Glossary

The average of what the analysts covering a company expect for its sales, profit and other figures. It's the yardstick for whether results surprised.

Example: If five analysts expect EPS of $0.95, 1.00, 1.00, 1.05 and 1.10, the consensus is $1.02.

The average growth per year that takes you from a starting value to an ending one, as if it had been the same every year.

Example: From 100 to 200 in 7 years: (200 ÷ 100)^(1/7) − 1 ≈ 10.4% a year.

A loan you make to a government or a company in exchange for fixed interest and getting your money back on a set date. When rates rise, the price of existing bonds falls.

Example: A $1,000 bond at 4% for 5 years pays $40 a year and returns the $1,000 at the end.

How management chooses to use the cash the company generates: reinvest in the business, buy other companies, pay dividends, buy back shares or reduce debt. Over the long run it matters as much as the business itself.

Example: A company generating $1bn a year and reinvesting it at 20% grows far faster than one reinvesting it at 5%.

What the company spends on machinery, buildings, equipment or software to maintain and grow the business.

Example: A chain opening 10 stores at $2 million each has $20 million of growth capex.

Earning returns on the returns you've already made. Over time, growth speeds up.

Example: $1,000 at 10% a year: $1,100 after year one, $1,210 after year two (10% of 1,100) and about $2,594 after 10 years.

When the company issues new shares (to pay staff, buy another company or raise money) and each existing share ends up representing a smaller slice of the business.

Example: With 100 million shares and 5 million new ones issued, your stake in the business shrinks by 4.8% (100 ÷ 105).

A method for estimating intrinsic value by adding up all the cash the company will generate in the future, brought back to today with a discount rate.

Example: $100 you'll receive in a year is worth 100 ÷ 1.10 ≈ $90.90 today if you discount at 10%.

Spreading money across many different investments so a problem in one doesn't sink the whole.

Example: With 20 companies in equal parts, one of them losing half its value takes 2.5% off the total (5% × 50%).

The part of its profit a company pays out in cash to its shareholders.

Example: A company paying $2 per share a year sends you $200 if you own 100 shares (before tax).

The yearly dividend divided by the share price. It tells you how much the company pays you each year for every dollar invested at that price.

Example: A $3 dividend and a $100 share price → a 3% dividend yield.

The largest drop from a peak to the following low. It gives you an idea of how rough the ride can get.

Example: If your investment rises to $15,000, falls to $9,000 and then recovers, the maximum drawdown was 40% (9,000 ÷ 15,000 − 1).

When a listed company publishes its quarterly or yearly figures, usually with a call for investors. It often moves the share price.

Example: If the market expected EPS of $1.00 and the company reports $1.10, it beat expectations by 10%.

Earnings before interest and taxes: what the business makes from its activity after all operating costs, including the wear and tear on its assets.

Example: Revenue of 1,000, operating costs of 750 and depreciation of 50 → EBIT of 200.

Earnings before interest, taxes, depreciation and amortisation. It approximates what the business generates from its operations, but ignores the fact that machines and buildings wear out and must be replaced.

Example: Operating profit of 800 plus depreciation of 200 → EBITDA of 1,000.

What it would cost to buy the whole company: market cap plus debt, minus cash. Useful for comparing companies with different amounts of debt.

Example: Market cap of $10bn, debt of $3bn and cash of $1bn → enterprise value of $12bn.

Net income divided by the number of shares. Diluted EPS also counts shares that could be created through options and convertible bonds.

Example: Net income of $135 million and 30 million shares → EPS of $4.50.

Enterprise value divided by EBITDA. Widely used to compare companies in the same sector with different debt; be careful with businesses that must invest heavily just to stand still.

Example: Enterprise value of $12bn and EBITDA of $1bn → EV/EBITDA of 12.

Enterprise value divided by free cash flow. Like the P/E, but looking at cash and taking debt into account.

Example: Enterprise value of $12bn and free cash flow of $600 million → EV/FCF of 20.

The multiple (P/E, EV/FCF…) you assume the company will trade at the end of the period you're valuing. Small changes in it move the result a lot.

Example: With EPS of $8 in 5 years, an exit P/E of 20 gives $160 and one of 15 gives $120: 25% less.

A quarterly report in which large US managers (over $100 million in shares) disclose which US shares they held at quarter end. It's filed up to 45 days later, so it arrives with a lag.

Example: A 13F as of 31 December may come out in mid-February: what you see is already about six weeks old.

The P/E calculated with the earnings per share expected over the next 12 months instead of the past ones. It looks ahead, but relies on an estimate.

Example: A $90 share, trailing EPS of $4.50 and expected EPS of $5.00 → a P/E of 20 and a forward P/E of 18.

Operating cash flow minus capital expenditure. It's the money left over, which the company can use to pay dividends, buy back shares, cut debt or buy other companies.

Example: Operating cash flow of 170 and capex of 50 → free cash flow of 120.

Free cash flow per share divided by the share price. It's like an upside-down P/E, but with real cash instead of accounting profit.

Example: Free cash flow of $6 per share and a $120 share price → a 5% FCF yield.

What it costs each year to hold the fund, as a percentage of the money invested. It's taken from the fund itself, so you never see it as a separate charge.

Example: On $50,000, a 1.5% yearly fee costs $750 a year; at 0.2%, $100.

What's left of each dollar of sales after paying the direct cost of making or delivering the product.

Example: Sales of 100 and cost of goods sold of 40 → a 60% gross margin.

What the company itself says it expects for the coming quarters or year: sales, margins or profit. It often matters more than past figures.

Example: A company with $1bn of revenue that guides to $1.08-1.10bn next year expects to grow 8-10%.

