One of my goals at Analyzing Alpha is to help new investors and traders get their bearings. And one of the fastest ways to build knowledge and expertise about investing is to learn the meaning of investing and trading terms. With that in mind, I have selected and given a brief explanation of the need-to-know terms that I think you will be well-served learning.
Rather than putting everything in alphabetical order, I have tried to organize each category based on what “makes sense”. For example, the basic terms start with the most foundational concepts and proceed to the more advanced terms. The financial statement terms are listed in how they appear on the financial statements, etc.
If you’re new to investing and trading, I suggest reading through all of the terms a few times as they all relate to each other instead of memorizing them. This will help you have much more context as you dip your toes into investing, and you’ll be surprised how quickly you begin to understand!
Exchanges are the regulated securities marketplaces where buyers and sellers interact. The New York Stock Exchange (NYSE) is the largest and most famous. But there are at least 13 exchanges at the time of this writing in the USA and many more worldwide.
A share is a unit of “shared” stock ownership. Before trading was digitized, investors used to get stock certificates that proved they owned a certain number of shares of company stock. See stock.
Stock refers to any form of ownership in a company in exchange for an investment in that company. When there are multiple company owners, ownership is represented in shares, and shares can be sold to other people willing to pay for them. This forms the foundation of the stock market.
A broker is a company that acts as an agent in the stock markets, purchasing and selling securities on behalf of its customers. Investors use brokers to buy and sell stocks, bonds, and other securities in the markets. TD Ameritrade, Charles Schwab, and Fidelity are some of the most well-known brokers in the US.
An order refers to any request an investor makes to a broker to buy or sell any kind of security.
Bonds are a form of debt issued by governments and corporations. Investors buy bonds because the issuer offers to pay a specific interest on the principal borrowed. Bonds are considered a “fixed-income” security since they often pay a set interest rate to the bondholder. There are many different types of bonds, including some that pay variable interest rates depending on factors such as inflation.
Yield, in investing, refers to the amount of money you receive while holding an investment. Yield often refers to the annual dividends paid or expected to be paid on stock and is the dollar value of the dividends divided by the current cost of the stock. Bonds also have a yield since they pay out a percentage of their face value each year to the bondholders.
Index funds, similar to indices themselves, are created to track the performance of an index or a subset of the markets. The S&P 500 is an example of an index that represents the market by monitoring the top 500 firms. But you can’t buy S&P 500 shares directly since it is just a calculated number. You would invest in an index fund based on the S&P 500.
An Exchange Traded Fund (ETF) is an iteration on Mutual Funds. An ETF holds an underlying basket of investments in other securities like mutual funds. Still, unlike a mutual fund dealt by the Fund Company, an ETF can be traded throughout the day on the major exchanges at market-derived prices, just like stocks. Although this distinction breaks down over time, ETFs tend to have lower expense ratios and fees than mutual funds.
A mutual fund is an investment vehicle offered by a Fund Company which allows investors to achieve a diversity of holdings with a single purchase. According to the prospectus, a mutual fund manager takes all the money they receive from shareholders and purchases stocks, bonds, and cash equivalents on the open markets. Their published investment strategy guides how they invest their shareholders’ money. Some mutual funds aim for producing consistent income, while others might seek high growth opportunities in the small-cap equity markets.
NAV stands for Net Asset Value and is used in the context of mutual fund pricing. Net Asset Value is calculated each day by dividing the net value of the assets in the fund by the number of shares, which becomes the basis for the cost of purchasing additional shares. NAV is the cost of a share of a mutual fund before any applicable loads (sales charges set by the Mutual Fund Company based on how many shares an investor is purchasing).
Dividends refer to the small payments that some companies pay to the holders of their stocks. Dividend stocks are the stocks that pay a dividend. Blue chip and utility stocks often pay dividends. Bonds also pay dividends called “bond dividends”. Bond dividends are paid at a guaranteed rate or yield.
A stock quote is an approximate price you can expect to buy or sell a security. Often, there is a difference between the quoted price and the execution price an order receives. This occurs for various reasons explained in my recent article on slippage.
When a trader enters an order in a broker’s system, the broker tries to fulfill that order as quickly as possible. Fulfilling the order within the appropriate exchange is called “executing an order”. The ultimate price that an order receives is called the “execution price”. Sometimes the execution price differs from the quoted price.
