Glossary
Plain-English definitions of every metric and term tenbagger uses. For the wider context, when to trust which number and how the pieces fit together, work through the learning path.
Valuation
- Discounted cash flow (DCF)Project free cash flow for N years, add a lump-sum value for everything after year N, then discount it all back to today's dollars. The two-stage version splits the projection into an early growth phase and a steady forever phase.
- Earning Power Value (EPV)Bruce Greenwald's no-growth value: today's normalized after-tax operating profit divided by the cost of capital. EPV gives no credit at all for growth, so it acts as the cautious floor of an intrinsic-value range.
- Earnings yieldEPS divided by price. The inverse of P/E. Directly comparable to bond yields.
- EV / EBITDAEnterprise value (market cap plus debt minus cash) divided by EBITDA. A value of Y times means a buyer would pay roughly Y years of current EBITDA to own the whole business.
- Free cash flow yieldFree cash flow divided by market value. It shows the cash return the business produces at today's price. Compare it to the 10-year Treasury bond. If it is lower, bonds pay you more cash at less risk. Above 5% is usually attractive.
- Margin of safety (MoS)The gap between intrinsic value and price, shown as a percent of intrinsic value. It is Graham's core idea: buy with a buffer so that even if your value estimate is wrong, the downside stays small. A gap of 30% or more is the textbook level for acting.
- P/B ratioStock price divided by book value per share. It compares the market price to what the company is worth on paper. Below 1 means the market values the business below its accounting net worth.
- P/E ratioStock price divided by earnings per share. It shows how many years of current earnings you are paying for. A high number means investors expect strong growth ahead.
- PEG ratioP/E divided by the earnings growth rate. It adjusts the valuation for growth, so a high P/E can be fair if growth is fast enough. Below 1 is cheap for the growth; above 2 is expensive. It was Peter Lynch's favorite screening tool.
- Return on equityNet income divided by shareholder equity. Measures how efficiently the business turns owner capital into profit.
- Return on invested capitalAfter-tax operating profit divided by invested capital, the truest measure of how well a business uses the money it employs, both debt and equity. It creates value only when it beats the cost of capital, often abbreviated WACC.
- Reverse DCFWorks out the early-years growth rate the market is quietly assuming at today's price. It guards against wishful thinking. A normal DCF lets you pick the growth that gives the answer you want, while a reverse DCF asks what growth today's price demands, so you can compare it to the company's actual record.
Income statement
- Cost of revenue (COGS)Direct cost of producing the goods or services sold. Revenue minus COGS equals gross profit.
- Depreciation & amortization (D&A)Non-cash charge that spreads the cost of long-lived assets over their useful lives.
- Earnings per share (diluted)Net income divided by share count, fully diluted to include options and convertibles.
- EBITDAEarnings before interest, taxes, depreciation, and amortization. A capital-structure-neutral profit measure used for cross-company comparison.
- Gross marginGross profit as a percentage of revenue. Direct signal of pricing power.
- Gross profitRevenue minus the direct cost of the goods or services sold (COGS). What's left to cover everything else — overhead, R&D, interest, and tax — and still turn a profit.
- Income tax expenseCorporate income tax owed for the period. The effective tax rate is tax expense divided by pre-tax income.
- Interest expenseThe cost of borrowed money. Cash interest paid (or accrued) on the company's debt.
- Net incomeBottom-line profit after all expenses, taxes, and interest.
- Net marginNet income divided by revenue. Bottom-line profitability after everything.
- Operating incomeProfit from the core business after all operating costs (COGS, SG&A, R&D, depreciation) but before interest and tax. Also called operating profit or EBIT.
- Operating marginOperating income divided by revenue. Combines gross margin with operating efficiency.
- R&D expensesResearch and development costs. Spending to invent new products or improve existing ones.
- RevenueTop-line sales. Money received from customers for goods or services sold.
- SG&A expensesSelling, general, and administrative expenses. Operating costs not directly tied to producing the goods sold.
- Weighted average diluted sharesThe official share count used to split profit per share: the fuller count including exercisable options, averaged across the year. It is the denominator of diluted EPS.
Balance sheet
- Accounts payableMoney the business owes to suppliers for goods or services already received but not yet paid for.
- Accrued expensesCosts the business has already incurred but not yet been billed for or paid — wages, interest, and utilities owed at period end.
- Asset turnoverRevenue divided by average total assets. How much sales each dollar of the asset base produces in a year.