A fund that tracks an index instead of picking companies. If it trades on the exchange like a share, it's called an exchange-traded fund, or ETF.

Example: With $1,000 in an MSCI World fund you own a little of around 1,500 companies at once, paying perhaps 0.2% a year ($2).

The general rise in prices. It means the same money buys less over time.

Example: With 3% yearly inflation, what costs $100 today will cost about $134 in 10 years.

What a business is really worth based on the cash it will generate in the future, regardless of what the market says today. It's an estimate, never an exact figure.

Example: If you reckon a company is worth $80-100 a share and it trades at $60, the market values it below your estimate.

How much debt a company carries relative to what it generates. A common measure is net debt divided by EBITDA: how many years of EBITDA it would take to pay it off.

Example: Net debt of $3bn and EBITDA of $1bn → leverage of 3 times.

How quickly and easily something can be turned into cash without losing value. A large company's shares are very liquid; a flat, much less so.

Example: You can sell $1,000 of a large company's shares in seconds; selling a flat can take months and cost 3-4% in fees.

The gap between what you think something is worth and what you pay for it. It's the cushion for when you get it wrong, which you will.

Example: If you estimate a value of $100 and pay $70, your margin of safety is 30%.

What the whole company is worth on the stock market: share price times the number of shares.

Example: $50 a share × 200 million shares = $10 billion market cap.

Whatever protects a business from competitors and lets it earn high returns for years: brand, lower costs, network effects, switching costs or patents.

Example: If a company earns 25% on its invested capital for ten years while its industry earns 8%, it probably has a moat.

Financial debt minus cash. If it's negative, the company has more money in the bank than it owes.

Example: Debt of $5bn and cash of $2bn → net debt of $3bn.

What the company earns after all costs, interest and taxes. In theory, it belongs to the shareholders.

Example: EBIT of 200, interest of 20 and taxes of 45 → net income of 135.

The cash that actually comes in from running the business over a period, once sales are collected and day-to-day costs are paid.

Example: Net income of 135, depreciation of 50 (which isn't cash going out) and 15 more owed by customers → operating cash flow of 170.

Operating profit (EBIT) divided by revenue. It shows how much the business keeps from each dollar it sells.

Example: EBIT of 200 on revenue of 1,000 → a 20% operating margin.

The share price divided by earnings per share. It tells you how many years of current earnings you're paying for the company.

Example: A $90 share and EPS of $4.50 → a P/E of 20.

The share of profit paid out as dividends. A very high ratio leaves little room if profits fall.

Example: Earnings per share of $5 and a $2 dividend → a 40% payout ratio.

Market cap divided by book equity (assets minus liabilities). Most useful for banks and insurers.

Example: Market cap of $15bn and book equity of $10bn → P/B of 1.5.

Your return after inflation: how much your purchasing power actually grows.

Example: A 7% return with 3% inflation gives a real return of (1.07 ÷ 1.03) − 1 ≈ 3.9%.

Investing a fixed amount at regular intervals, whatever the market does. When the price falls you get more units, and when it rises, fewer.

Example: $200 a month for three months at $10, $8 and $10 gets you 20 + 25 + 20 = 65 units, at an average price of about $9.23.

The minimum yearly return you ask of an investment to make its risk worthwhile. The higher it is, the less you're willing to pay today.

Example: A $160 target price in 5 years and a required 15% a year → you wouldn't pay more than 160 ÷ 1.15^5 ≈ $79.50 today.

Everything the company sells in a period, before any costs. It's the first line of the income statement.

Example: Selling 2 million subscriptions at $120 a year brings in $240 million of revenue.

Net income divided by shareholders' equity. It shows how much the company earns on shareholders' money; debt can inflate it.

Example: Net income of $150 million and equity of $1bn → ROE of 15%.

Operating profit after tax divided by all the capital invested in the business (from shareholders and lenders). A high, steady ROIC often points to a competitive advantage.

Example: EBIT of 200, a 25% tax rate and invested capital of 1,000 → ROIC of 200 × 0.75 ÷ 1,000 = 15%.

The risk that falls arrive just as you start withdrawing money: selling low early on hurts far more than doing so years later.

Example: Two people with the same average return can end up very differently if one gets a −30% year in their first year of withdrawals and the other in their tenth.

A small slice of ownership in a company. Shareholders own a piece of the business and its future profits, and sometimes receive dividends.

Example: If a company has 1,000 shares and you own 10, you own 1% of the business.

When a company uses its cash to buy back its own shares and cancel them. There are fewer shares left and each one represents a bigger slice of the business.

Example: If a company with 100 million shares buys back 5 million, earnings per share rise 5.3% even if total profit doesn't change (100 ÷ 95 = 1.053).

A basket of companies used to measure how a market is doing. The best-known ones weight each company by its market size.

Example: If a company is worth 7% of the whole index, a 10% rise in it moves the index by 0.7%.

The price you estimate a share could trade at on a future date, based on how the business grows and the multiple the market gives it.

Example: Expected EPS of $8 in 5 years and a P/E of 20 → a target price of $160.

How long you can leave the money invested without needing it. The longer it is, the more falls you can wait out.

Example: If you need $20,000 for a deposit in 3 years, that money has a 3-year horizon even if the rest of your investments have 30.

How much and how sharply a price moves up and down. More volatility doesn't necessarily mean more risk of losing money in the long run, but it does mean a bumpier ride.

Example: A share that goes from 100 to 70 and back to 110 in a year is more volatile than one that goes from 100 to 110 smoothly, even though both end in the same place.

The percentage of your wealth you take out each year to live on. The lower the rate, the more likely the money is to last.

Example: With $750,000 and a 4% rate, you withdraw $30,000 in the first year.