Glossary

This page sets out brief descriptions of the financial terms that you will find used throughout the competition. If you need more information than you find here, then we suggest that Investopedia is a good place to start!

Book Value per Share
What is it?
Calculated by dividing the Book Value, or Shareholders Equity (on the balance sheet) by the number of shares. The book value is the value that the net assets of company are recognised as, as listed in the company accounts, calculated by total assets minus intangible assets (patents, goodwill) and liabilities (debts).
Why do I want to know?
The ratio is another useful one in the armoury for comparing different companies. It should, however, be treated with caution as the value of assets on a company balance sheet may well be out of date, and indeed for companies were brand is important as in the case of, say Diageo, then extra caution is required: brands are an example of an asset which is very difficult to value.
How can I use this information?
The most useful application is arguably to help spot when a stock is trading at below its asset value, i.e. the ratio is less than one. This rarely happens, but if it does it could mean that the company is undervalued and might be an attractive buy.
Capital Expenditure to Sales
What is it?
Capital Expenditure divided by sales
Why do I want to know?
The measure gives a sense of how much the firm is investing for the future. When comparing across different companies in the same sector, a lower ratio is not necessarily better. This is because a firm needs to invest to continue to innovate and invent new products for future sales.
How can I use this information?
The ratio is very dependent on the sector being examined. Some companies are very capital intensive, and continually need to invest in new factories, e.g. the semiconductor industry. A games developer might be expected to invest less, yet it must invest sufficiently to remain competitive in terms of innovation. Many companies will spend c.15% sales on capital expenditure (capex).
Debt to Market Capitalisation
What is it?
Net Debt divided by Market Capitalisation
Why do I want to know?
This measure gives a sense of how indebted a company is relative to its market value. The importance is subtle, but crucial: many companies are valued on the basis of their Enterprise Value, which incorporates debt. If the valuation moves suddenly, the only portion of the EV which can quickly revalue is the Equity portion i.e. shares on the stock market. Thus, companies which have a high debt to market capitalisation ratio can be volatile, especially if trading is difficult and the company has a low valuation.
How can I use this information?
A ratio higher than 0.5x is high.
Dividend Yield
What is it?
Dividend divided by the price
Why do I want to know?
This is a simple measure telling the investor what the return will be from owning the stock irrespective of any capital gain or loss (rise or fall in the share price). Note that newer companies will either not pay a dividend or pay a small one: they are investing in the future of the business rather than returning cash to shareholders. Typically more mature businesses (with lower growth rates) pay higher dividends to compensate for a (likely) more sedate rise of the share price. Including the dividend yield is crucial in assessing the value of owning a particular share.
How can I use this information?
Higher than 10% is high, lower than, say 4%, is low. However, if it is a high growth stock a low or non-existent yield is perfectly acceptable.
EBITDA
What is it?
Earnings Before Interest, Tax, Depreciation, and Amortisation (i.e. revenues less expenses excluding interest, tax, depreciation, and amortisation)
Why do I want to know?
As a measure of operational results EBITDA strips out any expense due to depreciation and amortisation. It is useful for comparing companies within the same sector with similar capital intensities (i.e. depreciation/amortisation costs), as it enables investors to avoid distortions due to different accounting treatments of depreciation/amortisation.
How can I use this information?
It gives you an idea of how well the company is performing.
EBITDA growth
What is it?
Growth in EBITDA (see above), usually stated on a year-on-year basis
Why do I want to know?
A measure of growth which takes into account the profitability of the company. If the EBITDA is growing more slowly than sales then the firm is becoming less profitable. Conversely, if EBITDA growth exceeds Sales growth this is a good sign as it indicates the firm is becoming increasingly profitable.
Enterprise Value
What is it?
A measure of a company's value taking into account net debt or net cash. Calculated as the market capitalisation plus net debt
Why do I want to know?
Think of enterprise value as the theoretical takeover price. In the event of the company being acquired, an acquirer would have to take on the company's debt, but would pocket its cash
How can I use this information?
See Market Capitalisation
EPS
What is it?
Earnings per share. The portion of a company's profit allocated to each outstanding share.
Why do I want to know?
This measure is useful as the price of each share, which is commonly quoted, can be compared to the underlying earnings. The price to earnings ratio (P/E) is arguably the single most popular variable in dictating a share's price.
How can I use this information?
A high P/E ratio implies that a share is highly valued. The ratio is only useful in the context of the growth rate of a company. In broad terms however a P/E above 25x might be considered 'high', whilst a P/E below 10 might be considered 'low'. Dividing the P/E ratio by the growth of the company (the PEG ratio) arguably gives a better indication of value. A company on a P/E of 25x but growing at 25% has a PEG of 1.0x. In broad terms a company with a PEG ratio higher than 2.0x would look fully valued: less than 1.0x might look interesting.
ETF
What is it?
Exchange Traded Fund
Why do I want to know?
These are a type of investment fund which is traded on the stock market in much the same way as stock in a company. Each ETF is set up to track the performance of some other financial instrument or market. For example, you can invest in an ETF that tracks the performance of the American NASDAQ share index, or an ETF that tracks the gold price, or an ETF that tracks the commodities market, etc., etc.
How can I use this information?
Using an ETF gives you a way to invest in something which is not itself listed on the stock market. For example, if you think that company stocks are going to take a dive over the next few months and gold is the place for your money, then a gold ETF is for you!
EV to EBIT
What is it?
Enterprise Value divided by Earnings Before Interest and Tax (EBIT)
Why do I want to know?
EV / EBIT ratio indicates how many times the market values the operational result of the company. A low ratio suggests poorly efficient use of a company's resources, even if its profit margin is high.
How can I use this information?
The ratio is only useful in the context of the growth rate of a company. In broad terms however a EV/EBIT above c.17x might be considered 'high', whilst a EV/EBIT below about 7x might be considered 'low'.
EV to Sales
What is it?
Enterprise Value divided by Sales
Why do I want to know?
The price-to-sales ratio provides a simple approach: take the company's EV and divide it by the company's total sales over the past 12 months. The reason this is a useful measure is that the sales line in company accounts is usually a 'clean' measure i.e. there is less scope for accounting manipulation by the company. The negative aspect of the ratio is that it does not take into account how profitable a company is.
How can I use this information?
The ratio is only useful in the context of the growth rate of a company. In broad terms however, an EV/Sales much higher than 1.0x is considered high, whilst below 0.5x might be considered 'low'
Free Cash Flow (FCF)
What is it?
Calculated as EBITDA adjusted for working capital, capital expenditure, interest and tax.
Why do I want to know?
Ultimately, cash is king, and Free Cash Flow is one of the best measures. It measures how much cash a company has after paying its bills for ongoing activities and growth.
How can I use this information?
Best used as a comparative measure when compared to e.g. sales between companies in a similar industry (with very different ratios across different types of companies). For example take the FCF/Sales ratio for Diageo and compare it to Allied Domecq. The company with the higher ratio converts more of its sales to cash.
Market Capitalisation
What is it?
The total value of all outstanding shares. It's calculated by multiplying the number of shares by the current market price. This term is often referred to as the market cap.
Why do I want to know?
This is the value that the company trades at on the stock market. It is important to note that the price of each share is not meaningful as a guide to the total value of a company unless you know the number of shares in issue.
How can I use this information?
The traded value of a company depends on a multitude of factors but will be heavily influenced by its size (Sales, earnings, cash flow etc.) and its growth prospects.
Net Income
What is it?
A company's total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes, and other expenses.