Stock market and business definitions (cheat sheet)

This page is my personal “cheat sheet” of stock market, investing, and business/accounting definitions. I don’t offer many explanations of things, but I generally link to the Investopedia and other sites for more details.

The terms I show here are investing terms that I run into on websites like Yahoo Finance, Fastgraphs, Finviz, Motley Fool, Barchart, MarketWatch, and more. I’ll try to add my own value and interpretations to these terms as time goes on.

Acid Test

See “Quick Ratio.”

The Accounting Equation

Equation:

Assets = Liabilities + OwnersEquity
Assets = Liabilities + ShareholdersEquity

Per Wikipedia, “also called the balance sheet equation ... represents the relationship between the assets, liabilities, and owner’s equity of a business ... it is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits.”

Alpha

From CNBC, “Alpha is a measure of an investment’s performance compared to a benchmark, such as the S&P 500. It’s an estimate of the return, usually based on the growth of earnings per share (EPS).”

From Wikipedia, “An Alpha of 1.0 means the investment’s return on investment over a selected period of time was 1% better than the market during that period.”

From Forbes: “Alpha tells you if the investment manager is worth what you pay him.”

Assets (Total Assets)

Definitions:

• “A piece of property or equipment purchased exclusively or primarily for business use.”
• Something valuable that an entity owns.
• Range from cash on hand, to buildings, to patents and logos. An asset is classified in one of three categories: tangible, intangible and intellectual property. (From chron.com.)

Basis Point (Base Point)

From Investopedia: “One basis point (or ‘bp’) is equivalent to 0.01%, i.e., 1/100th of one percent. For example, if the Federal Reserve raises interest rates by 25 basis points, it means that rates have risen by 0.25% percentage points.”

Beta

Per Investopedia, Beta is a measure of the volatility (or risk) of a stock compared to the market as a whole. You can think of beta as how a stock historically responds to swings in the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market.

Meaning for a given stock:

• Beta = 1 indicates that the stock’s price will move with the market
• Beta < 1 means the stock is less volatile than the market
• Beta > 1 means the stock is more volatile than the market

Example: if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech, Nasdaq-based stocks have a beta of greater than 1, posing more risk (but assuming they have a high Alpha (i.e., Seeking Alpha), they offer the possibility of a higher rate of return).

Book Value

Per Investopedia, “The net asset value of a company ... the accounting value of a firm.”

From Wikipedia, “Traditionally, a company’s book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both.”

Two main uses:

• The total value of the company’s assets that shareholders would receive if a company were liquidated (in theory).
• Compared to market value, the book value can indicate whether a stock is under- or over-priced.

Book Value Per Share

What its name implies, the Book Value of the company divided by the total number of shares of the company.

(This should also be Book Value divided by Market Value (or Market Cap).)

Current Ratio

Per Investopedia, “The current ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations ... current ratio considers the current total assets of a company (both liquid and illiquid) relative to that company’s current total liabilities.”

Current Ratio = Current Assets / Current Liabilities

The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current assets and liabilities.

I’ll add, “the higher, the better.”

Also, the Quick Ratio shown below is more conservative than the Current Ratio because it only considers assets that are really liquid.

Related: Quick Ratio.

Debt/Equity Ratio

Equation:

= TotalLiabilities / ShareholdersEquity

Per Investopedia, “used to measure a company's financial leverage.” More:

• Used to gauge the extent to which a company is taking on debts as a means of leveraging (attempting to increase its value by using borrowed money to fund projects).
• A high debt/equity ratio generally means that a company has been aggressively financing its growth with debt.
• Aggressive leveraging practices are often associated with high levels of risk.
• This may result in volatile earnings as a result of the additional interest expense.

Compare to other companies in the same industry. Higher is generally better.

Dividend Payout Ratio

The ratio of dividends paid to investors divided by Net Income (Profit):

= DividendsPaid / NetIncome
= YearlyDividendsPerShare / YearlyEarningsPerShare

• Vary widely bi industry
• REITs must be at least 90%
• MLPs tend to also be very high
• On average they were about 90% back in the 1930s, but are down to 32% now
• Older companies tend to be higher than younger companies

Earnings (Profit, Net Income)

Earnings is another name for “profit.” Per Investopedia, Earnings typically refer to after-tax net income.

Related: Net Income.

Earnings Yield

The term earnings yield is used on the Fastgraphs website, and I had no idea what it meant. It turns out that it’s just the inverse of the P/E ratio, so instead of P/E it is E/P. Chuck Carnevale states in one video that he wants to see at least 6.5-7%, which is a P/E of 14.3-15.4. So if the earnings yield goes higher to 8%, that’s a P/E going down to 12.5%.

