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!
Total Assets: The sum of all assets owned by a company, representing everything of value on its balance sheet.
Total Liabilities: The sum of all obligations or debts a company owes. Along with shareholders’ equity, this represents the total financing of the company.
Shareholders’ Equity: Also known as book value, it is calculated as Total Assets minus Total Liabilities and represents the net assets available to shareholders.
Invested Capital: The capital deployed in a company’s operations—typically defined as Total Assets minus non–interest-bearing liabilities (e.g., accounts payable, tax payables, deferred revenue) and minus any excess cash. It reflects the funds actively used to generate returns.
Capital Employed: Calculated as Total Assets minus Current Liabilities, it represents the total capital used in a company’s operations.
Net Working Capital: A measure of short-term liquidity, usually computed as (Current Assets excluding cash) minus (Current Liabilities adjusted for interest-bearing debt). It indicates the funds available for day-to-day operations.
Excess Cash: The amount of cash a company holds above the minimum required to cover its current liabilities. This cash is often excluded from Invested Capital since it is not actively used in generating operating returns.
Revenue: The total income generated from a company’s core business activities before any expenses are deducted.
Gross Profit: Calculated as Revenue minus the Cost of Goods Sold (COGS), Gross Profit represents the profit made before accounting for operating expenses.
Gross Profit Margin: The percentage of revenue that remains after subtracting COGS. It measures production efficiency.
Operating Income: The profit earned from a company’s core operations before deducting interest and taxes. It is often used interchangeably with EBIT.
Operating Profit Margin: The percentage of revenue remaining after deducting operating expenses, reflecting the efficiency of a company’s core operations.
Net Income: The profit remaining after all expenses—including taxes, interest, and non-operating items—are deducted from revenue. It represents the bottom line of a company’s income statement.
Net Profit Margin: The percentage of revenue remaining after all expenses have been deducted, indicating overall profitability.
Earnings Before Interest and Taxes (EBIT): A measure of operating profit calculated before the impact of interest and taxes.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): This metric builds on EBIT by excluding non-cash expenses such as depreciation and amortization, offering deeper insight into operating performance.
Net Operating Profit After Tax (NOPAT): Derived by multiplying Operating Income by (1 – Tax Rate), NOPAT represents the profit generated from core operations after tax, excluding financing costs.
Operating Cash Flow: The cash generated from a company’s core business operations.
Free Cash Flow (FCF): FCF is the cash remaining after subtracting capital expenditures from Operating Cash Flow. It shows the funds available to service debt, pay dividends, and reinvest in the business.
Owner’s Earnings: Defined as Operating Cash Flow minus Maintenance CAPEX (the recurring capital expenditures needed to maintain a company’s asset base), Owner’s Earnings represent the true cash flow available to shareholders for dividends, share buybacks, or reinvestment.
Free Cash Flow Margin: The percentage of revenue that is converted into FCF, indicating a company’s efficiency in generating cash from sales.
Free Cash Flow Yield: Calculated as FCF divided by market capitalization, this yield shows the cash return generated per dollar of a company’s valuation.
Cash Conversion Ratio: The ratio of FCF to Net Income. A higher ratio suggests that a larger portion of reported earnings is translated into actual cash flow.
Return on Equity (ROE): ROE measures profitability relative to shareholders’ equity by dividing Net Income by average equity. It indicates how effectively a company uses its shareholders’ funds to generate profit.
Return on Assets (ROA): ROA is calculated by dividing Net Income by Total Assets, showing how efficiently a company uses its asset base to generate earnings.
Return on Invested Capital (ROIC): Defined as NOPAT divided by Invested Capital, ROIC measures how well a company turns the capital it has deployed into profits.
Return on Capital Employed (ROCE): ROCE is EBIT divided by Capital Employed (Total Assets minus Current Liabilities). It helps assess operational efficiency and profitability relative to the capital in use.
Cash Return on Invested Capital (CROIC): This metric uses FCF instead of EBIT in the ROIC calculation, offering a cash-based measure of how efficiently a company uses its invested capital.
Return on Invested Capital – Owner’s Earnings (ROIC-OE): Similar to ROIC, this ratio uses Owner’s Earnings (Operating Cash Flow minus Maintenance CAPEX) in the numerator, emphasizing the cash returns available to shareholders.
Price-to-Earnings (P/E) Ratio: The P/E ratio compares a stock’s price to its EPS, indicating what investors are willing to pay for each dollar of earnings. A higher P/E may suggest growth expectations or potential overvaluation.
