Glossary: Fundamental Analysis Terms
This glossary defines the key terms you'll encounter throughout the Fundamental Analysis series. Bookmark it for quick reference when working through financial statements or building valuation models.
Profitability and Margin Terms
Gross Profit: Revenue minus cost of goods sold (COGS). Measures the profit earned from core production before operating expenses.
Gross Margin: Gross profit divided by revenue, expressed as a percentage. A 40% gross margin means $0.40 of every revenue dollar remains after production costs.
Operating Income (EBIT): Earnings before interest and taxes. Revenue minus COGS minus operating expenses (SG&A, R&D, depreciation).
Operating Margin: Operating income divided by revenue. Shows what percentage of revenue converts to operating profit before financing costs.
Net Income: The bottom line after all expenses, interest, and taxes. What shareholders actually earned.
Net Margin: Net income divided by revenue. A 15% net margin means $0.15 of profit per revenue dollar after everything.
EBITDA: Earnings before interest, taxes, depreciation, and amortization. A cash-flow proxy that adds back non-cash charges to operating income.
Return Metrics
Return on Equity (ROE): Net income divided by shareholders' equity. Measures how efficiently a company generates profits from shareholder capital. 15% ROE means $0.15 earned per dollar of equity.
Return on Assets (ROA): Net income divided by total assets. Shows profit generation efficiency relative to the entire asset base.
Return on Invested Capital (ROIC): NOPAT (net operating profit after tax) divided by invested capital (debt + equity minus excess cash). The gold standard for measuring capital efficiency.
Economic Profit: NOPAT minus (Invested Capital x WACC). Positive economic profit means the company earns above its cost of capital.
Cash Flow Terms
Operating Cash Flow (OCF): Cash generated from core business operations. Found on the cash flow statement, it adjusts net income for non-cash items and working capital changes.
Free Cash Flow (FCF): Operating cash flow minus capital expenditures. The cash available for debt repayment, dividends, buybacks, or acquisitions.
Free Cash Flow to Equity (FCFE): FCF adjusted for net debt issuance/repayment. Cash available specifically to equity holders.
Cash Conversion: The ratio of operating cash flow to net income. A ratio above 1.0x indicates earnings are fully backed by cash.
Capex (Capital Expenditures): Spending on property, plant, equipment, and other long-term assets. Found in the investing section of the cash flow statement.
Balance Sheet Terms
Working Capital: Current assets minus current liabilities. The capital tied up in day-to-day operations.
Current Ratio: Current assets divided by current liabilities. Above 1.5x suggests adequate short-term liquidity.
Quick Ratio: (Current assets minus inventory) divided by current liabilities. A stricter liquidity test excluding potentially illiquid inventory.
Debt-to-Equity (D/E): Total debt divided by shareholders' equity. Measures financial leverage. 0.5x D/E means $0.50 of debt per dollar of equity.
Net Debt: Total debt minus cash and cash equivalents. A company with $500M debt and $400M cash has only $100M net debt.
Interest Coverage Ratio: EBIT divided by interest expense. Shows how many times over a company can pay its interest bill. Below 3.0x is concerning.
Goodwill: The premium paid above fair value of net assets in an acquisition. Represents intangible value like brand, customer relationships, or synergies.
Tangible Book Value: Shareholders' equity minus intangible assets and goodwill. The hard asset backing of the equity.
Valuation Metrics
Price-to-Earnings (P/E): Stock price divided by earnings per share. A 20x P/E means investors pay $20 for every $1 of annual earnings.
Forward P/E: Stock price divided by next year's estimated earnings. Uses analyst consensus estimates.
PEG Ratio: P/E divided by expected earnings growth rate. A PEG of 1.0 suggests fair value relative to growth.
Price-to-Sales (P/S): Market cap divided by annual revenue. Useful for unprofitable companies where P/E is meaningless.
Price-to-Book (P/B): Stock price divided by book value per share. A P/B of 2.0x means the market values equity at twice its accounting value.
EV/EBITDA: Enterprise value divided by EBITDA. A capital-structure-neutral valuation multiple. 10x EV/EBITDA is typical for mature industrials.
