20 Most Confusing Finance Terms
 
Understanding key financial terms is essential for making informed business decisions and evaluating company performance.

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1. Fixed Costs vs Variable Costs 

Fixed Costs: 
- Costs that do not change with production volume. 

Example: 
- Factory rent = $10,000/month → Remains constant whether 1 cable or 10,000 cables are produced. 

Variable Costs: 
- Costs that vary based on production or sales volume. 

Example: 
- Raw materials cost = $5 per cable → The more cables produced, the higher the total cost. 

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2. EBITDA vs Net Income 

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): 
EBITDA = Revenue – Operating Expenses + Depreciation + Amortization 

Example: 
- Revenue = $1,000,000 
- Operating Expenses = $400,000 
- Depreciation = $100,000 
- Amortization = $50,000 
EBITDA = 1,000,000 – 400,000 + 100,000 + 50,000 = $750,000 

Net Income: 
Net Income = EBITDA – Interest – Taxes 

Example: 
- Interest = $20,000 
- Taxes = $100,000 
Net Income = 750,000 – 20,000 – 100,000 = $630,000 

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3. Profit vs Revenue 

Revenue: 
- Total income from product and service sales. 

Profit: 
Profit = Revenue – Expenses 

Example: 
- Sales = $500,000 
- Expenses = $300,000 
Profit = 500,000 – 300,000 = $200,000 

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4. CAPEX vs OPEX 

CAPEX (Capital Expenditures): 
- Funds used to acquire, upgrade, and maintain physical assets. 

Example: 
- Buying new machinery for $50,000 → CAPEX 

OPEX (Operating Expenses): 
- Day-to-day expenses to run the business. 

Example: 
- Monthly electricity bill of $5,000 → OPEX 

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5. Accrual vs Cash Accounting 

Accrual Accounting: 
- Record revenue and expenses when they are incurred, regardless of payment. 

Example: 
- A sale made in December but paid in January → Recorded in December. 

Cash Accounting: 
- Record revenue and expenses when cash is exchanged. 

Example: 
- A sale made in December but paid in January → Recorded in January. 

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6. Market Cap vs Enterprise Value 

Market Cap: 
Market Cap = Share Price × Total Shares Outstanding 

Example: 
- Share price = $50 
- Shares = 1,000,000 
Market Cap = $50 × 1,000,000 = $50,000,000 

Enterprise Value: 
Enterprise Value = Market Cap + Debt – Cash 

Example: 
- Debt = $10,000,000 
- Cash = $5,000,000 
Enterprise Value = $50,000,000 + $10,000,000 – $5,000,000 = $55,000,000 

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7. Assets vs Liabilities 

Assets: 
- All resources owned and controlled by a company. 

Example: 
- Factory = $1,000,000 
- Machinery = $500,000 

Liabilities: 
- All obligations a company owes to others. 

Example: 
- Bank loan = $200,000 

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8. Gross Margin vs Net Margin 

Gross Margin: 
Gross Margin = (Gross Profit ÷ Revenue) × 100 

Example: 
- Gross Profit = $400,000 
- Revenue = $1,000,000 
Gross Margin = ($400,000 ÷ $1,000,000) × 100 = 40% 

Net Margin: 
Net Margin = (Net Income ÷ Revenue) × 100 

Example: 
- Net Income = $200,000 
- Revenue = $1,000,000 
Net Margin = ($200,000 ÷ $1,000,000) × 100 = 20% 

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9. Return on Investment (ROI) vs Return on Equity (ROE) 

ROI: 
ROI = (Net Profit ÷ Total Investment) × 100 

Example: 
- Net Profit = $50,000 
- Investment = $500,000 
ROI = ($50,000 ÷ $500,000) × 100 = 10% 

ROE: 
ROE = (Net Profit ÷ Shareholder's Equity) × 100 

Example: 
- Shareholder's Equity = $200,000 
ROE = ($50,000 ÷ $200,000) × 100 = 25% 

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10. Financial Leverage vs Operating Leverage 

Financial Leverage: 
- Use of debt in capital structure to amplify returns. 

Example: 
- A factory takes a $1,000,000 loan at 5% interest to finance new equipment. 

Operating Leverage: 
- Use of fixed vs. variable costs to amplify operating income. 

Example: 
- Increasing fixed costs (e.g., factory rent) vs reducing variable costs (e.g., labor). 

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✅ Summary Example (Cable Factory): 

Term	Example	Result
Market Cap	Share price × Total shares	50,000,000
Net Margin	Net Income ÷ Revenue	20%
ROI	Net Profit ÷ Investment	10%
CAPEX	New machine purchase	50,000

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Practical Insights: 
- Understanding EBITDA vs Net Income prevents misjudging profitability. 
- Knowing Fixed vs Variable Costs helps in cost control and forecasting. 
- ROI and ROE give insight into investment and shareholder returns. 
- Accrual vs Cash Accounting affects cash flow visibility. 

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