Stock Investing Glossary

Navigating the world of stock investing can be overwhelming, with a dizzying array of financial metrics and terminology to understand. Fear not! Our comprehensive Stock Investing Glossary is here to help. As your trusted guide, we’ve compiled clear, concise definitions of the key stock metrics you need to know, empowering you to evaluate a company’s financial health and growth potential like a pro. Let’s dive in!

Valuation Metrics

Market Capitalization: This metric represents a company’s total market value, calculated by multiplying its outstanding shares by the current stock price. It’s a quick way to gauge and compare the relative sizes of different companies.

Enterprise Value (EV): A more comprehensive measure of a company’s total value, EV accounts for both equity and debt. It’s calculated by adding market cap to debt and minority interests, then subtracting cash and equivalents. EV provides a holistic view of a company’s worth.

Price-to-Earnings (P/E) Ratio: The P/E ratio compares a stock’s price to its earnings per share. It’s a popular valuation metric that shows what investors are willing to pay for each dollar of earnings. A higher P/E may indicate growth expectations.

P/E Ratio – R&D Adj.: This ratio adjusts the traditional P/E ratio by capitalizing R&D expenses. It treats R&D as a long-term investment, providing a more accurate picture of a company’s true earnings power.

Price/Earnings-to-Growth (PEG) Ratio: The PEG ratio takes the P/E ratio a step further by factoring in expected earnings growth. It’s calculated by dividing the P/E by the projected annual earnings per share growth rate. A PEG below 1 may signal an undervalued stock relative to its growth prospects. Our stock screeners use historical rather than projected growth rates for PEG calculations.

Price-to-Sales (P/S) Ratio: The P/S ratio compares a company’s stock price to its revenue per share. It’s useful for valuing companies with no earnings or inconsistent profitability.

Price-to-Book (P/B) Ratio: The P/B ratio compares a stock’s market value to its book value (shareholder’s equity per share). A low P/B may indicate an undervalued company.

Profitability Metrics

Gross Profit Margin: This metric measures the percentage of revenue that exceeds the cost of goods sold. It indicates a company’s efficiency in using labor and supplies.

Operating Profit Margin: This margin measures the percentage of revenue left after deducting operating expenses. It shows how much profit a company makes from its core operations.

Net Profit Margin: This margin measures the percentage of revenue remaining after all expenses and taxes have been deducted. It shows a company’s overall profitability.

Return on Equity (ROE): ROE measures a company’s profitability in relation to shareholder’s equity. It shows how effectively management generates profits from invested capital. Consistently high ROE is a hallmark of strong companies.

Return on Invested Capital (ROIC): ROIC gauges how efficiently a company allocates capital to profitable investments. It’s calculated by dividing net operating profit after tax by invested capital. A high, stable ROIC often indicates a competitive advantage.

Return on Capital Employed (ROCE): ROCE measures a company’s profitability and the efficiency with which its capital is employed. It’s calculated by dividing EBIT by capital employed (total assets minus current liabilities).

Free Cash Flow Return on Capital Employed (FCF ROCE): FCF ROCE measures the cash return a company generates relative to the capital it employs. It’s calculated by dividing FCF by capital employed. A high FCF ROCE indicates a company is generating substantial cash from its invested capital.

Return on Capital (ROC) – Joel Greenblatt: This is a variation of ROCE popularized by investor Joel Greenblatt. It focuses on tangible capital and is calculated by dividing EBIT by the sum of net working capital and net fixed assets.

Return on Assets (ROA): ROA shows how profitable a company is relative to its total assets. It’s calculated by dividing net profit by total assets.

Cash Flow Metrics

Free Cash Flow (FCF): FCF is the cash a company generates after accounting for capital expenditures. It shows a company’s ability to pay off debt, pay dividends, and facilitate growth. Sustainable FCF is a very positive sign.

Free Cash Flow Margin: This metric measures the percentage of revenue converted into FCF. It shows how efficiently a company translates sales into cash. A high and stable FCF margin is a sign of a financially robust company.

Free Cash Flow Yield: Calculated by dividing FCF by a company’s market cap, this metric shows the cash flow a company generates per dollar invested. It’s a way to compare a company’s valuation across sectors.

Cash Conversion Ratio: This ratio measures the proportion of net profit converted into FCF. A high cash conversion ratio indicates a company’s earnings are of high quality and are being readily converted into cash.

Financial Health Metrics

Debt-to-Equity Ratio: This solvency ratio compares a company’s total liabilities to shareholder equity. It indicates the degree to which a company is financing operations through debt versus wholly-owned funds. A high ratio may signal greater financial risk.

Net Debt to Equity Ratio: This ratio compares a company’s net debt (total debt minus cash and cash equivalents) to shareholder equity. It provides a more accurate picture of a company’s financial leverage by considering its cash reserves.

Debt-to-Asset Ratio: This ratio measures the percentage of a company’s assets that are financed by debt. A higher ratio indicates greater financial leverage and potentially higher risk.

Interest Coverage Ratio: This metric assesses a company’s ability to pay interest on outstanding debt. It’s calculated by dividing EBIT by interest expense. The higher the ratio, the more financially stable the company.

Shareholder’s Equity: Also known as owner’s equity or book value, this is the residual claim shareholders have on a company’s assets after all liabilities are paid. It’s a key indicator of financial health.

Dividend Metrics

Dividend Yield: This is the annual dividend per share divided by the stock’s price. It represents the return on investment from dividends alone.

Payout Ratio (Earnings): This ratio shows the proportion of earnings paid out as dividends. It’s calculated by dividing dividend per share by earnings per share. A lower ratio may indicate a company is retaining more earnings for growth.

Payout Ratio (Free Cash Flow): This ratio measures the percentage of FCF paid out as dividends. It’s calculated by dividing dividend per share by FCF per share. It provides a more accurate picture of dividend safety and sustainability compared to the traditional payout ratio based on earnings.

Earnings Metrics

EBIT (Earnings Before Interest and Taxes): EBIT measures a company’s operating profit without the impact of interest expenses and taxes. It’s calculated by subtracting operating expenses (excluding interest and taxes) from revenue.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): EBITDA takes EBIT a step further by also excluding non-cash expenses like depreciation and amortization. It provides a clearer picture of a company’s operational performance.

Net Profit: This is a company’s total earnings, calculated by subtracting total expenses (including taxes) from total revenue. It’s the bottom line on the income statement.

Earnings Per Share (EPS): This is a company’s net profit divided by its outstanding shares. EPS shows the profitability attributed to each share.

Understanding these key stock metrics is crucial for making informed investment decisions. However, it’s important to remember that no single metric tells the whole story. Use these measures in conjunction with the other powerful tools on our site, like the Stock Screeners, Stock Analysis dashboard, Intrinsic Value Calculator, and Reverse DCF Calculator to gain a comprehensive understanding of a company’s true worth and growth potential.