Basic Fundamentals

Stock or Share: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. If you buy one share of yahoo! at $32, you pay $32 for one share.

Preferred Stock: A class of ownership in a corporation with a stated dividend that must be paid before dividends to common stock holders.

Dividend: Distribution of a portion of a company's earnings in cash or in stock, to its shareholders.

Authorized shares (AS): The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation.

Outstanding shares (OS): Stock currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public. OS = restricted shares + float.

Float: The total number of shares publicly owned and available for trading. A company having a float of 5M shares, will increase or decrease its share price faster than a company with a float of 5B.

Earnings: E = SP: Earnings = sales x profit margin. (20 M in sales) X 40 % net profit = 8 M.

Diluted Earnings Per Share: A performance metric used to gauge the quality of a company's earnings per share (EPS), if all convertible securities were exercised. Convertible securities refers to all outstanding convertible preferred shares, convertible debentures, stock options and warrants. Unless the company has no additional potential shares outstanding (a relatively rare circumstance) the diluted EPS will always be lower than the simple EPS.

Basic Earnings per share (EPS): Net income / outstanding shares

Market Cap: A measurement of how much a company is worth. It is estimated by finding the cost of buying an entire business in its current state. MC = (OS) X (share price)

Small Cap: A company with a market capitalization between $100 Million and $2 billion.

Mid Cap: A company with a market capitalization between $2 billion and $10 billion.

Big Cap: A company with a market capitalization between $10 billion and $200 billion.

Enterprise Value (EV): A measure of a company's value, often used as an alternative to straightforward market capitalization. EV is calculated as: Market Cap + Total Debt – Total Cash & Short Term Investments. Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company's debt, but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm's value. The value of a firm's debt, for example, would need to be paid by the buyer when taking over a company, and thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.

Amortization: Paying off debt in regular basis over a period of time or the deduction of capital expenses over a specific period of time. The deduction is an intangible asset ( such as patents, trademarks and brand recognition ).

Enterprise Multiple: EV / EBITDA: A ratio used to determine the value of a company. The enterprise multiple 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. It's used to find attractive takeover candidates. Enterprise value is a better metric than market cap for takeovers. It takes into account the debt which the acquirer will have to assume.

Tangible Book Value: The company's total book value minus the value of intangible assets.

Price to Tangible Book Value ( PTBV): Share price divided by the tangible book value per share.

Tangible Asset: An asset that has a physical form such as machinery, buildings and land.

Liability: A company's legal debts or obligations that arise during the course of business operations. These are settled over time through the transfer of economic benefits including money, goods or services. Recorded on the balance sheet (right side), liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's operations because they are used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. For example, the outstanding money that a company owes to its suppliers would be considered a liability.

Leverage: Borrowed capital, such as margin.

Price-To-Earnings Ratio (P/E): A valuation ratio of a company's current share price compared to its per-share earnings: P/E = Market Value per Share / Earnings per Share
The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

Price-To-Sales Ratio: (P/S): Biotechs with promising pipelines typically trade at 7 to 20 price/sales. Price to sales is calculated by dividing a stock's current price by its revenue per share for the trailing 12 months or by dividing the market cap by the total sales (ttm). This is Zetlock's favorite ratio.

Price-To-Book Ratio: (P/B): A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value (book value is simply total assets minus intangible assets and liabilities). Also known as the "price-equity ratio".
 

Price / Earnings-To-Growth Ratio: (PEG): A ratio used to determine a stock's value while taking into account earnings growth. 
The calculation is as follows: (P/E) / Annual EPS growth
If the P/E is less than the EPS growth rate, then the stock can be interpreted as undervalued. For example, if a company is expected to grow earnings 20 percent annually, its stock is undervalued when its P/E is 15. A PEG of 1 translates to fair value.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): An indicator of a company's financial performance which is calculated as follows:
Revenue - Expenses (excluding tax, interest, depreciation and amortization). EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant.

