next decision should depend on future costs, benefits, risks, and available alternatives.

Marginal cost is the change in total cost caused by producing one additional unit, making it central to short-run output and incremental decisions.