Investing Glossary

A unit of fractional ownership in a company. Shareholders have a proportional claim on the company's earnings, assets, and dividends — and in most cases, a vote at shareholder meetings.

The total equity value of a company in the public market. Calculated as share price × diluted shares outstanding. Reflects what the market currently values the equity portion of the business at.

Market capitalization plus net debt (total debt minus cash). Represents the total price to acquire the entire business — equity and debt claims combined. Used in EV-based valuation multiples.

A durable structural advantage that allows a business to earn above-average returns on capital for extended periods. Sources include: brand, switching costs, network effects, cost advantages, and regulatory barriers.

An increase in shares outstanding that reduces each existing shareholder's percentage ownership. Caused by equity offerings, convertible debt conversion, or stock-based compensation. Dilution reduces per-share metrics even when total earnings grow.

When a company purchases its own shares, reducing shares outstanding. If done at prices below intrinsic value and funded by FCF, buybacks increase per-share economic value for remaining shareholders.

Management's decisions about where to deploy the company's cash: dividends, buybacks, acquisitions, debt reduction, or reinvestment. The quality of capital allocation decisions is one of the most important drivers of long-term shareholder returns.

An estimate of what a business is worth based on its future cash generation, growth prospects, competitive position, and risk profile. Intrinsic value is a range, not a precise number.

The gap between estimated intrinsic value and the current market price. A wider margin of safety absorbs analytical errors and unforeseen events. Introduced by Benjamin Graham as a core principle of value investing.

Total sales recognized during a period. The starting point of the income statement. Revenue quality matters: recurring, contractual revenue deserves higher multiples than lumpy, transactional revenue.

Gross profit = Revenue − Cost of Goods Sold. Gross margin = Gross Profit ÷ Revenue. Reflects pricing power and direct cost management. Trends in gross margin often lead earnings trends by 1–2 years.

Earnings Before Interest and Taxes. A measure of operating profitability that excludes the effects of financing (interest) and tax jurisdiction. EBIT ÷ Revenue = EBIT margin, a core profitability metric.

Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash generation — but a poor one for capital-intensive businesses that require heavy ongoing capex. Widely used in M&A and leverage analysis.

Total profit after all expenses including interest and taxes. The starting point for EPS. Net income can diverge significantly from cash generation due to non-cash charges and accruals.

Cash generated by core operations. Calculated from net income adjusted for non-cash charges (D&A, SBC) and working capital changes. The first building block of free cash flow.

Operating cash flow minus capital expenditures. The cash available after funding the business. Funds dividends, buybacks, debt reduction, and reinvestment. The most reliable measure of a business's economic earning power.

Cash spent on property, plant, equipment, and other long-term assets. Split between maintenance capex (keeping existing assets operational) and growth capex (new capacity). High capex relative to OCF reduces FCF and indicates capital intensity.

Non-cash charges that spread the cost of tangible assets (depreciation) and intangible assets (amortization) over their useful lives. D&A reduces accounting earnings but not cash. Understanding the D&A vs. capex relationship reveals asset aging and reinvestment needs.

Current Assets minus Current Liabilities (excluding cash and short-term debt). Represents the net operating capital tied up in receivables, inventory, and payables. Rising working capital consumes cash; improving working capital efficiency releases it.

The premium paid in an acquisition above the book value of net assets. Represents what the acquirer paid for brands, customer relationships, and synergies that aren't on the target's balance sheet. Impairment charges reduce goodwill and hit net income when acquisitions underperform.

Equity given to employees as part of compensation. A non-cash charge on the income statement — but a real economic cost, as it dilutes existing shareholders. Many investors subtract SBC from FCF to calculate 'true FCF.'

Price-to-Earnings ratio. Market price per share divided by earnings per share. The most widely cited valuation multiple. Weak when earnings are distorted by non-cash items, leverage, or cyclical peaks.

Price-to-Free-Cash-Flow. Market capitalization divided by free cash flow. More reliable than P/E for mature businesses because FCF is harder to inflate through accounting choices. The preferred multiple for capital-light businesses.

Enterprise Value divided by EBITDA. Widely used in M&A and for cross-capital-structure comparisons. Ignores capex intensity — dangerous for heavy-capex sectors. Supplement with EV/EBIT for capital-intensive industries.

Market capitalization divided by revenue. Useful when earnings are temporarily depressed or negative (early-stage growth). Completely ignores profitability — only meaningful when combined with margin trajectory analysis.