P/E Ratio – R&D Adjusted: This ratio capitalizes R&D expenses (treating them as investments rather than costs) to offer a refined view of a company’s sustainable earnings.
Price-to-Sales (P/S) Ratio: The P/S ratio divides the stock price by Revenue per Share, making it useful for evaluating companies with minimal or inconsistent earnings.
Price-to-Book (P/B) Ratio: This ratio compares a company’s market value to its Book Value (Shareholders’ Equity per Share) to help identify undervalued stocks.
Price-to-Free Cash Flow (P/FCF) Ratio: Calculated by dividing Market Cap by FCF, this ratio shows how much investors pay for each dollar of cash generated after capital expenditures.
Acquirer’s Multiple: Defined as Enterprise Value divided by Operating Income, this metric is used to assess how much it would cost to acquire a company relative to its operating earnings.
Earnings Per Share (EPS): Calculated as Net Income divided by the number of outstanding shares, EPS shows the profit attributable to each share of common stock.
Dividend Yield: The annual dividend per share divided by the stock’s price, indicating the cash return from dividends relative to the share price.
Payout Ratio (Earnings): The proportion of Net Income paid out as dividends, calculated as Dividend per Share divided by EPS. It helps gauge dividend sustainability.
Payout Ratio (Free Cash Flow): Similar to the earnings-based payout ratio but using FCF per share instead of EPS, offering a cash-based perspective on dividend sustainability.
Revenue Per Share: Total Revenue divided by the number of outstanding shares, providing a per-share measure of sales performance.
Net Income Per Share: Net Income divided by the number of outstanding shares, showing the profit attributable to each share.
Free Cash Flow Per Share: FCF divided by outstanding shares, indicating the cash generated on a per-share basis.
Owner’s Earnings Per Share: Owner’s Earnings divided by the number of outstanding shares, revealing the cash flow available per share after maintenance capital expenditures.
Dividend Per Share: The total dividends paid divided by the number of outstanding shares, representing the cash return on a per-share basis.
Compound Annual Growth Rate (CAGR): CAGR is the geometric mean annual growth rate over a specified period. It smooths out volatility to show a consistent annual growth rate for metrics like Revenue or Earnings.
Annualized Growth Rate: Similar to CAGR, this rate represents the compounded annual growth over a period, computed from periodic growth rates.
Revenue Growth: The percentage change in Revenue over a defined period, indicating how quickly a company’s sales are expanding.
Net Income Growth: The percentage change in Net Income over time, reflecting the growth (or decline) in profitability.
Free Cash Flow Growth: This measures the percentage change in FCF over time, highlighting a company’s ability to expand its cash generation.
Equity Growth: The percentage change in Shareholders’ Equity over time, indicating the rate at which a company builds its net asset base.
Buyback Yield: Derived from the reduction in outstanding shares through share repurchases, this yield provides an extra return component for shareholders.
Total Shareholder Return (TSR): TSR combines capital gains (the change in market capitalization) with Dividend Yield to reflect the overall return to shareholders over time.
Coefficient of Variation (CV): CV is the ratio of the standard deviation to the mean of a metric (such as per-share growth). It indicates relative volatility—lower CV values suggest more stable performance.
Correlation Coefficient: This statistical measure indicates the strength and direction of the linear relationship between two variables (for example, a financial metric and calendar year). Values near +1 or –1 denote a strong relationship, while values near 0 imply little correlation.
Discount Rate: The rate used to discount future cash flows to their present value in a DCF model. It reflects both the time value of money and the risk associated with the cash flows.
Terminal Value (TV): An estimate of a company’s value beyond the explicit forecast period in a DCF model. TV is typically calculated with a perpetuity growth formula or by applying a terminal multiplier.
Terminal Value Multiplier: A factor applied to the final year’s cash flow to determine the terminal value, reflecting market expectations for future valuation multiples.
Reverse DCF: A valuation technique that starts with the current stock price and works backward to determine the implied growth rate (or discount rate) that justifies that price given forecasted cash flows and terminal value. It reveals the assumptions embedded in the market price.
Implied Growth Rate: In reverse DCF analysis, this is the growth rate that, when applied to forecasted cash flows and terminal value, discounts them to match the current stock price. It shows the market’s expectation for future growth.
Convergence (in DCF Calculations): This term describes whether the iterative process used in a reverse DCF model has successfully found a solution where the present value of projected cash flows equals the current stock price. Failure to converge suggests that the model’s assumptions may need adjustment.
Understanding these key stock metrics is crucial for making informed investment decisions. However, no single metric tells the whole story.
Use these measures alongside our advanced analytical tools—such as our
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.
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