The stock symbol, also called the ticker, refers to the letters representing a stock in its respective exchange. Every symbol is unique, and trading platforms are often set up to function using the symbols rather than the full name of a company. ETFs and Mutual Funds also have ticker symbols.
The bid refers to the highest price market makers are currently willing to pay to buy a security in a specific market. It is the first number in the bid/ask quote. It is the number that a seller could “take” with a market sell order.
The Ask is the lowest price a seller currently offers to sell specific security within a particular market. The Ask is the second number in a bid/ask spread. If an Ask lists a Price followed by a number (e.g., $43.20 x 900), the second number is probably the number of shares offered.
Spread refers to the price difference between the bid and the ask prices for a particular stock. If a stock has a small spread of 1 or 2 cents, it is a well-traded stock with sufficient liquidity. If a stock has a large spread of 15 cents or more, it may be thinly traded, and an investor should research whether the stock has sufficient liquidity and volume for their purposes.
The high and low refer to the highest or lowest price point a security or index reached within a specific timeframe. So the intraday high and low tell you the extremes reached during the day. Annual high or low are also commonly used.
The open is the price at which a stock is first traded at the beginning of the day when the exchange opens. The close is the last price the stock traded at when the market hours end.
An asset is anything of value held within an investor’s account. Assets can also be called “holdings”. When investors open an investment account, they use their money to purchase “assets” to generate value over time. Typical assets include mutual funds, ETFs, public stocks, and bonds. Assets are what earn money for investors, but the term also applies to anything of positive worth on an organization’s balance sheet.
Risk tolerance refers to what level of risk is acceptable to a specific investor. Just as different people have varying tolerance for physical pain, different investors have a varying willingness to accept more significant risks in pursuit of greater potential returns on their investments. Risk tolerance is categorized on a spectrum from very aggressive to very conservative.
To allocate something is to arrange it or select a proper place. Asset Allocation refers to the process of making sure that an investor has the right “mix” of investments in their accounts, given their goals, time horizon, and risk tolerance. Different types of investments are classified into groups, and financial advisors help investors allocate their account holdings to diversify the underlying sectors and classes to reduce risk.
An investor’s time horizon refers to the likely period between when an investor gets into an investment and when they intend to get out of that investment and use the funds for other use (such as living expenses in retirement). A 55-year-old saving for retirement may have a 15-year time horizon, whereas a 25-year-old probably has a 40-year time horizon. On the other hand, a day trader has an extremely short time horizon of one day.
A diverse portfolio means that the holdings in your investment portfolio comprise different companies, sectors, industries, and even global regions. Portfolio diversification is a core risk management strategy in investing. It is essentially the principle of not putting all of your investor eggs in one investment basket.
A sector is a subsection of the market. It might be an industry, such as the healthcare sector. Or it might be based on other criteria, such as how old a company is (e.g., start-ups vs. blue chips).
RIA (Registered Investment Advisor)
A Registered Investment Advisor is a person or company which has received the required training, certifications, and regulatory compliance to legally give investment advice. RIA charges advisory fees on the assets under their management (or on an hourly basis less commonly) and has a “fiduciary responsibility” under the law to act in their client’s best interest. This contrasts with broker-dealers who make money on commissions based on the products they sell and are held to a “suitability” standard under the law.
People refer to The Dow Jones Industrial Average (DJIA) as “the Dow” or the “Dow Jones”. The Dow is not a market but a price-weighted index that tracks and represents how a small number (30) of the largest publically traded stocks are doing. It is used just to include industrial companies but is broader today. Because the Dow only consists of 30 companies, the S&P 500 is considered a better index for the broader US stock market.
NASDAQ stands for the National Association of Securities Dealers Automated Quotations, a major electronic stock market exchange, second only to the NYSE in terms of Market Cap. Based in the US, the NASDAQ is notable for including non-US-based stocks and not having a physical trading floor. “The NASDAQ” also refers to the stock market index by the same name, which tracks all of the stocks listed on the NASDAQ exchange. The NASDAQ has more tech-related stocks than the NYSE.
NYSE stands for the New York Stock Exchange, the largest stock exchange globally in terms of market capitalization. Founded in 1792 in New York City, the NYSE is home to most of the 30 companies that form the Dow Jones. The NYSE can be monitored using the NYSE Composite Index.
Day trading is when an investor initiates and exits positions in the market all on the same day. If an investor enters and exits short-term positions over multiple days or just a few weeks, they are referred to as a “swing trader”. Day traders need to open special accounts for day trading to follow regulations. See Regulation T for more.