EBITDA

“Earnings before interest, taxes, depreciation and amortization.”

Per Investopedia, “EBITDA is essentially net income, but with interest, taxes, depreciation, and amortization added back to it ... can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.”

EBITDA = Revenue
       - Expenses (excluding tax, interest, depreciation and amortization)

Enterprise Value

Enterprise value is calculated as the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents. Often times, the minority interest and preferred equity is effectively zero, although this need not be the case.

EV = [market value of common stock]
   + [market value of preferred equity] 
   + [market value of debt]
   + [minority interest] 
   - [cash and investments]

Enterprise Value/Revenue

A measure of how the market values a company. Equation:

= EnterpriseValue / Revenue

Needs to be compared against other businesses in the same industry.

If EV/R is high compared to others, it means that the stock price is high compared to the company’s sales, as compared to the competition. This can mean that the company has a great brand, or that it is currently over-valued compared to the competition.

Enterprise Value/EBITDA

Equation:

= EnterpriseValue/EBITDA

Needs to be compared against other businesses in the same industry. A low ratio indicates that a company might be undervalued.

Per Investopedia, “looks at a firm as a potential acquirer would, because it takes debt into account — an item which other multiples like the P/E ratio do not include.”

Investopedia also refers to this ratio as “Enterprise Multiple.”

The Jason Kelly book states that EBITDA/EV is the best all-purpose measure for evaluating a stock: “How much profit is produced by the business’ value.” When using EBITDA/EV (the opposite of this term), higher is better. He also states that you can approximate this with FreeCashFlow/MarketCap.

Equity (Shareholders Equity)

Shareholders’ Equity is a firm's total assets minus its total liabilities:

ShareholdersEquity = TotalAssets - TotalLiabilities

Shareholders’ Equity represents the amount by which a company is financed through common and preferred shares.

You can find this on a company’s Balance Sheet. Twitter’s Shareholders’ Equity is reported as “Total Stockholder Equity” on Yahoo Finance, and is 4,368,047 as of December, 2015.

Forward P/E

A measure of P/E forecasted earnings:

Forward P/E = CurrentStockPrice / ExpectedEarningsPerShare

TODO: Whose “estimate” is used here?

Gross Profit (Gross Income)

Equation:

= Revenue - Cost Of Goods Sold
= Sales - Cost Of Goods Sold

Per Investopedia:

• Also called “gross margin,” “sales profit” and “gross income.”
• Assesses a company’s efficiency at using labor and supplies.
• Only considers variable costs, that is, costs that fluctuate with the level of output: materials; direct labor, assuming it is hourly or otherwise dependent on output levels; sales commissions; credit card fees on customer purchases; equipment, perhaps including usage-based depreciation; utilities for the production site; shipping; etc.
• Does not include fixed costs, or costs that must be paid regardless of the level of output: rent, advertising, insurance, salaries for employees not directly involved in production, etc.

Levered Free Cash Flow

Per Investopedia, “the free cash flow that remains after a company has paid its obligations on its debt ... represents the amount of cash left over for stockholders and investments after all obligations are covered ... can be negative while the operating cash flow is positive if the amount of cash paid to cover obligations exceeds the cash that comes from operations ... a signal of what a company has on hand to use for expansion.”

Related: Operating Cash Flow.

Liabilities (Total Liabilities)

Definitions:

• A liability is a company’s legal debt or obligation that arises during the course of business operations.
• Liabilities are obligations of the company; they are amounts owed to creditors for a past transaction and they usually have the word "payable" in their account title. (From accountingcoach.com)

Per Wikipedia, Current liabilities are reasonably expected to be liquidated within a year. Long-term liabilities are reasonably expected not to be liquidated within a year. They usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

Market Cap

The current share price multiplied by the number of shares a company has outstanding.

Net Cash

Per Investopedia, “Net cash is a company’s total cash minus total liabilities when discussing financial statements ... commonly used in evaluating a company’s cash flow.”

When to use Net Cash:

• Help determine if a company’s stock is an attractive investment
• Use with other measures to gauge the company's liquidity
• Assess if a company has enough cash to make investments in future projects

Net Income (Profit, Earnings)

Per Investopedia, “a company’s total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses ... Often referred to as ‘the bottom line.’”

Related: Earnings, Gross Income, Gross Profit.

