Key financial terms used in stock market
- Basic EPS: – This is nothing but Earnings per share.
Diluted EPS: – If all the convertible securities such as convertible preferred shares, convertible debentures, stock options, bonds etc. are converted into outstanding shares then the Earnings per share is called Diluted earnings per share. The less the difference between Basic and diluted EPS the more the company is preferable.
Cash EPS: – This is the ratio of cash generated by company per diluted outstanding share. If Cash EPS is more the more the company is preferred.
Cash EPS = Cash flows / no of diluted out standing shares
- Book value: – It is the ratio of total value of company assets to the no of shares. In general, this is the value which the shareholders will get if the company is liquidated. Hence, it is always preferred to buy a stock with high book value compared to the current share price.
Book Value (BV) = [Total assets – Intangible assets (patents, goodwill..) – liabilities] / No of sharesThe “Book Value” of a firm is simply the amount of money left on table after the company pays off its obligations.Suppose the book value of a company is Rs.200 crs, then this is the amount of money the company can expect to receive after it sells everything and settles its debts. Usually the book value is expressed on a per share basis.
- Current Ratio: Current ratio is a key financial ratio for evaluating a company’s liquidity. It measures the proportion of current assets available to cover current liabilities. It is a company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable
Current Ratio = (Current Assets)/(Current Liabilities)
- Dividend yield: – It is the portion of the company earnings decided by the company to distribute to the shareholders. A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage. It can be distributed quarterly or annually basis and they can issue in the form cash or stocks.
Dividend Yield = (Dividend per Share) / (Price per Share)*100
- Disclosed quantity : Disclosed quantity allows you to disclose only a part of the actual quantity you want to buy/sell. Once the disclosed quantity is specified by the client, the order is sent to the exchange and only the disclosed quantity will be shown on the market screen. The disclosed quantity, if entered should not be greater than or equal to the order quantity. However, the exchanges set minimum disclosed quantity criteria from time to time.For instance, an order of 1,000 with a disclosed quantity mandate of 200 means the market will know that you are buying just 200 shares. After this, the order for another 200 will be released, and so on, till the full order is executed.
- Debt to Asset Ratio: This ratio helps us understand the asset financing pattern of the company. It conveys to us how much of the total assets are financed through debt capital. The formula to calculate the same is:
Debt to Asset Ratio = Total Debt / Total Assets
- Debt to Equity Ratio: The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Generally, as a firm’s debt-to-equity ratio increases, it becomes more risky A lower debt-to-equity number means that a company is using less leverage and has a stronger equity position.
Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)
- Dividend % – This is the ratio of the dividend given by the company to the face value of the share.
- Earnings Per Share : EPS is the profit that a company has made over the last year divided by how many shares are on the market. Preferred shares are not included while calculating EPS. In general, Money earned per outstanding shares .
Earnings Per Share (EPS) = (Net income – dividends from preferred stock)/(Average outstanding shares)From the prospective of an investor, it is always better to invest in a company with higher EPS as it means that the company is generating greater profits.
- EBITDA:- The Earnings before Interest Tax Depreciation & Amortization (EBITDA) Margin indicates the efficiency of the management. EBITDA Margin tells us how profitable (in percentage terms) the company is at an operating level. An EBITDA margin of 16.3% the company spent Rs 83.7 of its revenue (Rs 100) towards its expenses and retained Rs 16.3 at the operating level, for its operations.
- Face value: – It is the price of the stock written in company’s books when issued during IPO. It is the amount of money that the holder of a debt instrument receives back from the issuer on the debt instrument’s maturity date. Face value is also referred to as par value or principal.
- Financial Leverage Ratio :- Financial leverage ratio gives us an indication, to what extent the assets are supported by equity. The formula to calculate the Financial Leverage Ratio is:
Financial Leverage Ratio = Average Total Asset / Average Total EquityHigher is the company’s financial leverage and the more careful the investor needs to be.
- Fixed Assets Turnover :- The ratio measures the extent of the revenue generated in comparison to its investment in fixed assets. It tells us how effectively the company uses its plant and
equipment. Fixed assets include the property, plant and equipment. Higher the ratio, it means the company is effectively and efficiently managing its fixed assets.
Fixed Assets Turnover = Operating Revenues / Total Average Asset
- Interest Coverage Ratio: The interest coverage ratio is also referred to as debt service ratio or the debt service coverage ratio. The interest coverage ratio helps us understand how much the company is earning relative to the interest burden of the company. This ratio helps us interpret how easily a company can pay its interest payments. For example, if the company has an interest burden of Rs.100 versus an income of Rs.400, then we clearly know that the company has sufficient funds to service its debt. However a low interest coverage ratio could mean a higher debt burden and a greater possibility of bankruptcy or default. The formula to calculate the interest coverage ratio:
Interest Coverage Ratio = (Earnings before Interest and Tax) / (Interest Payment)
- Market Capitalization: – Market Cap or Market capitalization refers the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures. In general, market capitalization is the market value of company outstanding shares.
