Stock Market Jargons
This page provides an introduction to Stock Market Jargons.
Depreciation
Depreciation is an accounting method used to allocate the cost of tangible assets over their useful lives.
When a company purchases a long-term asset such as property, plant, or equipment, it is typically not expensed in the year of purchase. Instead, the cost of the asset is allocated over the estimated useful life of the asset through annual depreciation charges.
For example, if a company purchases a machine for $ with an estimated useful life of years, the company could choose to depreciate the machine using the straight-line method, which would allocate $ of the machine's cost to depreciation expense each year for years. This annual depreciation charge would be recorded on the company's income statement and reduce its net income, even though no actual cash is being spent.
Depreciation is important because it helps companies accurately reflect the declining value of their assets over time and ensures that expenses are properly matched with the revenues they generate. Additionally, depreciation expense can be used to reduce a company's taxable income, which can result in lower tax payments.
Amortization
Amortization refers to the process of gradually reducing the value of an intangible asset over time. Intangible assets include things like patents, copyrights, trademarks, goodwill, and other intellectual property rights.
When a company acquires an intangible asset, it is recorded as an asset on the balance sheet. However, because intangible assets generally do not have a physical form and may have a limited lifespan, they need to be gradually written off or amortized over their useful life.
For example, if a company acquires a patent for $ million with an estimated useful life of years, it would be amortized over years, or $ per year. Each year, the company would record a $ amortization expense on its income statement to reflect the declining value of the patent.
Amortization is different from depreciation, which is the process of gradually reducing the value of a tangible asset over time. Tangible assets include things like buildings, machinery, and equipment, and they are generally depreciated over their estimated useful life.
Share Outstanding
Shares outstanding refers to the total number of shares of a company's stock that are currently held by all of its shareholders, including both institutional and individual investors. This figure is used to determine a company's market capitalization, which is the total value of its outstanding shares.
Shares outstanding can fluctuate over time as a result of various factors, including share repurchases or issuances, stock splits, and mergers or acquisitions.
Let's say Company A has issued $ shares of stock to the public. Of those shares, $ are currently held by institutional investors and $ are held by individual investors, while remaining $ shares are held by the company itself as treasury stock. In this example, the total number of shares outstanding for Company A would be ( held by institutional investors + held by individual investors).
This figure is important because it determines the company's market capitalization, or the total value of its outstanding shares based on the current market price. For example, if the current market price for Company A's shares is $, its market capitalization would be $ ( shares outstanding x $ per share).
In addition to market capitalization, the number of shares outstanding can also impact a company's earnings per share (EPS) calculation. EPS is calculated by dividing a company's net income by the number of outstanding shares. If a company has a high number of shares outstanding, each individual share represents a smaller portion of the company's net income, resulting in a lower EPS. Conversely, a company with a low number of shares outstanding will have a higher EPS.
Institutional Ownership
Institutional ownership refers to the percentage of a company's outstanding shares that are held by institutional investors such as pension funds, mutual funds, hedge funds, and other financial institutions. Institutional investors often purchase large amounts of shares, and their decisions to buy or sell shares can have a significant impact on a company's stock price.
Institutional ownership is important for several reasons. First, it can provide an indication of the level of confidence that institutional investors have in a company's prospects for growth and profitability. If institutional ownership is high, it may suggest that these investors have done their due diligence and believe that the company has strong potential. On the other hand, low institutional ownership may signal that investors are skeptical about the company's future prospects.
Number of Floating Shares
The number of floating shares refers to the total number of a company's shares that are available for trading on the open market, excluding shares that are held by insiders, such as company executives or major shareholders.
The number of floating shares is an important metric for investors to consider when evaluating a company's stock. This is because the level of available shares for trading can impact the stock's liquidity, or the ability to buy or sell shares quickly and without significant price impact. A higher number of floating shares typically means that the stock is more liquid, which can make it easier for investors to buy and sell shares without affecting the stock price too much.
Short Interest as % of Float
Short interest as a percentage of float is a metric that represents the percentage of a company's float shares that have been sold short by investors who are betting that the stock will decrease in value. Short selling is a trading strategy where investors borrow shares from a broker, sell those shares on the market, and then hope to buy them back at a lower price to return to the broker, pocketing the difference as profit.
This metric can provide insights into the level of bearish sentiment or market expectations for a particular stock. A higher short interest as a percentage of float can indicate that more investors are betting against the stock, which can be seen as a negative sign for the stock's future performance.