Operating Cash Flow

Per Investopedia, “a measure of the amount of cash generated by a company’s normal business operations ... important because it indicates whether a company is able to generate sufficient positive cash flow to maintain and grow its operations (or whether it may require external financing) ... calculated by adjusting net income for items such as depreciation, changes to accounts receivable and changes in inventory.”

Also: “Thought to provide a clearer picture of the current reality of the business operations. Example: booking a large sale provides a big boost to revenue, but if the company has a hard time collecting the cash, it is not a true economic benefit to the company.”

Also see Levered Cash Flow.

Operating Margin

Per Investopedia, “a measure of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, raw materials, etc ... calculated by dividing a company’s operating income (also known as “operating profit”) during a given period by its net sales during the same period.”

Equation:

= OperatingIncome / NetSales
= OperatingIncome / Revenue

“gives an idea of how much a company makes (before interest and taxes) on each dollar of sales. Generally speaking, the higher a company’s operating margin is, the better off the company is.”

Compare to other companies in the same industry. Higher is generally better.

Related: Profit Margin.

P/E (Price to Earnings Ratio)

The ratio of the stock’s current price to the earnings reported on their last income statement. Technically the denominator is “Earnings per Share,” so P/E is defined as:

P/E = CurrentStockPrice / EarningsPerShare

If the current price of a stock is $50/share, and its last reported earnings were $2.50/share, its P/E Ratio is 20.

PEG (Price/Earnings To Growth)

A stock’s price-to-earnings ratio divided by the growth rate of its earnings for a specified time period:

PEG = (P/E Ratio) / (Annual EPS Growth)

Per Investopedia, “PEG is used to determine a stock’s value while taking the company's earnings growth into account ... considered to provide a more complete picture than the P/E ratio. While a low P/E ratio may make a stock look like a good buy ... PEG factors in growth rate ... the lower the PEG ratio, the more the stock may be undervalued.”

Profit Margin

Equation:

= NetIncome / NetSales
= NetIncome / Revenue

Per Investopedia, “Net income (or net profit) may be determined by subtracting all of a company’s expenses, including operating costs, material costs (including raw materials) and tax costs, from its total revenue.”

Compare to other companies in the same industry. Higher is generally better.

Related: Operating Margin.

Quarterly Revenue Growth

An increase of sales compared to a previous quarter’s sales. Can be compared to the actual previous quarter, or the same quarter from the previous year.

“YOY” means that the quarter is compared to the same quarter of the previous year.

Quick Ratio

Per Investopedia, “The quick ratio — aka the quick assets ratio or the ‘acid test’ ratio — is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities ... more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash ... a strong indicator of whether a firm has sufficient short-term assets to cover its immediate liabilities ... a higher ratio means a more liquid current position.”

Related: Current Ratio.

Revenue (Total Revenue)

Revenue is basically sales: How much did you sell during this time period? What are your sales receipts?

2,218,032

Price/Book

Compares market value to book value:

CurrentStockPrice / BookValue

A low P/B can indicate a bargain, or something wrong with the company. Varies by industry; check the company’s P/B against its competitors.

Price/Sales

Compares market value to the last reported sales:

CurrentStockPrice / CurrentSales

A low P/S can indicate a bargain, or something wrong with the company. Varies by industry; check the company’s P/S against its competitors.

The Jason Kelly book states that using P/S beats the market over the long term (page 107).

ROA (Return on Assets)

Equation:

= NetIncome / TotalAssets
= Earnings / TotalAssets

“What earnings were generated from invested capital (assets).”

• Gives an idea of management efficiency.
• The key word here is “assets.” This is significantly different than ROE.

More:

• Varies by industry; compare to the competition.
• Some people refer to ROA as ROI.
• “If ROA is low or the company is carrying a lot of debt, a high ROE can give investors a false impression about the company’s fortunes.”

ROE (Return on Equity)

Equation:

= NetIncome / ShareholdersEquity
= Earnings / ShareholdersEquity

Per Investopedia, “the amount of net income returned as a percentage of shareholders equity. ROE measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.”

• Varies by industry; compare to the competition.
• Also known as “return on net worth.”
• High growth companies you should expect a higher ROE.
• Averaging ROE over the past 5 to 10 years can give you a better idea of the historical growth.

Shares Float

Shares Float is the number of shares actually available for trading. Closely held shares — held by insiders, employees, ESOP plans, other long-term holders — are not on the open market. (From TheStreet.com.)

TODO

• ROI
• Total Cash
• Total Debt