Always advisable to have a list of applicable terms that are vital to understanding securities and for evaluating business concerns. Here is a list of some of the terms and definitions you will need on your Christian investment journey.
The employees of the shareholders (the owners)
The most important thing in the company is the CEO. He is the top manager and he sets the tone for the entire company. A great CEO can turn a lackluster company into a great one.
Board of Directors
A group of individuals appointed by shareholders to ensure that the company is managed in the best interest of shareholders. Most BODs comprises of an audit committee, compensation committee and corporate governance committee.
Revenue / Total sales
Total sales for a given period, usually measured quarterly or annually
Gross sales minus cost of goods sold (the cost to produce the product. It does not include administrative cost. For example, how much did it cost Jacob to produce one goat, excluding debt and top management). Companies with high gross margin compared to their peers usually have effective management and efficient processes.
Buildings get old, Machines get worn-out and equipment become obsolete. The deduction of the lost of value of a tangible asset over its useful life
Amortization is similar to depreciation, except it deals with intangible assets. Amortization is usually perform on goodwill >intangible asset (difference between the price paid for a company minus the actual value of its assets).
Earnings per share
Net income divided by total shares outstanding (all shares owned by shareholders). Could also be referred to as net income per share.
The owners of the company. Each share the shareholder own gives him one vote in all voting decision made by the general body of shareholders.
Earnings (income) Before Interest Taxes Depreciation and Amortization
Interest Paid on Debt
The net profit of the company after interest, taxes, depreciation and amortization has been subtracted from operating income
Taxes paid to the government which averages between 25 to 40%. CAUTION: taxes on the income statement is usually different from that paid to the IRS. look in the proxy statement or in the footnotes of the 10-K for the real amount of taxes paid.
Never buy a company without reading the 10-K. This is the annual report of the company with detail information about every aspect of the company: liabilities, loans, revenue, cash flows, how the company makes it money, the company major customers, supplies and competition, debt rating, debt payments and loan covenants,
The quarterly sales (3 months revenue) of the company. This report gives the shareholder key quarterly data such as sales, sales by division, net income, liabilities, cash flow and the general environment in which the company has operated under for the last 3 months.
I said never buy a company without reading the 10-K. Never buy a company without reading the proxy statement. This SEC document comprise of information regarding the company’s board of directors and individual qualifications, executive compensation, pension obligations, shareholders with more than 5% of company stock, related party transaction, allowances like paid jets, yachts, gym memberships, rosy insurance policies, etc. If investors had read the proxy statements of Enron, Tyco, WorldCom, etc they would have never invested in these securities with all the signs of bankruptcy.
SEC form filed by an investor who has purchased more than 5 percent of the company’s stock and has expressed in writing his/her desire to play an activist role (direct involvement in the direction of the company, usually suggesting someone for a board of directors position).
SEC form filed by an investor who has purchased more than 5 percent of the company’s stock and does not intend to play an activist role.
This is filed by members of the executive team and the board of directors whenever the company securities (stocks or bonds) are purchased or disposed off through the open market or through stock options.
Includes the current assets (cash and market securities, account receivables and inventory) and Long term assets (fixed assets like building and equipment and intangible assets like goodwill).
Includes current liabilities like accounts payable (payment to suppliers within a 12 month period) and long term liabilities like bank loans. Preferred stocks and bonds issued by the company are also designated as liabilities by the stockholder because holders these senior securities have a priority on the claim of the company’s assets.
The company’s total assets minus its total liabilities. The reminder represents what the company financed through shares outstanding (share sold or held by investors)
Current cash and market securities as well as cash allocated to long term investments. For example, Apple, as of March 28, 2015 had $193.5b in cash ($14.5b in cash, $18.5b in market securities and $160.5b in long term investments)
Or account receivable is the amount owned to the company by its customers on an “i owe you” bases.
Finished and unfinished goods
Total current assets
Cash + receivables + inventory
Total current liabilities
Short term liabilities like accounts payable and short term bank debts
long term liabilities
Long term debt, preferred stocks and bonds
Net current assets
Current assets minus current liabilities. Also called working capital
Operating cash flow
All the cash generated from the operation of the company (excludes cash from financing or investing).
Free cash flow
Cash flow from operation minus capital expenditure (capex). Meaning the cash that is left over after the company has paid for capital expenditures. Free cash flow is one of the most important metric for measuring the health of a company because it is the money left over for (1)dividends payments (2)acquisitions (3)debt reduction (4)business expansion (5)stock buybacks.
Free cash flow per share
How much free cash flow is generated per share outstanding. The higher the number the better.
The amount of dividend paid
The amount of dividend paid per year divided by the price of the stock
P/E ratio (Price to earnings ratio)
Current price divided by earning per share, meaning as an owner of the company (shareholder) how much of net income per share one gets for the current price paid. A lower P/E is always better. Companies with P/E lower than 15 is said to be cheap or reasonably priced.
Price of the stock divided by total sales for the year (10-K sales).
The price of the stock divided by the book value (total assets – total liabilities / total shares outstanding).
P/TB (price to tangible book ratio)
This is one of the most widely used calculations for determining whether a stock is undervalued. Used by Benjamin Graham (founder of value investing), Warren Buffet and other value investors. It is the price of the stock divided by the net tangible book value per share (total assets – intangible assets – preferred shares – bonds / total shares outstanding)
Net net asset value
This is a deep value investment technique used by Benjamin Graham to find really cheap undervalued stocks. It is based on the purchasing a security below its liquidation (bankruptcy) value. The formula: 100% of cash + 80% of receivables (never guaranteed to get paid from all customers) + 50% of inventory (not all inventory is guaranteed to sell at full price) – total liability. If the result is a value higher than the total market capitalization (price of stock x total shares outstanding) of the stock then the stock is priced below liquidation value.
Net current asset value
Current assets – total liability. A positive value indicated that the company can cover all its liability with current assets only. This means that the company can be flexible and is not heavily leveraged (indebted).
Price / Free Cash Flow ratio
The market capitalization / free cash flow. The smaller the number the better
Current assets / current liabilities. A quick ratio higher than 2 is preferable.
Ratio of inventory to sales
How much return in sales is generated by investment in inventory (inventory / sales for a given period)
Number of times interest charges earned
Also referred to as interest coverage ratio is a measure of a company’s ability to pay its debt. It is calculated by Earning before interest and taxes (EBIT) / interest charges. The higher the number the better.
Return on Invested Capital (ROIC)
Measure how effectively a company uses its capital to generate returns for shareholders. Return on invested capital above 15% is considered good. Formula: net income – dividends / invested capital or (Net Operating Profit After Taxes–NOPAT) / (Invested Capital–IC) where NOPAT is (Operating Profit) x (1 – Tax Rate) and Invested Capital is (Total Assets) – (Excess Cash) – (Non-Interest-Bearing Current Liabilities)
Return on Assets (ROA)
Net income / total assets. Indicates how well a company uses its assets to generate income
Return on Equity
Net income / shareholder’s equity. Highlights how much income is generated by use of stockholders equity.
Number of shares trading during a time period.
Total number of shares outstanding x price per share. Total market value of the company.
Total number of shares held by shareholders
When 1 share is split into more than one or less than one (reverse split).
Company buying back its shares from the market, thus reducing the number of shares outstanding and increasing the earnings per share.