Price/Earnings (TTM)
Price/earnings ratio (P/E ratio) is a valuation metric used to measure the relative value of a company's stock price to its earnings per share (EPS). The P/E ratio is calculated by dividing the current market price per share by the earnings per share (EPS) over the last months, also known as the trailing -month (TTM) period.
For example, Let's say a company reported net income of $ million in the first quarter, $ million in the second quarter, $ million in the third quarter, and $ million in the fourth quarter. The total net income for the past four quarters would be $ million.
If the company has million outstanding shares, then the EPS (TTM) would be calculated as EPS (TTM) = $ million / million shares = $. Now, if a company's stock is trading at $ per share then P/E ratio would be (i.e. $/$).
The P/E ratio can be used as a valuation metric to compare the relative value of a company's stock to other stocks in the same industry or market. A high P/E ratio may suggest that the company's stock is overvalued compared to its earnings potential, while a low P/E ratio may suggest that the stock is undervalued.
Price/Sales (TTM)
Price-to-sales (P/S) ratio is a valuation metric used to compare a company's stock price to its revenue per share. The P/S ratio is calculated by dividing the current market price per share by the revenue per share over the last months, also known as the trailing -month (TTM) period.
For example, let's say a company generated total revenue of $ billion over the past months and has million outstanding shares. To calculate the revenue per share (TTM), you would divide $ billion by million shares, giving you a revenue per share (TTM) of $. Now, if a company's stock is trading at $ per share then the P/S ratio would be (i.e., $/$).
The P/S ratio can be used to compare the relative value of a company's stock to other stocks in the same industry or market. A high P/S ratio may suggest that the stock is overvalued compared to its revenue potential, while a low P/S ratio may indicate that the company's stock is undervalued.
Price/Book
Price to book (P/B) ratio, also known as price to equity ratio, is a valuation ratio used to compare a company's current market price to its book value. It is calculated by dividing the current market price per share of a company by its book value per share.
Book value per share represents the amount of a company's assets that would be left over for shareholders if all its liabilities were paid off. It is calculated by subtracting a company's total liabilities from its total assets, and then dividing the resulting number by the total number of shares outstanding.
Let's say a company has a book value of $ million and million shares outstanding. This would give a book value per share of $. If the current market price per share of the company is $, then the P/B ratio would be .
This P/B ratio of indicates that the company's stock is currently trading at times its book value per share. If the P/B ratio is less than , it indicates that the stock is trading at a discount to its book value, while a P/B ratio greater than indicates that the stock is trading at a premium to its book value.
Price/Cash Flow
Price-to-cash-flow (P/CF) ratio is a valuation ratio used to evaluate a company's current market price relative to its cash flow. It is calculated by dividing the current market price per share of a company by its cash flow per share.
Cash flow represents the amount of cash generated or consumed by a company's operating, investing, and financing activities. It provides an indication of a company's financial health and its ability to generate cash to support its business operations, pay off its debts, and return value to its shareholders.
A high P/CF ratio indicates that investors are willing to pay more for each dollar of the company's cash flow, which may suggest that the company is overvalued or that investors are expecting significant future growth in cash flow.
On the other hand, a low P/CF ratio indicates that investors are paying less for each dollar of the company's cash flow, which may suggest that the company is undervalued or that investors have low growth expectations for the company's cash flow.
While earnings are based on accrual accounting and may be subject to various accounting adjustments, cash flow is a more objective measure of a company's financial health, as it reflects the actual inflows and outflows of cash.
Return on Assets (ROA)
Return on assets (ROA) is a financial ratio that measures a company's efficiency in generating profits from its total assets. It is calculated by dividing a company's net income by its total assets.
Net income is the amount of profit a company earns after subtracting all of its expenses from its revenues. Total assets refer to all the assets that a company owns, including cash, accounts receivable, inventory, property, plant, and equipment.
ROA is expressed as a percentage and indicates how efficiently a company is using its assets to generate profits. A higher ROA means that a company is using its assets more efficiently to generate profits, while a lower ROA indicates that a company is not generating as much profit from its assets.
Return on Equity (ROE)
Return on Equity (ROE) is a financial ratio that measures the profitability of a company in relation to the amount of shareholder equity. It indicates the amount of net income generated by a company as a percentage of the shareholder equity invested in it.
The higher the ROE, the better it is for the company as it means the company is generating more profits for its shareholders. A high ROE is a sign that a company is making efficient use of its shareholders' investments to generate profits.