- Cash & equivalentsThe money a company can spend right now: bank balances plus near-instant, ultra-safe holdings like government bills maturing within three months. The most honest line on the balance sheet.
- Cash conversion cycle (CCC)DSI + DSO − DPO (days). How many days of cash the operating cycle ties up.
- Current capital lease obligationsThe portion of finance (capital) lease liabilities coming due within the next year.
- Current ratioCurrent assets divided by current liabilities. Short-term liquidity check.
- Days payable outstanding (DPO)Average payables divided by daily cost of goods sold. How many days, on average, the business takes to pay its own suppliers.
- Days sales of inventory (DSI)Average inventory divided by daily cost of goods sold. How many days inventory sits before it's sold.
- Days sales outstanding (DSO)Average receivables divided by daily revenue. How many days, on average, it takes customers to pay.
- Debt / Assets (debt ratio)Total debt divided by total assets. A value of 0.X means X% of the company's assets are financed by debt. Higher means more reliance on lenders; lower means a more self-funded business.
- Debt-to-equity ratioTotal debt divided by total equity. Measures financial leverage and balance-sheet risk.
- Deferred revenue (current)Cash already collected for goods or services not yet delivered, expected to be recognized as revenue within a year.
- Fixed asset turnoverRevenue divided by average net PP&E. How productively the physical asset base generates sales.
- GoodwillIntangible asset representing the premium paid for acquisitions above the fair value of identifiable net assets.
- Intangible assetsNon-physical assets like patents, trademarks, customer relationships, and acquired technology. Often appears after acquisitions.
- Interest coverageOperating income divided by interest expense. It shows how many times over the company could pay its interest bill from operating profit. Above 6 times is comfortable, while below 2 times signals financial stress.
- InventoryRaw materials, work-in-progress, and finished goods held for sale. A current asset.
- Long-term debtDebt that is due more than one year from now. It is the biggest debt category for most businesses.
- Net debtTotal debt minus cash and short-term investments. The debt position after netting out cash on hand.
- Net debt / EBITDANet debt divided by EBITDA. A value of Y times means it would take roughly Y years of EBITDA to pay off all the debt after using the cash on hand first. Under 3 times is comfortable, and above 4 to 5 times is worrying.
- Net receivables (accounts receivable)Money owed by customers for goods or services already delivered. Sales that have been booked as revenue but not yet collected as cash.
- Other current liabilitiesA catch-all for short-term obligations due within a year that aren't itemized on their own line.
- Other payablesShort-term amounts owed that aren't trade accounts payable — interest, dividends declared, payables to related parties, and similar.
- Property, plant & equipment (PP&E)Land, buildings, factories, machinery, and equipment, net of accumulated depreciation.
- Quick ratio (acid test)Cash plus money owed by customers, divided by bills due within a year. It is stricter than the current ratio because it leaves out inventory.
- Retained earningsCumulative profits the company has kept and reinvested, rather than paid out as dividends.
- Short-term debtDebt due within one year, including the current portion of long-term debt and revolving credit lines.
- Short-term investmentsSpare cash put to work in bonds, deposits, and similar holdings that mature within a year. Add it to cash and equivalents for the company's real liquid firepower.
- Tax payableIncome and other taxes owed to governments but not yet remitted as of the balance-sheet date.
- Total assetsEverything the company owns: cash, inventory, property, plant, equipment, goodwill, and other.
- Total debtShort-term debt plus long-term debt. The total interest-bearing obligations of the business.
- Total equityNet worth on the balance sheet: assets minus liabilities. What shareholders own after creditors are paid.
- Treasury stockCompany's own shares it has bought back. A growing treasury stock balance means consistent buybacks.
- Working capitalCurrent assets minus current liabilities. The short-term capital a business needs to run day-to-day operations.
Cash flow
- Capital expenditure (CapEx)Cash spent on long-lived assets like factories, equipment, and technology. The cost of maintaining and growing the business.
- Dividend coverageFree cash flow divided by dividends paid. How comfortably the business funds its dividend.
- End cash positionThe cash the company holds at the close of the period, the final line of the cash flow statement. Start cash plus the net change equals end cash, and it matches the balance sheet's cash line.
- Financing cash flowCash moving between the company and the people who fund it: borrowing and share issues in, debt repayment, dividends, and buybacks out. Mature businesses should show it negative.
- Free cash flowOperating cash flow minus capital expenditures. Cash available to return to shareholders.