Market Capitalization = No of outstanding shares * share value of each stock
- Market lot: – It is the minimum no of shares required to purchase or sell to carry a transaction.
- Net profit margin: – It is the ratio of Net profit to the revenue
- Outstanding shares: – The company shares that are owned by the shareholders but not promoters are called the outstanding shares. Promoters are the owners of the company. Therefore, outstanding shares are those shares, which are available for the public for trading. Public (retail investors), foreign institutional investors (FII), Domestic institutional investors (DII), mutual funds etc. can own outstanding shares.
- Promoter’s shares: – The company shares that are owned by the promoters i.e. the owners of the company is called Promoters shares. The public cannot own these shares.
- Price to Earnings Ratio: A high P/E ratio generally shows that the investor is paying more for the share. As a thumb rule, a low P/E ratio is preferred while buying a stock, but the definition of ‘low’ varies from industries to industries. So, different sectors (Ex Automobile, Banks etc) have different P/E ratios for the companies in their sector, and comparing the P/E ratio of company of one sector with P/E ratio of company of another sector will be insignificant.
Price to Earnings Ratio= (Price Per Share) / ( Earnings Per Share)It’s easier to find the find the price of the share as you can find it from the current closing stock price. For the earning per share, we can have either trailing EPS (earnings per share based on the past 12 months) or Forward EPS (Estimated basic earnings per share based on a forward 12-month projection.
- Price to Book Ratio: Price to Book Ratio (P/BV) is calculated by dividing the current price of the stock by the latest quarter’s book value per share. P/B ratio is an indication of how much shareholders are paying for the net assets of a company. Generally, a lower P/B ratio could mean that the stock is undervalued, but again the definition of lower varies from sector to sector.
Price to Book Ratio = (Price per Share)/( Book Value per Share)
- Price to Sales Ratio: The stock’s price/sales ratio (P/S) measures the price of a company’s stock against its annual sales. P/S ratio is another stock valuation indicator similar to the P/E ratio.
Price to Sales Ratio = (Price per Share)/(Annual Sales Per Share)The P/S ratio is a great tool because sales figures are considered to be relatively reliable while other income statement items, like earnings, can be easily manipulated by using different accounting rules.
- PBDIT: Profit before depreciation, interest and taxes.
- PBIT: – Profit before interest and taxes
- PBT: – Profit before taxes
- PAT: – Profit after taxes
- PBDIT margin: – It is the ratio of PBDIT to the revenue
- Quick ratio: The name itself tells quick means how well the company can meet its short-term financial liabilities. The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.
- Return on Equity: Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. In other words, ROE tells you how good a company is at rewarding its shareholders for their investment.
Return on Equity = (Net Income)/(Average Stockholder Equity)
- Return on Asset: Return on Assets (RoA) evaluates the effectiveness of the entity’s ability to use the assets to create profits. A well managed entity limits investments in non productive assets. Hence RoA indicates the management’s efficiency at deploying its assets. Needless to say, higher the RoA, the better it is.
- Return on Capital Employed : Return on Capital employed (ROCE) indicates the profitability of the company taking into consideration the overall capital it employs.
- Stop Loss : Stop-loss can be defined as an advance order to sell an asset when it reaches a particular price point. It is used to limit loss or gain in a trade. This is an automatic order that an investor places with the broker/agent by paying a certain amount of brokerage. Stop-loss is also known as ‘stop order’ or ‘stop-market order’. By placing a stop-loss order, the investor instructs the broker/agent to sell a security when it reaches a pre-set price limit.
- Target Price: A price set by analysts predicting where the stock will head in specified period of time.
- Total Assets Turnover : It indicates the company’s capability to generate revenues with the given amount of assets. Here the assets include both the fixed assets as well as current assets. A higher total asset turnover ratio compared to its historical data and competitor data means the company is using its assets well to generate more sales.
Total Asset Turnover = Operating Revenue / Average Total Assets
- Working Capital : Working capital refers to the capital required by the firm to run its day to day operations. To run the day to day operations, the company needs certain type of assets. Typically such assets are – inventories, receivables, cash etc. If you realize these are current assets. A well managed company finances the current assets by current liabilities. The difference between the current assets and current liabilities gives us the working capital of the company.
Working Capital = Current Assets – Current Liabilities If the working capital is a positive number, it implies that the company has working capital surplus and can easily manage its day to day operations. However if the working capital is negative, it means the company has a working capital deficit. Usually if the company has a working capital deficit, they seek a working capital loan from their bankers.
Reference :- Stock Market Terms That Every Beginner Should Know