It is important to note that the ROE should be compared to the industry average or the company's historical performance to get a better idea of how the company is performing in relation to its peers.
Return on Invested Capital (ROIC)
Return on invested capital (ROIC) is a financial performance ratio that measures the return that a company generates on its invested capital. Invested capital represents the total amount of capital that a company has raised from both equity and debt sources.
ROIC is calculated by dividing a company's after-tax operating income (income before interest and taxes, or EBIT, minus taxes) by its invested capital. The result is a percentage that represents the return that the company is generating on its invested capital.
A high ROIC indicates that a company is generating a high return on the capital that it has invested in its operations, while a low ROIC suggests that the company may be wasting capital on unproductive investments.
Dividend Yield
Dividend yield is a financial ratio that measures the amount of cash dividends paid out to shareholders relative to the market value per share of the stock.
For example, if a company pays an annual dividend of $ per share and its current stock price is $, the dividend yield would be % ($/$ x %). This means that for every $50 invested in the stock, the investor would receive $1 in annual dividend payments.
Dividend yield is an important metric for income-oriented investors who are looking for stocks that provide regular cash payouts. A high dividend yield may indicate that a stock is undervalued, but it can also signal that a company is struggling to grow and reinvest in its business.
It's worth noting that dividend yield is not a fixed or guaranteed rate of return, as a company can choose to increase or decrease its dividend payments at any time based on its financial performance and strategic priorities.
Payout Ratio
The payout ratio is a financial metric that measures the percentage of earnings that a company pays out in the form of dividends to its shareholders. It is calculated by dividing the total amount of dividends paid by the company by its net income.
A low payout ratio may suggest that the company is retaining more of its earnings to reinvest in growth opportunities, while a high payout ratio may indicate that the company has less cash to reinvest in the business. In some cases, a high payout ratio may also suggest that the company is paying out more than it can afford and may need to cut its dividend in the future.
Annual Dividend
Annual dividend is the total amount of dividend paid out by a company to its shareholders in a fiscal year. It is usually expressed in dollars per share, and is calculated by multiplying the dividend per share by the total number of outstanding shares.
For example, if a company pays a quarterly dividend of $ per share and has million outstanding shares, the annual dividend would be: $ x quarters x shares = $. So the company paid out a total of $2 million in dividends to its shareholders over the course of the year.
Current Ratio
The current ratio is a financial metric that measures a company's ability to pay its short-term liabilities or debts with its current assets. It's calculated by dividing a company's current assets by its current liabilities.
Quick Ratio
The Quick Ratio, also known as the Acid-Test Ratio, is a financial metric used to measure a company's liquidity or ability to meet its short-term obligations with its current assets.
The quick ratio is considered a more conservative measure of liquidity than the Current Ratio, which includes inventory as part of current assets. The Quick Ratio excludes inventory because it may not be easily converted into cash or may have a lower resale value.
A high quick ratio indicates that a company has a strong ability to meet its short-term obligations without having to sell off its long-term assets. Conversely, a low quick ratio may suggest that a company may face difficulty in meeting its short-term obligations and may need to raise capital by borrowing or issuing equity.
Debt/Equity
Debt/Equity is a financial ratio that compares a company's total debt to its total shareholder equity. It is calculated by dividing a company's total liabilities by its total shareholder equity. The resulting ratio provides insight into the level of debt a company has taken on relative to its equity.
For example, if a company has $ in total liabilities and $ in total shareholder equity, its debt/equity ratio would be (i.e., $ / $).
This indicates that the company has taken on half a dollar in debt for every dollar of equity it has. A higher debt/equity ratio generally indicates that a company has taken on more debt and is potentially more risky, while a lower ratio indicates that the company has more equity relative to its debt and is potentially more stable.
Debt/Assets
Debt/Assets is a financial ratio that measures the proportion of a company's total debt to its total assets. It is calculated by dividing a company's total debt by its total assets.
For example, if a company has a total debt of $ million and total assets of $ million, its Debt/Assets ratio would be (i.e., $ million / $ million).
This means that % of the company's assets are financed by debt. A higher Debt/Assets ratio indicates that a company is more highly leveraged and has a greater risk of defaulting on its debt obligations.
Gross Margin
Gross margin is a financial metric that measures the percentage of revenue that remains after deducting the cost of goods sold (COGS). It is calculated by subtracting COGS from total revenue and dividing the result by total revenue.