Price per share divided by book value per share. Most relevant for banks, insurers, and asset-heavy businesses. Has limited meaning for asset-light companies where most value lies in intangibles not on the balance sheet.

A valuation method that estimates intrinsic value by projecting future free cash flows and discounting them to the present at a rate reflecting risk and time value. The most conceptually rigorous approach — but highly sensitive to terminal assumptions.

The weighted average required return across equity and debt holders. Used as the discount rate in enterprise DCF models. Reflects the risk of the business and the cost of its capital structure.

The estimated value of a business beyond the explicit forecast period in a DCF model. Typically represents 60–80% of total DCF value for quality businesses — making terminal assumptions the most important (and most dangerous) part of any model.

P/E divided by the earnings growth rate. Attempts to adjust P/E for growth. A PEG of 1× implies the multiple is 'in line' with growth. Useful as a rough screen but should not be used in isolation.

Annual dividend per share divided by current share price. A measure of current income return. High yield can indicate value or risk — always test dividend safety before relying on yield as an opportunity signal.

Dividends per share divided by earnings or FCF per share. Measures how much of cash flow is being distributed. FCF-based payout is more reliable than EPS-based. REITs should use AFFO-based payout.

Annual dividend divided by original purchase price (not current price). Reveals the compounding power of dividend growth for long-term holders. A 3% initial yield with 9% annual growth reaches 7% YoC in 10 years.

The cut-off date for receiving the next declared dividend. Shares purchased on or after this date will not receive the coming payment. The stock price typically falls by approximately the dividend amount on the ex-date.

An S&P 500 company that has increased its dividend every year for at least 25 consecutive years. A widely used quality screen — but streak length does not guarantee future safety. Always validate with current FCF coverage.

The compound annual growth rate of dividends over a period. A company with 8% 10-year dividend CAGR is compounding income significantly faster than inflation. Dividend growth is often more important than current yield for long-term investors.

A high-yielding stock where the dividend is likely to be cut. Market price has fallen (raising yield) in response to business deterioration before management officially reduces the payout. Identified by high FCF payout ratio, rising debt, and declining earnings.

A company that owns income-producing real estate and, in exchange for distributing most taxable income, receives favorable pass-through tax treatment. Provides real estate exposure through listed securities.

Net income plus real estate depreciation minus property sale gains. The primary REIT earnings metric, correcting for the distortion of D&A on real estate that typically holds or gains value. Defined by NAREIT.

FFO adjusted further for recurring maintenance capex, leasing commissions, and straight-line rent effects. A closer approximation of distributable cash and the preferred metric for REIT dividend safety analysis.

Property revenue minus operating expenses, before debt service. A pure measure of property-level profitability. Used in cap rate calculations and same-store comparisons.

NOI divided by property value. A property with $1M NOI and $15M value has a 6.7% cap rate. Lower cap rates = higher valuations. The spread between cap rates and REIT cost of capital determines acquisition accretion.

NOI growth from properties owned for more than 12 months. Isolates organic revenue growth from acquisition-driven growth. A key indicator of operational quality and pricing power.

Estimated value of total real estate assets minus total liabilities. A REIT trading at a discount to NAV may be undervalued; a premium implies growth expectations. NAV calculation requires cap rate assumptions.

NOPAT divided by invested capital (equity + net debt). Measures how efficiently a business converts capital into operating profit. Sustainably above-average ROIC (vs. WACC) is the clearest signal of a durable competitive advantage.

EBIT × (1 − tax rate). The after-tax operating profit before financing costs. The numerator in ROIC calculation. Measures how much the business earns from operations independent of its capital structure.

Net income divided by shareholders' equity. Measures returns on equity capital. Can be inflated by leverage (the Dupont decomposition shows this). Less reliable than ROIC for comparing businesses across capital structures.

Free cash flow divided by net income. Measures how much of accounting earnings is converted into real cash. Consistently above 90–100% indicates high earnings quality; below 70% warrants investigation.

EBIT divided by interest expense. Measures ability to service debt from operating earnings. Below 2–3× is a warning signal. Above 5× typically indicates comfortable debt servicing capacity.

Net debt (total debt minus cash) divided by EBITDA. A primary leverage metric. Above 4–5× for non-financial businesses is typically elevated; above 6–7× in cyclical industries creates significant refinancing risk.

The degree to which a business's operating costs are fixed vs. variable. High operating leverage means small revenue increases produce disproportionately large profit increases — and vice versa in downturns. Software and media tend to have high operating leverage.