Market Capitalization refers to the total value that investors in the market are collectively ascribing to a corporation via share price. Market Cap is the collective value of all outstanding shares (the number of shares outstanding multiplied by the share price). Investment analysts use the market cap to discern whether a stock is overpriced or not and group public companies into categories (e.g., Large Cap, Mid Cap, Small Cap).
Your investment portfolio is the collection of all your investment assets viewed as a whole, regardless of how many accounts you may have. Investors need to consider their overall portfolio, assessing whether their holdings are aggressive or conservative enough for their goals and risk tolerances. A portfolio can include multiple accounts, each holding different investment vehicles such as mutual funds, stocks, ETFs, derivatives, futures, etc.
More Advanced Terms
Balance Sheet The balance sheet is the financial statement prepared by a company’s accountants to give a snapshot in time of what that company owns (its assets), what it owes in the form of debt and payments due (its liabilities), and which shareholders own what portion of the resulting valuation (the equity). Investors care about balance sheets because the information helps investors assess and compare companies’ health and potential growth.
An indicator is a calculated measure of some aspect of performance. Fundamental investment analysis uses indicators that measure aspects of the underlying company behind the stock, such as Earnings Per Share. On the other hand, technical indicators don’t focus on the company at all but rather on the trends related to the price and volume of a security, such as a moving average.
In Investing, Alpha (or α) is a standard measure of the marginal value created by managers of a fund compared to the closest index or benchmark to that fund. Positive alpha means the fund outperformed its benchmark by a certain percentage per year.
The basic idea is this: index funds have lower fees since they just hold whatever is in a specific subset of the market without doing any research to pick and choose. They have passively managed funds. The alternative is to pay more to have an actively managed fund where the fund manager tries to outperform the index by researching and picking select investments. Alpha measures whether the active management generated additional returns or not. Investors are always seeking a positive alpha.
Beta (i.e., β, also Beta coefficient) refers to a common measure of a security’s price volatility compared to a benchmark. Beta is a ratio of the particular security’s price movements over time divided by the price movements of the benchmark over that same time. A beta coefficient greater than 1.0 means that the security’s price is more volatile than the index, and a beta less than 1.0 is less volatile.
Investors rely upon a comprehensive report that publically traded companies must publish for their shareholders once a year with updates about their activities, financials, opportunities, and more. Annual reports are required by the SEC (Securities & Exchange Commission). Investors and fund managers spend a lot of time combing through annual and quarterly reports to determine whether to buy/hold/sell a company’s shares.
Technically, arbitrage refers to buying and selling the same asset in two different markets simultaneously to make a profit from the price difference between the two markets. In practice, investors use the term arbitrage to refer to any opportunity to make a profit purely by selling in a different marketplace than where you purchased the security.
Averaging down refers to buying more of an existing holding because the share price has gone down. If you buy more at lower prices, you reduce your average cost per share, thereby increasing your profit potential if the price comes back up. For example, if an investor buys two shares of stock X for 20, their average cost per share is 10. But if the price drops to 7 on what the investor believes is a temporary over-reaction to negative news, that investor might “average down” and buy two more shares. This would reduce his average cost per share from 10 to $8.50. Averaging down is only a good idea if you’re confident that the price will eventually come up.
Bear Market and Bull Market
The investment community refers to stock market periods when stock prices rise (faster than inflation) as Bull Markets because a bull was historically a sign of strength and wealth. On the other hand, the Bulls were just a nuisance and a threat. So a market that is falling or in recession is called a bear market.
Blue Chip Stocks
Blue Chip Stocks are the stocks of companies generally regarded as the safest investments because they are large, established, profitable companies that have been in business and have paid dividends for a long time. Coca-Cola, Visa, and ExxonMobil are some examples.
According to the balance sheet, book value refers to the net value of a company’s assets minus its liabilities. Book value is used to calculate book value per share, which investors use to evaluate whether they should purchase stock at a specific price or not.
Capital Gains (and Capital Losses)
Capital gains are the value increases (profits) that your investments produce. These gains must be reported for tax purposes, and they are taxed at a different rate than ordinary income. Capital losses refer to the amount that your investments decreased in value over a period of time. Capital losses are also reported in certain tax situations.
Earnings Per Share (EPS) The earnings per share (EPS) of a stock is simply the total profit reported by the company divided by the number of shares outstanding. It is a useful measure for stock analysis.