Economic Order Quantity (EOQ): To minimize the cost of ordering and storage by the number of units requested with every purchase order. The quantity of an item, when ordered regularly, results in minimum ordering and storage costs. Ordering costs will be minimal if annual requirements are all ordered at one time in the beginning of the year, but warehouse costs will be at a maximum. EOQ = (2RO / W)^1/2 where R = required number of units in each time period. O = ordering cost per order. W = cost of warehouse / storage.

Quarter (Q1, Q2, Q3, Q4): A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends. Quarters are important because all public companies must report their results on a quarterly basis.
Q1 - January, February, and March.
Q2 - April, May, and June.
Q3 - July, August, and September.
Q4 - October, November, December.
For example, if earnings per share were $1.40 in Q1, this means earnings were $1.40 for the period of January, February, and March.

10-K: A comprehensive summary report of a company's performance that must be submitted annually to the Securities & Exchange Commission. The 10-K contains much more detail than the annual report. It includes information such as company history, organizational structure, equity, holdings, earnings per share, etc.

8-K: A report of unscheduled material events or corporate changes at a company that could be of importance to the shareholders or the SEC.

10-Q: A comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities & Exchange Commission. The 10-Q is due 35 days after each of the first three fiscal quarters.

Share repurchase: A program by which a company buys back its own shares from the marketplace, thus reducing the number of outstanding shares (OS). This is usually an indication that the company management thinks the shares are undervalued in the long-term.

Equity: 1. Stock or any other security representing an ownership interest.

2. On the balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholder's equity". The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity

3. In the context of margin trading, the value of securities in a margin account minus what has been borrowed from the brokerage.

4. In the context of real estate, the difference between the current market value of the property and the amount the owner still owes on the mortgage. Thus, it is the amount the owner would receive after selling a property and paying off the mortgage.

Return on equity: ROE reveals how much profit a company generates with the money shareholders have invested in it.

Current ratio (A liquidity ratio): A liquidity ratio that measures a company's ability to pay short-term obligations; calculated by dividing current assets by current liabilities. This also helps to give an idea as to the efficiency of the company's operating cycle. Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
The ratio is mainly used to give an idea about the company's ability to pay back their short-term liabilities (debt and payables) with their short-term assets (cash, inventory, and receivables). The higher the current ratio the more capable the company is at paying their obligations. A ratio under 1 suggests that the company is unable at that point to pay off their obligations if they came due. While this shows the company is not in good financial health, it does not necessarily mean it will go bankrupt as there are many ways to access financing but it is not a sign of financial health. The current ratio can give an idea to the efficiency of a company's operating cycle or their ability to turn their product into cash. Companies that have trouble with getting paid on their receivables or have long inventory turnover can run into liquidity problems as they are unable to alleviate their obligations. Because business operations differ in each industry, it is more useful to compare companies within the same industry. Look for a 1.5 minimum current ratio.

Long-Term Debt / equity ratio: A measure of a company's financial leverage calculated by dividing long-term debt by stockholder equity. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Look for a 0.5 maximum long-term debt to equity ratio.

Net Profit Margin or profit Margin: A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 10% profit margin, for example, means the company has a net income of $0.10 for each dollar of sales.

Operating Margin: Operating income divided by sales.

Operating Income: Sales minus all expenses except income taxes and other non-related business.

Return on Assets (ROA) or Return on Investment: (Net income / total assets). A useful indicator of how profitable a company is relative to its total assets. The higher the ROA, the better, because the company is earning more money on less investment. It also gives an idea as to how well the company is able to use its assets to generate earnings. Calculated by dividing a company annual earnings by its total assets, ROA is displayed as a percentage. Look for a minimum 8 percent ROA.

Revenue or Sales: Revenue is the amount of money that is brought into a company by its business activities. Look for a minimum 15 percent 5-year revenue growth, 20 percent 3-year revenue growth, and 20 precent 1-year revenue growth.

Gross Income: Your gross income is how much you make before taxes. A company's revenue minus cost of goods sold.

Net Income or Overall Profit: 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. For example, suppose that your gross income is $50,000 and you have $20,000 in deductions and credits. This leaves you with a taxable income of $30,000. Then, suppose that another $5,000 of income tax is subtracted; the remaining $25,000 will be your net income.

Capital Expenditure: Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operation. These expenditures can include everything from repairing a roof to building a brand new factory.

Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Also known as "beta coefficient". Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

Book Value Per Common Share: A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly. In other words, the amount of money that a holder of a common share would get if a company were to liquidate.

Operating Cash Flow: Surplus cash generated from company's basic operations. It is arguably a better measure of a business's profits than earnings because a company can show positive net earnings (on the income statement) and still not be able to pay its debts. It is cash flow that pays the bills! Let's say, company Z reports a $2000 sale to customer Y. The $2000 unpaid bill is added to accounts receivables. Then the company Z records the $2000 as a complete sale, then deducts the product cost and other expenses. After all deductions, company Z logs a $400 net income. Company Z showed the $400 profit on its income statement, but since it received no cash from the customer, it actually spent $1600 in real cash. The operating cash flow (OPC) was a negative $1600!

Free Cash Flow: Operating cash flow (OPC) minus capital spending on equipment & plants, and minus dividends.

Liquidity: A measure of how easily assets can be converted into cash.

Rule of 72: A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.

Generally Accepted Accounting Principles (GAAP): The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

Derivative: In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. Futures contracts, forward contracts, options and swaps are the most common types of derivatives.

Mutual Fund: A security that gives small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. 
Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds: Equity funds (stocks), Fixed-income funds (bonds) and Money market funds.:

Bond: A debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.

Short: The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value. An investor who borrows shares of stock from a broker and sells them on the open market is said to have a short position in the stock. The investor must eventually return the borrowed stock by buying it back from the open market. If the stock falls in price, the investor buys it for less than he or she sold it, thus making a profit.

Market Index: An aggregate value produced by combining several stocks or other investment vehicles together and expressing their total value against a base value from a specific date. Market indexes are intended to represent an entire stock market and thus track the market's changes over long periods of time.

Inventory: Inventory can be either raw materials, finished items already available for sale, or goods in the process of being manufactured. Inventory is recorded as an asset on a company's balance sheet

Synergism: Economies and other gains created by the combination of companies in a merger.

Consolidation: A combination of two frims in which a new company is formed and new stock is issued.

Receivables: An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company's accountants and reported on the balance sheet, and they and include all debts owed to the company, even if the debts are not currently due. Receivables are recorded as an asset by the company because it expects to receive payment for the outstanding amounts soon. Long-term receivables, which do not come due for a significant length of time, are recorded as long-term assets on the balance sheet; most short-term receivables are considered part of a company's current assets.

Sector: A group of securities in the same industry or market. Grouping companies in the same industry makes it easier to track a particular part of the economy. One of the most common classification breaks the market into 11 different sectors. Investors consider two of those sectors defensive and the remaining nine cyclical.

Defensive Stocks: Defensive stocks include utilities and consumer staples. These companies usually don’t suffer as much in a market downturn because people don’t stop using energy or eating.

Cyclical Stocks: Stocks that rise quickly when economic growth is strong, and falls rapidly when growth is slowing down. Here is a list of the nine sectors considered cyclical: Basic Materials, Capital Goods, Communications, Consumer Cyclical, Energy, Financial, Heath Care, Technology and Transportation.

Dow Jones Composite Average (DJA): A stock index that tracks 65 prominent companies. The average's components are every stock from the Dow Jones IndustrialAverage, the Dow Jones Transportation Average, and the Dow Jones Utility Average.

Cash Burner: A firm consistently reporting negative operating cash flow.

Initial Public Offering (IPO): First sale of stock to the public by a corporation.

Insiders: Officers, directors, and investors owning more than 10 percent of the OS.

Volume: Number of shares traded during a specified time.

Working Capital: Current assets minus current liabilities. The cash available to run the business.

US dollar Index (USD): Measures the value of the US dollar compared to other major currencies. The US Dollar Index was launched in 1973 by the New York Board of Trade (NYBOT). At its inception, the US Dollar Index was set at a base value of 100. The US Dollar Index includes the exchange rates of the following six currencies: euro (EUR), Japenese yen (JPY), Pound sterling (GBP), Canadian dollar (CAN), Swedish krona (SEK), and Swiss franc (CHF).