Enterprise Value (EV): Market cap plus net debt plus minority interest minus associate investments. Represents the total cost to acquire the entire business.
Dividend Yield: Annual dividend per share divided by stock price. A 3% yield means $3 in annual dividends per $100 invested.
Growth and Quality Terms
Revenue Growth: Year-over-year percentage change in sales. Organic growth excludes acquisitions and currency effects.
Earnings Growth: Year-over-year percentage change in EPS. Can be distorted by share buybacks or one-time items.
Same-Store Sales (Comps): Revenue growth from stores open at least one year. Isolates true demand trends from new store openings.
Recurring Revenue: Revenue from subscriptions or contracts expected to repeat. Higher predictability than one-time sales.
Customer Acquisition Cost (CAC): Total sales and marketing spend divided by new customers acquired. Key efficiency metric for growth companies.
Lifetime Value (LTV): Total expected revenue from a customer over the relationship. LTV/CAC above 3.0x indicates healthy unit economics.
Churn Rate: Percentage of customers or revenue lost in a period. A 5% monthly churn means losing 5% of customers each month.
Quality of Earnings Terms
Accruals: The difference between reported earnings and operating cash flow. High accruals relative to earnings can signal aggressive accounting.
Days Sales Outstanding (DSO): (Accounts receivable / Revenue) x 365. Rising DSO may indicate collection problems or channel stuffing.
Days Inventory Outstanding (DIO): (Inventory / COGS) x 365. Rising DIO can signal demand weakness or obsolescence risk.
Revenue Recognition: The accounting policy determining when sales are recorded. Aggressive recognition inflates near-term revenue.
Deferred Revenue: Cash collected before service delivery. Appears as a liability and converts to revenue over time. Common in SaaS businesses.
Restructuring Charges: One-time costs for layoffs, facility closures, or asset write-downs. Recurring "one-time" charges are a red flag.
Competitive Analysis Terms
Economic Moat: A sustainable competitive advantage protecting profits from competition. Types include network effects, switching costs, cost advantages, and intangible assets.
Barriers to Entry: Obstacles preventing new competitors from entering a market. Capital requirements, regulation, patents, and scale economies create barriers.
Market Share: A company's revenue as a percentage of total industry revenue. Gaining share in a growing market is the ideal scenario.
Pricing Power: The ability to raise prices without losing customers. A sign of strong competitive position and brand value.
Operating Leverage: The relationship between fixed and variable costs. High operating leverage means small revenue changes cause large profit swings.
Valuation Model Terms
Discounted Cash Flow (DCF): A valuation method that calculates present value of expected future cash flows using a discount rate.
Weighted Average Cost of Capital (WACC): The blended cost of debt and equity financing, weighted by capital structure. Used as the discount rate in DCF models.
Terminal Value: The value of all cash flows beyond the explicit forecast period. Often 60-80% of total DCF value.
Comparable Company Analysis (Comps): Valuing a company by applying multiples from similar public companies.
Precedent Transactions: Valuing a company by applying multiples from recent M&A deals in the same industry.
Sum-of-the-Parts (SOTP): Valuing a diversified company by separately valuing each business segment and adding them together.
Margin of Safety: The discount to intrinsic value at which you purchase. A 30% margin of safety means buying at 70% of fair value.
Filing and Disclosure Terms
10-K: Annual report filed with the SEC containing audited financial statements, business description, risk factors, and MD&A.
10-Q: Quarterly report with unaudited financials and updated disclosures. Filed within 45 days of quarter end.
8-K: Current report for material events like acquisitions, executive changes, or guidance updates. Filed within 4 business days.
MD&A (Management Discussion and Analysis): Section of 10-K/10-Q where management explains financial results, trends, and outlook.
Proxy Statement (DEF 14A): Filing disclosing executive compensation, board composition, and shareholder voting matters.
Form 4: Insider trading disclosure. Filed within 2 business days of insider buying or selling company stock.
Next Steps
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Bookmark this page for quick reference when reading financial statements or analyst reports.
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Practice calculating at least 5 of these metrics for a company you're researching.
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Cross-reference terms as you work through other articles in the Fundamental Analysis series.