In an investing context, Float refers to the number of shares currently held by the general public (so Float = Outstanding Shares – Restricted Shares – Closely Held Shares). Float is relevant because it can provide clues about the liquidity of a particular security.
Initial Public Offering (IPO)
Public Offerings are when a company offers equity shares for the general public to purchase. This is one way for large companies to secure funds for development. The IPO refers to the first or initial time that a particular company offers its shares to the public.
After a company has “gone public” by offering its securities to the general public via an IPO (Initial Public Offering), it may find that it needs to raise additional funds later on. If the company issues new shares, this is called a secondary offering or follow-on public offer (FPOs).
Leverage refers to when a company uses borrowed money (debt) to fund its operations with the expectation that the company can earn an amplified return on its investment precisely because it is using less of its own money. Leverage for an investor is similar – the investor borrows funds to make investments with the hope of earning more after paying interest and debts off than if they didn’t borrow any money.
Margin trading is an example of using leverage. An investor trading on margin is borrowing funds from their broker to make trades, typically collateralized using some of the investor’s other funds to ensure that the broker gets repaid. You need a Margin Account to trade on margin. If you try to use a cash account to day trade, you will likely break Regulation T rules and have your account restricted for 90 days.
A [moving average/moving-average) is a charted line that takes the average price of a certain period of days preceding and charts that to mute daily volatility and reveal the momentum or direction a stock price is heading.
The Price to Earnings Ratio (P/E Ratio) is a statistical measure used by analysts to assess whether the shares of a particular company are a good buy or not. They take the price of a single share and divide it by the profit earned per share (EPS), and the resulting ratio reveals how many dollars an investor must pay for every dollar a share earns the company. For example, a P/E ratio of 15 means that shares are trading for 15 times earnings.
A support level is a price at which a falling stock ceases to fall in price and stabilizes. This happens due to the demand for the low-priced stock kicking in at a specific bargain price.
To sell short means that you are selling a security before you’ve technically even purchased that security. A short seller borrows the security for a limited time to sell it, repurchase it later, and return it to replace the dealer’s inventory. Selling short is only profitable if the stock price goes down after the investor makes the initial sale. This way, it is the opposite strategy of the traditional long-term investor.
Volatility refers to how much the price of security changes over time, up or down. If the price changes significantly and frequently, the stock is very volatile. If the price stays level, it has low volatility. Volatility is often described in terms of standard deviation.
Trading volume is a technical indicator that tells investors how many shares were exchanged during a set period (so the daily volume is the number of shares traded that day). Traders use volume to assess the strength and confidence of trends in a particular security.
A share buyback is when a public company decides to repurchase shares from shareholders in the open market to reduce the number of shares outstanding for strategic financial reasons. Share buybacks often lead to an increase in the valuation of the outstanding shares.
After Hours Trading
After-hours trading refers to trades made outside of regular hours when the exchange is open. After-hours trades are automatically processed over Electronic Communications Networks (ECNs) that automatically match buyers’ and sellers’ orders.
A rally is a continuous significant rise in stock prices that theoretically may last for any length of time but often plays out somewhere from a few days to a few months. A rally can be termed a bull market rally or a bear market rally depending on the context in which it takes place. You can also have an “intraday rally”.
Pink Sheet Stocks
Pink sheet stocks are not traded on any exchange but rather through the facilitation of a broker-dealer network “over the counter” (directly between dealers rather than through a facilitated exchange). Pink sheet stocks do not have to provide financial information like companies listed on the exchanges because they are not regulated by the SEC. Pink Sheet Stocks are viewed as significantly more risky investments due to the lack of regulation and transparency requirements, which opens the door to fraudulent “shell companies”.
A penny stock is any stock that trades for less than $5 per share, whether it is on a major securities exchange like the NASDAQ or whether it is an unregulated pink sheet stock traded over the counter. Investors need to be extra cautious with penny stock investing since it bears risks similar to pink sheet stocks.
When an investor uses a cash account, they must pay for security with “settled” cash before selling that security. If they sell a security before the payment has settled, they break free ride rules in Regulation T, and will likely have their account restricted.
Regulation T (or “Reg T” in some circles) is a regulation set forth by the Federal Reserve Board that limits how brokers handle cash accounts and margin accounts for investors and sets forth requirements for the timing of payments that cover investment orders.
When a trader buys and sells the same security within the same day, it is considered a day trade and has unique regulations and requirements that the trader must follow.