- Investing cash flowCash spent on or received from long-lived assets: equipment, acquisitions, and investments. Normally negative for an operating business; what matters is where the money went.
- Net stock issuanceCash received from issuing new shares minus cash spent on buybacks. Positive means net dilution; negative means net buyback.
- Operating cash flowCash generated by core business operations, before capex or financing activities.
- SBC / FCFStock-based compensation divided by free cash flow. A value of X% means X cents of every free-cash-flow dollar is effectively eaten by employee share grants, cash that could have gone to shareholders. Below 10% is healthy, and above 25% means dilution is taking a real bite out of owner returns.
- Stock-based compensationValue of equity (stock options, RSUs) granted to employees as part of pay. A non-cash expense that dilutes shareholders.
Market
- Buyback yieldDollars spent on buybacks divided by market cap. The implicit yield from shrinking the share count.
- Dividend CAGRAnnualized growth rate of dividends per share. How much the dividend has compounded each year.
- Dividend yieldTrailing-twelve-month dividends per share divided by the current price. The cash return you'd lock in on day one.
- Market capitalizationStock price multiplied by total shares outstanding. The total equity value of the company at the current price.
- Net share changeThe percent change in the diluted share count over a stretch of time. Negative is good, because fewer shares means a bigger slice for you.
- Payout ratioDividends as a share of net income. It shows how much of the profit the company hands out versus how much it keeps to reinvest.
- SectorA broad industry grouping, for example Technology, Financials, Healthcare, or Consumer Staples.
- Total shareholder yieldDividend yield plus buyback yield. Total capital returned to owners, as a percentage of market cap.
Concepts
- Altman Z-ScoreA single number that estimates the risk of bankruptcy within about 2 years, built from 5 weighted ratios. Above 3 is safe, and below 1.8 signals distress.
- Capitalizing vs expensingEvery cost is either expensed now (profit drops today) or capitalized as an asset and spread over years (profit barely feels it). The gray middle is where profit gets massaged.
- Changing depreciation estimatesStretching an asset's assumed useful life lowers the yearly depreciation charge and lifts profit, with no transaction at all, just a revised opinion buried in the notes.
- Channel stuffingInflating revenue by pushing more product to distributors than real demand supports, borrowing next year's sales to dress up this year's. Rising receivables and quarter-end spikes are the tells.
- Cookie jar reservesOver-reserving in good years and releasing the surplus in bad ones smooths reported profit into a steady rising line that hides how the business really behaves.
- Discount rate (cost of capital)The yearly return you demand, used to discount future cash flows back to today. We treat it as a judgment about business quality, not a precise calculation: start from the risk-free rate (the 10-year Treasury) and add a premium for the business's risk — about 2.5 points for a high-quality compounder, rising to 8.5 points for a below-average one. The textbook formulas pretend to a precision the inputs cannot support.
- FIFO vs LIFOTwo legal rules for costing inventory sold. When prices rise, FIFO reports higher profit and a realistic inventory value; LIFO reports lower profit but saves tax. LIFO is US-only.
- Non-GAAP / adjusted earningsCompany-defined "adjusted" profit that strips out items management deems unrepresentative. The removals are discretionary, and the loudest headline figure is usually the massaged one.
- Notes to the financial statementsThe dozens of pages behind the three main statements where a company explains what the summary numbers actually contain. Almost every accounting choice is disclosed here, and almost nobody reads them.
- Owner earningsBuffett's favorite earnings measure: net income plus non-cash charges, minus the spending needed to maintain the business and minus changes in working capital. The maintenance spending is estimated three ways: using depreciation as a stand-in (the classic shortcut), using all capital spending (conservative), or scaling capital spending by how fast the business is growing.
- Piotroski F-ScoreA score from 0 to 9 that counts how many of 9 financial-health checks the business passes. A score of 8 or 9 is strong, and 0 to 2 is weak.
- Quarter-over-quarter (QoQ)Comparison of a metric to the immediately preceding quarter. Sequential growth.
- Releasing reservesA reserve set aside for expected losses is only an estimate; revising it downward flows the difference back through the income statement as profit, even though nothing was sold.
- Writing down an assetOfficially cutting an asset's book value when it is worth less than the books claim, with the cut hitting profit as an expense. When to admit it is partly a timing choice.
- Year-over-year (YoY)Comparison of a metric to the same period one year earlier. Standard finance growth measure.