Glossary Of Financial Terms starting with E

List of Financial Terms (Alphabet Wise)

Earnings Per Share (EPS) The net profits of a company expressed on a per (EQUITY) SHARE basis. It is arrived at by dividing the figure of profits after taxes and DIVIDENDS paid on PREFERENCE SHARES, if any, by the number of equity shares outstanding. Therefore, it does not reveal the potential impact of dilution in earnings on account of securities such as convertibles or warrants that may be outstanding. Moreover, an improvement in EPS does not necessarily indicate a more productive use of the total amount of funds available with a firm.

Economic Value Added (EVA) A tool for evaluating and selecting stocks for investment, and also used as a measure of managerial performance. An American consultancy firm, Stern Stewart is credited with the development of this tool in the late eighties. It is calculated by subtracting the total cost of capital from the after-tax operating profits of a company.

EVA = After-tax Operating Profits – Total cost of capital

Operating profits simply mean earnings before interest and taxes. The cost of capital is the composite cost of total equity and debt, which together are deployed in various ASSETS such as land, buildings, machines, INVENTORIES, receivables and cash. Total equity includes reserves and shares PREMIUM, for which an appropriate OPPORTUNITY COST must be considered. A positive EVA is deemed to be a good sign and the higher it is, the better. EVA expressed on a per share basis facilitates comparison between companies.

EEFC Account This refers to the Exchange Earners' Foreign Currency Account, a scheme introduced in 1992 for exporters and residents receiving foreign exchange. A certain percentage of the earnings may be maintained in this account in order to limit exchange rate risk in case of future imports or for other specified purposes.

Efficient Portfolio A diversified selection of stocks resulting in a least risk PORTFOLIO for a given rate of return. At that level of RISK, no other portfolio provides superior returns. Combining shares from different unrelated industries helps to neutralize the UNSYSTEMATIC RISK inherent in each security. (See also MARKOWITZ MODEL.)

EOQ The acronym for Economic Order Quantity, a term that relates to INVENTORY management. It is the optimum size of order which minimizes the cost of purchasing and holding inventories.

Equity Grading A service offered by the credit rating agency, ICRA Limited, under which the agency assigns a grade to an equity issue, at the request of the prospective issuer. This symbolic indicator conveys the agency's opinion on the relative quality of equity being offered, on the basis of its in-depth study of the company and all relevant factors. It takes into account the earning prospects, risk and financial strength associated with the issuer, which reflect its managerial competence, industry outlook, competition, etc. credit rating agency, ICRA Limited, under which the agency assigns a grade to an equity issue, at the request of the prospective issuer. This symbolic indicator conveys the agency's opinion on the relative quality of equity being offered, on the basis of its in-depth study of the company and all relevant factors. It takes into account the earning prospects, risk and financial strength associated with the issuer, which reflect its managerial competence, industry outlook, competition, etc. There are 12 grades starting with ERAI (signifying excellent earning prospects with low risk) and ending with ERD3 (representing poor earning prospects and high risk). The agency also offers the service of Equity Assessment, which is at the request of an investor. This appraisal is a one-time exercise and is in the form of a report that is intended to help investors in their investment decisions.

Equity Share A security that represents ownership interest in a company. It is issued to those who have contributed capital in setting up an enterprise. Apart from a PUBLIC ISSUE, equity shares may originate through an issue of BONUS SHARES, CONVERTIBLE securities, WARRANTS, GDRS, etc. An alternative term that is sometimes used is 'COMMON STOCK' or simply, 'STOCK'.

The share of a public limited company can be subsequently sold through stock exchanges or other forums. The claim of equity shareholders on earnings and on ASSETS in the event of liquidation, follows all others. For example, DIVIDEND on equity shares is paid after meeting interest obligations and dividends to PREFERENCE shareholders. Hence, they are also known as 'residual owners'. For bearing such risk, equity shareholders expect handsome returns by way of DIVIDENDS and price appreciation of the share, when their enterprise performs well.

Escrow Cash, securities or other valuable instruments that are held by a third party to ensure that the obligations under a contract are discharged. The escrow mechanism is a technique of mitigating the risk to lenders and it is used typically in infrastructure projects such as power, roads or telecom. For example, an escrow account can be set up at a bank for depositing the payments of electricity bills.

Euro The common European currency that will come into being with the formation of the European Union. This economic union has given birth to the European Monetary Union tht will be characterized by a common CENTRAL BANK and MONETARY POLICY, besides the common currency. Elimination of exchange rate risk and reduction of transaction costs between members are seen as major benefits of the common currency. The circulation of the Euro is slated to take place in 2002 and it is expected to emerge as an important international currency. More specifically, it will compete with the US dollar as a reserve currency.

Euro Issue An issue of securities to raise funds outside the domestic market. Euro issues by Indian companies have been by way of GDRS or EUROCONVERTIBLE BONDS. The advantages associated with Euro issues are :

1. Reduced cost of capital owing to lower interest rates and floatation costs.
2. Efficient pricing that maximizes mobilization.
3. No immediate dilution of voting control.
4. Greater visibility due to international exposure.
5. Inflow of foreign currency funds.

Euro issues must conform to the guidelines issued by the Central Government. Among other thing, prior permission for an issue must be obtained from the Ministry of Finance. (See GDR and FOREIGN CURRENCY CONVERTIBLE BOND).

Eurobond A bond denominated in a currency different from that of the country in which it is sold.

Extraordinary Item An accounting term in the U.S. for a profit or loss to a company resulting from an unusual and rare occurrence or event. Examples include expropriation of properties by a foreign government or gains from refunding a BOND issue.