The financial terms listed below are in the order they would appear on the applicable financial statement. I’ve listed the financial metrics in alphabetical order. I used these terms when creating a company fundamental database using Sharadar. I’ve updated and added additional terms where I felt it was beneficial.
Financial Statement Terms
Income Statement Terms
Amount of Revenue recognized due to normal business activities. Revenue includes goods sold, services rendered, insurance premiums, Interest income for financial institutions net of the provision for credit losses, and interest expense.
Cost of Revenue
The cost of revenue is the total cost over a reporting period to produce the goods sold or the services rendered.
Research and Development Expense
Research and development expense, often abbreviated as R&D, is a component of operating expenses. R&D represents the total costs incurred in activities related to discovering new knowledge or innovations that will be useful in developing a new product or service.
Selling General and Administrative Expenses
Selling, General, and Administrative Expense, often abbreviated as SG&A, is a component of operating expenses. SG&A represents the total aggregate cost related to revenue generation, including direct and indirect selling, general, and administrative expenses.
Direct selling expenses, such as advertising and warranties, relating to the sale of specific products. Indirect selling expenses, including costs like brand marketing and sales executive salaries, are expenses that can’t be attributed to the sales of a particular product or service. General and administrative expenses include utilities, communication services, office rent, and salaries of non-sales personnel.
Operating expenses, abbreviated as OpEx, represent the total ongoing cost of running a business. OpEx includes SG&A, R&D, and other expense items. OpEx does not include the Cost of Revenue.
Operating income is a measure of financial performance before deducting interest expenses, tax expense, and other Non-Operating items. The formula for Operating Income is gross profit minus Operating Expenses.
Earnings Before Income and Taxes
Earnings Before Income and Taxes, often referred to as EBIT, is Operating income plus non-operating income and expenses and other income and expenses.
Interest Expense is the cost of borrowed funds.
Income Tax Expense
Income Tax Expense equals the amount of current income tax expense (benefit) and deferred income tax expense (benefit) for continuing operations.
Effective Tax Rate
The Effective Tax Rate is the tax rate reported most frequently on financial statements. The formula for calculating the Effective Tax Rate is Taxes Paid / Taxable Income. Taxable income is also known as Earnings before Taxes.
Marginal Tax Rate
The Marginal Tax Rate is the tax rate paid on the last dollar of income. Aswath Damodaran provides the Corporate Tax Rates by Country.
Net Income / (Loss) from Discontinued Operations
Discontinued operations pertain to eliminating a meaningful part of a company’s business. Net Income / (Loss) from Discontinued Operations is the amount of after-tax income or loss from the disposal. Net Income / (Loss) from Discontinued Operations is reported as a separate income component.
Consolidated income is the period’s after-tax profit or loss before the deduction from non-controlling interests attributable to the consolidated business.
Net Income to Non-Controlling Interests
Net Income to Non-Controlling Interests is the portion of income attributable to non-controlling interest shareholders. Net Income to Non-Controlling Interests is subtracted from Consolidated Income to obtain Net Income.
Net income is the after-tax profit or loss for the period after deducting Net Income to Non-Controlling Interests from Consolidated Income and before reducing Preferred Dividends.
Preferred Dividends are payments to preferred stockholders owning preferred shares. Preferred Dividends are deducted from Net Income to obtain Net Income to Common Stockholders.
Net Income to Common Stockholders
Net Income to Common Stockholders is the portion of Net Income / (Loss) for the period due to common shareholders. Net Income to Common can be different from Net Income due to the subtraction of Preferred Dividends.
Earnings per Basic Share is the amount of Net Income to Common Stockholders for the period per Share (Weight Average) after adjusting for Share Factor.
Earnings per Diluted Share is the Net Income to Common Stockholders for the period per Share (Weighted Average Diluted) after adjusting for Share Factor.
The Weighted Average Shares is the number of outstanding shares issued and used by the company to calculate Earnings Per Share. The Weighted Average Shares depend on the timing of shares issued during the period.
The Weighted Average Shares Diluted is the number of issued shares that are outstanding and used by the company to calculate Earnings Per Share (Diluted). Diluted shares include common shares plus convertible instruments such as options and warrants. The Weighted Average Shares depend on the timing of shares issued during the period.
Balance Sheet Terms
Total Assets are the sum of the carrying amounts of all assets recognized as of the balance sheet date.
Cash and Equivalents
Cash and Equivalents is a components of Assets that represent the amount of currency on hand and demand deposits available for withdrawal from financial institutions.