For example, if a company has total revenue of $ and COGS of $, its gross margin would be i.e., ($ - $) / $.
This means that 40% of the company's revenue remains after deducting the cost of goods sold. The higher the gross margin, the more profitable the company is, as it has more money left over to cover other expenses and generate profit.
Operating Margin
Operating Margin is a financial metric that measures a company's profitability by calculating the percentage of revenue that remains after deducting operating expenses. It reflects the portion of revenue that is available to cover non-operating expenses such as interest and taxes, as well as to generate profit for the company's shareholders.
A high operating margin indicates that a company is able to generate profits from its core operations, while a low operating margin may indicate that a company is struggling to cover its operating expenses and may need to make changes to its business model or cut costs.
EBITDA Margin
EBITDA Margin is a financial metric that measures a company's earnings before interest, taxes, depreciation, and amortization (EBITDA) as a percentage of its total revenue. The higher the EBITDA margin, the better it is for the company, as it indicates that it is generating more earnings from its operations.
Net Profit Margin
Net profit margin is a financial ratio that measures a company's profitability by expressing its net income as a percentage of its total revenue. It is calculated by dividing the net income of a company by its total revenue.
A high net profit margin indicates that a company is able to efficiently manage its costs and generate significant profits from its revenue. Conversely, a low net profit margin suggests that a company may be facing challenges in managing its costs or generating sufficient revenue to cover its expenses.
Asset Turnover
Asset turnover is a financial ratio that measures a company's efficiency in using its assets to generate revenue. It is calculated by dividing a company's net sales by its average total assets.
For example, if a company has net sales of $ and average total assets of $, its asset turnover would be (i.e., $ / $).
The asset turnover ratio is especially important when comparing companies within the same industry or sector, as it provides insights into which companies are making the most efficient use of their assets. It is also useful for assessing a company's historical performance over time or comparing its current performance to industry benchmarks. Overall, a higher asset turnover ratio is generally seen as a positive sign of a company's financial health and operational efficiency.
Inventory Turnover
Inventory turnover is a financial ratio that measures the number of times a company sells and replaces its inventory over a specific period of time. It is calculated by dividing the cost of goods sold (COGS) by the average inventory during the period.
A high inventory turnover ratio is good, because it means that the company is selling its inventory quickly and not holding onto it for long periods of time. This can lead to lower costs associated with carrying inventory, such as storage costs and insurance costs. Additionally, a high inventory turnover ratio can be a sign of strong sales, as the company is able to sell its inventory quickly.
However, it is important to note that a high inventory turnover ratio is not always desirable. If a company is selling its inventory too quickly, it may be losing sales because it does not have enough inventory on hand to meet customer demand. Additionally, a high inventory turnover ratio can be a sign of inefficient inventory management, as the company may be ordering too much inventory or not ordering enough inventory.
The ideal inventory turnover ratio for a company will vary depending on the type of products it sells, the industry it operates in, and its inventory management practices. Companies should track their inventory turnover ratio and compare it to industry averages to identify areas where they can improve their efficiency and profitability.
Receivables Turnover
Receivables turnover is a financial ratio that measures how efficiently a company uses its assets and manages its accounts receivables. It indicates the number of times a company collects its average accounts receivable balance during a period.
A high receivables turnover indicates that a company is collecting payments from its customers quickly and efficiently, while a low receivables turnover indicates that a company may be having difficulty collecting payments from its customers in a timely manner. A low receivables turnover may be a sign of weak customer credit policies or poor collection efforts.
Effective Tax Rate
Effective tax rate is the actual rate at which a company or an individual's income is taxed after accounting for all deductions and credits. It represents the total tax expense paid as a percentage of the total taxable income earned. It is calculated by dividing the total tax expense by the company's or individual's total taxable income.
For example, if a company has a total tax expense of $ and a total taxable income of $, its effective tax rate would be % (i.e., $/$). This means that the company paid cents in taxes for every dollar of taxable income earned.
Additional Paid-In Capital
Additional Paid-In Capital (APIC) is the amount of money that a company raises through the sale of its stock above the par value of the stock.
For example, if a company issues shares of common stock with a par value of $ per share but sells the stock for $ per share, the difference of $ per share is recorded as additional paid-in capital. The total APIC in this case would be $.
APIC is recorded as a component of shareholders' equity in the balance sheet and represents the amount of capital contributed by shareholders that is in excess of the par value of the common stock.