Time to admit it: half the battle in high finance is understanding what anyone’s actually talking about. Throw around some Greek letters, acronyms, and made-up-sounding words, and suddenly you’re as confused as you were the first time you watched ‘The Big Short’.
Let’s crack open the IB dictionary and give these buzzwords the breakdown they deserve.
EBITDA – The MVP of Profitability Metrics
It’s the go-to metric that analysts, bankers, and investors love to throw around, and for good reason. Once you know what it stands for (and what it leaves out), it becomes go-to metric for slicing through the financial fog.
EBITDA = Earnings Before Interest, Tax, Depreciation, and Amortisation.
Translation? EBITDA stands for ‘Earnings before Interest, Tax, Depreciation, and Amortisation.’ Simply put this is a company’s earnings purely from the operational side of the business, as EBITDA strips out anything that is not specifically related to the profitability of the company or related to things that are outside of the company’s control.
Here’s why investors love it:
- Interest – Debt levels vary across companies. As a result, the amount of interest that companies pay will vary. Also, interest rate environments vary by country, resulting in varying levels of interest paid by different enterprises. By excluding interest, EBITDA allows organisations’ profitability to be compared, even if they have significantly differing levels of debt.
- Tax – Companies exist in different countries and therefore have different tax obligations and different methods to defer taxes available to them. By stripping out tax, EBITDA lets us compare companies’ profitability without comparisons being skewed due to different tax rules, which are often outside of the business’s control.
- Depreciation and Amortisation – Depreciation and Amortisation are slightly more complicated. These refer to non-cash accounting expenses that reflect how the value of assets falls over time. Depreciation applies to tangible assets like machinery or vehicles, whereas amortisation applies to intangible assets like patents and intellectual property. Companies will have varying amounts of these assets on their balance sheets and will use different methods to account for them. So, by stripping them out, EBITDA makes comparing companies easier, as it removes the impact of asset-related accounting, making core profitability easier to compare.
So, EBITDA gives a cleaner, more apples-to-apples view of how well a company’s core business is performing. And yes, it’s the cornerstone for valuation multiples like EV/EBITDA, a classic in the investment banker’s toolkit.
Market Capitalisation – Size Really Does Matter
Market cap: sounds intense, but it’s really just:
Market Cap = Share Price × Number of Shares Outstanding
It’s how much the market thinks a company is worth. Not how much cash it has, or how good its products are, but how much investors are willing to pay for a slice of it.
It’s a great way to size up a company. Is it a nimble small-cap startup with big dreams? Is it a mid-cap player gearing up for its glow-up? Or a market-moving titan that dominates headlines? Knowing where a company lands on the market cap scale gives you an idea of its risk profile, growth potential, and how it might respond to economic swings.
Leverage – Debt Trap?
Leverage is one of those financial terms that sounds more complex than it is. Leverage is just a fancy way of saying, “We borrowed money to (hopefully) make more money.” If a company is referred to as ‘highly leveraged’, this means it has taken on a significant amount of debt relative to its equity.
Companies use debt for three main reasons:
- It’s cheaper than equity – Debt can often be a cheaper way to raise funds. The interest payments that are associated with debt are usually lower than the returns equity investors will expect to earn. Also, interest payments are often tax deductible.
- They keep control—When companies issue equity, they need to give up a proportion of the company. However, taking on debt means companies can access the funds they need without handing over the reins to new shareholders.
- Returns get juicier if things go well (this is a big if) – When a business is performing well, it is able to deliver returns to shareholders. By taking on debt rather than equity, profits are shared amongst fewer people, resulting in better returns.
But here’s the catch—debt doesn’t care if your revenue tanks. Interest payments are non-negotiable, and too much leverage can turn into a fast track to bankruptcy.
Synergies – The Buzzword You Can’t Escape
You’ll hear synergies tossed around every time two companies merge like it’s some sort of magic dust that turns 1 + 1 into 3. Despite sounding like corporate jargon, synergies has a simple meaning at its core. Synergies are the benefits that are expected to arise from two companies coming together.
Two types to know:
- Cost Synergies: Cut the fat – These are the benefits that reduce overall costs when two firms come together. These come from cutting overlapping costs or improving overall efficiency. For example, combining head offices, reducing overlapping staff, or consolidating supply chains. The idea is that the merged company should be able to operate more cheaply than the two companies could separately
- Revenue Synergies: These are the benefits that come from the merged company being able to generate more revenue than it could prior to merging. These synergies can come from cross-selling products to a wider customer base, bundling services together, or entering new markets more efficiently as a combined business.. More revenue = more champagne.
These synergies are typically the way companies justify M&A deals. The logic is that if a combined company can save more and/or earn more, it is worth paying a premium up front to acquire the target.
Synergies are great in theory, but execution is tough. Integration costs are real. Cultures clash, systems don’t align, and sometimes those dreamy synergies disappear into thin air.
Alpha – Beating the Market
In Greek, alpha might mean “first.” In finance, it means “better.”
Alpha = Performance above a benchmark (after adjusting for risk).
If your portfolio earns 12% and the market earns 10%, congrats—you’ve earned 2% alpha. Proof (maybe) that you or your fund manager knew what they were doing.
Alpha is particularly important in the world of active investing, where managers charge higher fees under the promise of delivering returns that beat the market. It’s the metric that tells you whether they’ve actually earned those fees or just rode the wave with everyone else.
There are different types of alpha calculations too. Jensen’s Alpha, for example, adjusts returns for risk using CAPM, so it accounts for how much risk was taken to get those returns. A high alpha with low risk? That’s the dream. A high alpha with reckless bets? That’s a gamble, not genius.
It also plays a key role in evaluating hedge funds, private equity, and portfolio strategies. Many institutional investors use alpha to separate the skilled from the lucky. In this industry, separating those two is half the game.
At its heart, alpha reflects skill, timing, and sometimes a little market magic. But don’t forget, generating alpha consistently is hard, which is why most of Wall Street spends their careers chasing it.
So… Why Should You Care?
Because this is the language of investment banking and high finance. Whether you’re pitching a deal, building a model, or trying to sound smart in an interview, these terms will guide you.
Mastering them puts you in the fast lane. And now that you’re fluent in IB jargon, you’ll never have to nod along awkwardly again when someone says, “What’s the company’s EV/EBITDA multiple post-synergy integration?”