Investments are a component of Assets that represents the total aggregate amount of marketable and non-marketable securities, receivables, and other invested assets.
Current investments represent assets readily realizable that are not intended to be held for more than a year from purchase. Current Investments are reported if the company operates a classified balance sheet that segments existing and non-current assets.
Non-current investments represent assets that are not readily realizable and are intended to be held for more than a year from purchase. Non-Current Investments are reported if the company operates a classified balance sheet that segments current and non-current assets.
Deferred revenue is a component of liabilities representing the carrying amount of receivables that were not recognized as revenue. These generally include sales, licensing fees, and royalties but exclude interest income. Deferred revenue is usually classified as a current liability.
Deposit Liabilities are a component of Liabilities, mainly down payments, representing the total of all deposit liabilities, including foreign and domestic interest and noninterest-bearing deposits.
Property Plant & Equipment Net
Property, Plant & Equipment, often abbreviated PP&E, is a component of Assets representing long-term operational assets not easily converted into cash and not intended for resale.
PP&E net is the carrying amount after accumulated depreciation. Accumulated depreciation is the depletion and amortization of physical assets used to conduct business to produce goods and services.
Inventory is a component of Assets representing the amount of inventory/stock expected to be sold or consumed within one operating cycle after valuation and reserves.
Tax assets are a component of Assets representing assets that may reduce future tax responsibilities.
Trade and Non-Trade Receivables
Trade and Non-Trade Receivables is a component of Assets representing trade and non-trade receivables. Trade receivables, also called accounts receivable, are receivables created through regular business activities or “trade”. Non-Trade receivables are payments due to non-trade activities, such as employee advances.
Trade and Non-Trade Payables
Trade and Non-Trade Payables is a component of Liabilities representing trade and non-trade payables. Trade payables, also called accounts payable, are payables created through regular business activities or “trade”. Non-Trade payables are payments due to non-trade activities, such as employee payroll.
Goodwill and Intangible Assets
Goodwill and Intangible Assets is a component of Assets representing the carrying amounts of goodwill and all intangible assets, net of accumulated amortization and impairment charges, as of the balance sheet date.
Total Liabilities are the sum of the carrying amounts of all recognized liabilities as of the balance sheet date.
Shareholders Equity represents the total of all stockholders’ equity (deficit) after receivables from owners, officers, directors, and affiliates attributable to the parent.
Accumulated Retained Earnings (Deficit)
Accumulated Retained Earnings (Deficit) is equity representing the cumulative amount of the entity’s undistributed earnings or deficit. Accumulated Retained Earnings is reported only annually by some companies.
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income, often abbreviated AOCI, is a component of equity representing the accumulated change in equity from transactions and other events from non-owner sources after-tax at period end.
AOCI includes foreign currency translation items and certain pension adjustments. AOCI also includes unrealized gains and losses on specific equity and debt instruments investments.
Current Assets is the portion of Assets expected to be converted into cash within one year. Existing Assets is reported if a business operates a classified balance sheet that separates current and non-current assets.
Non-Current Assets is the portion of assets that are not expected to be converted into cash within one year. Non-Current Assets is reported for firms that operate a classified balance sheet that separates current and non-current assets. Non-Current Assets is calculated as the difference between Total Assets and Current Assets.
Current Liabilities is the portion of Liabilities that the firm expects to pay within one year. Current Liabilities is reported if the company operates a classified balance sheet that segments current and non-current liabilities.
Non-Current Liabilities is the portion of Liabilities that the firm does not expect to pay within one year. Non-Current Liabilities is reported if the company operates a classified balance sheet that segments current and non-current liabilities.
Tax Liabilities is a component of Liabilities representing outstanding tax liabilities.
Total debt is a component of Liabilities representing the total amount of current and non-current debt owed. Total debt includes credit facilities, commercial paper, notes payable, secured and unsecured bonds, lines of credit, capital lease obligations, and convertible notes.
Current debt is the portion of debt expected to be paid within one year. Current debt is reported if the firm operates a classified balance sheet that separates current and non-current liabilities.
Non-Current debt is the portion of debt that is not expected to be paid within one year. Non-Current debt is reported if the firm operates a classified balance sheet that separates current and non-current liabilities.
Cash Flow Statement Terms
Capital Expenditure, also abbreviated as CapEx, is a Net Cash Flow from Investing component. CapEx represents the net cash inflow (outflow) associated with the acquisition and disposal of long-lived, physical & intangible assets that are not intended for resale and are used in the ordinary course of business to produce goods and services. CapEx includes cash inflows/outflows to pay for developing self-constructed assets & software.
Net Cash Flow – Business Acquisitions and Disposals
Net Cash Flow – Business Acquisitions and Disposals is a component of Net Cash Flow from Investing representing the net cash inflow (outflow) associated with the acquisition & disposal of businesses, named investments, affiliates, and joint ventures.
Net Cash Flow – Investment Acquisitions and Disposals
Net Cash Flow – Investment Acquisition and Disposals is a component of Net Cash Flow from Investing representing the net cash inflow (outflow) associated with investment acquisition & disposal, including loan originations and marketable securities.
Net Cash Flow from Financing
Cash Flow from Financing, sometimes abbreviated as NCFF, is a component of Net Cash Flow / Change in Cash & Cash Equivalents representing the amount of cash inflow (outflow) from financing activities for both continuing and discontinued operations. The primary components of financing cash flow are issuance (purchase) of equity, issuance (repayment) of debt, and payment of cash distributions and dividends.
Issuance (Repayment) of Debt Securities
Issuance (Repayment) of Debt Securities is a component of Net Cash Flow from Financing, signifying the net cash inflow (outflow) from issuance (repayment) of debt securities.
Issuance (Purchase) of Equity Shares is a component of Net Cash Flow from Financing, representing the net cash inflow (outflow) from common equity activities. Issuance (Purchase) of Equity Shares includes contributions from share issuances and stock options and outflow from share repurchases.
Payment of Dividends & Other Cash Distributions
Payments of Dividends and Other Cash Distributions is a component of Net Cash Flow from Financing representing payments on common stock and restricted stock units for dividends and dividend equivalents.
Net Cash Flow from Investing
Net Cash Flow from Investing, sometimes abbreviated as NCFI, is a component of Net Cash Flow representing the amount of cash inflow (outflow) from investing activities, from both continuing and discontinued operations. Principal components of NCFI are capital (expenditure) disposal of equipment, investment (acquisition) disposal, and business (acquisitions) disposition.
Net Cash Flow from Operations
Net Cash Flow from Operations, sometimes abbreviated as NCFO, is a component of Net Cash Flow representing the amount of cash inflow (outflow) from operating activities from both continuing and discontinued operations.
Effect of Exchange Rate Changes on Cash
Effect of Exchange Rate Changes on Cash is a component of Net Cash Flow representing the amount of increase (decrease) from exchange rate changes on cash and cash equivalents held in foreign currencies.
Net Cash Flow / Change in Cash & Cash Equivalents
Net Cash Flow / Change in Cash & Cash Equivalents, sometimes abbreviated as NCF, represents the amount of increase (decrease) in cash and cash equivalents. NCF includes Net Cash Flow from Operations (NCFO), Net Cash Flow from Investing (NCFI), and Net Cash Flow from Financing (NCFF) for both continuing and discontinued operations and the effect of exchange rate changes on cash.
Share-Based compensation, sometimes abbreviated as SBC, is a component of Net Cash Flow from Operations representing the total amount of non-cash, equity-based employee compensation. SBC may include the value of stock or options, amortization of restricted stock, and adjustment for officers’ compensation. SBC is non-cash and added back when calculating net cash generated by operating activities using the indirect method.
Depreciation, Amortization & Accretion
Depreciation, Amortization & Accretion is a component of operating cash flow representing the aggregate net amount of depreciation, amortization, and accretion recognized during an accounting period. Deprecation, Amortization & Accretion is a non-cash item added back to net income when calculating cash provided by or used in operations using the indirect method.
Financial Statement Metrics & Calculations
Market Capitalization represents the product of Basic Shares, Share Price, and the Share Factor.
Enterprise value, abbreviated as EV, is a measure of the value of a business as a whole. The EV is what an individual or entity would need to purchase the entire company from both equity and debt holders. Enterprise Value is calculated as Market Capitalization plus Debt minus Cash & Equivalents.
Invested Capital is an input into the Return on Invested Capital. Invested Capital is calculated as Debt plus Assets minus Intangibles minus Cash and Equivalents minus Current Liabilities.
Invested Capital (Valuation)
Invested Capital Valuation is calculated as the sum of the book value of equity and debt minus cash and equivalents.
Average Equity value is the average of the equity at the start and end of the accounting period. Average equity is used in the calculation of Return on Equity.
Average Assets is the average value for the assets at the start and end of the accounting period. Average Assets is used to calculate Return on Equity and Return on Assets.
Average Invested Capital
Average Invested Capital is the average value for Invested Capital at the start and end of the period. Average Invested Capital is used in Return on Invested Capital.
Tangible Asset Value
Tangible Assets are physical and measurable assets. Tangible Asset Value is the value of tangibles assets calculated as the difference between Assets and Intangibles.
Return on Average Equity
Return on Average Equity measures a firm’s profitability relative to equity invested by calculating the amount of Net Income to Common returned as a percentage of Average Equity.
Return on Average Assets
Return on Average Assets measures how profitable a firm is relative to the assets it owns by calculating the amount of Net Income to Common as a percentage of its Average Assets.
Free Cash Flow
Free Cash Flow is a measure of financial performance calculated as Net Cash from Operations minus Capital Expenditures.
Free Cash Flow (Valuation)
Free Cash Flow, when used in valuation, is calculated differently than Free Cash Flow. Free Cash Flow (Valuation) is calculated as Capital Expenditures (Long-term Investments) minus Changes in Non-Cash Working Capital (Short-Term Investments).
Return on Invested Capital
Return on Invested Capital is the ratio estimated by dividing Earnings Before Income Taxes (EBIT) by Average Invested Capital.
Return on Invested Capital (Valuation)
Return on Invested Capital (Valuation) is the ratio estimated by dividing Earnings Before Income Taxes by Invested Capital (Valuation). Invested Capital (Valuation) may also be an average.
Gross profit is calculated as Revenue minus the Cost of Revenue.
Gross Margin measures the ratio between a company’s Gross Profit and Revenue.
Profit Margin measures the ratio between a company’s Net Income to Common and Revenue.
EBITDA margin measures the ratio between a company’s EBITDA and Revenue.
Return on Sales
Return on Sales is a ratio that measures a company’s operational efficiency. Return on Sales is calculated as EBIT divided by revenue.
Asset Turnover is a measure of operating efficiency. Asset Turnover is calculated as revenue divided by Average Assets.
Payout Ratio is the percentage of earnings paid as dividends to common stockholders. Payout Ratio is calculated as Dividends per Share divided by Earnings Per Share.
Retention Ratio is the percentage of profits retained by the firm and is available for capital investments.
Enterprise Value over EBITDA
EV/EBITDA is a pricing metric calculated as the ratio between EV and EBITDA.
Enterprise Value over EBIT
EBIT/EV is a pricing metric calculated as the ratio between EV and EBITUSD.
Price Earnings (Damodaran Method)
P/E is a pricing metric calculated as the ratio between Market Capitalization and Net Income to Common
Price to Earnings Ratio
P/E is a pricing metric calculated as the ratio between Price and Earnings per Share.
Sales per Share measures the ratio between Revenue and Shares (Weighted Average) adjusted by the Share Factor.
Price Sales (Damodaran Method)
Price to Sales, often abbreviated as P/S, measures the ratio between Market Capitalization and Revenue.
Price to Sales Ratio
Price to Sales, often abbreviated as P/S, measures the ratio between a company’s price and its Sales per Share.
Price to Book Value
Price to Book Value measures the ratio between Market Capitalization and Equity.
Debt to Equity Ratio
Debt to equity, often abbreviated as D/E, measures the ratio between Liabilities and Equity.
Dividend Yield, or simply Yield, measures the ratio between a company’s Dividends per Share and its Share Price.
The Current Ratio is the ratio between Current Assets and Current Liabilities for companies that produce a classified balance sheet.
Working capital measures the difference between Current Assets and Current Liabilities.
Working Capital (Valuation)
Non-Cash Working Capital is used in valuation. NCWC is calculated as Working Capital minus Cash and Equivalents and Interested Bearing Debt due in the current period.
Free Cash Flow per Share is calculated by dividing Free Cash Flow by Shares (Weighted Average) and the Share Factor.
Book Value per Share measures the ratio between Equity and Shares (Weighted Average) as adjusted by the Share Factor.
Tangible Assets Book Value per Share measures the ratio between Tangibles and Shares (Weighted Average) as adjusted by Share Factor.
Share factor is a multiplicand in the calculation of Market Capitalization. Share Factor is used to adjust for: American Depository Receipts (ADRs) that represent more or less than one underlying share and; companies with different earnings share for different share classes such as Berkshire A and Berkshire B shares.