Glossary and List of Abbreviations
Jack's glossary gives
more than just strict definitions. It tells how each term is
meaningful and how it is used.
- A charge against earnings
over an extended period of time to recognize the value paid for an
intangible asset such as a trademark or "goodwill."
something that a company can use to generate income. It may be
tangible, like a truck or building, or intangible, like a trade
name, patent, or "goodwill."
Report - A
statement found in a publicly held corporation's annual report. It
is issued by an accounting firm which has audited the corporation's
financial statements. It states an opinion as to whether the
auditing firm believes the financial statements represent an
accurate picture of the corporation's financial condition and
Owner - One
who legally owns or controls stock or has the ability to own or
control stock through the exercise of stock
Value - The
net value of a firmís assets
minus its liabilities.
It includes both tangible and intangible assets and is often given
on a per share basis. Usually a firm's stock will sell at a price
higher than its book value per share.
Flow Statement -
The financial statement that tells the actual amount of money
flowing in and out of a company. It is divided into 3 sections,
operating cash flow, investment cash flow, and financing cash flow. Operating
cash flow is
the one that is usually the most useful to investors.
- A charge against earnings
over an extended period of time to recognize that a tangible asset
such as a building or truck is losing value as it wears out. The
implication is that the asset will eventually have to be replaced,
and this will cost money. Depreciation does not actually use cash in
the period in which it is charged.
Per Share (EPS) -
A company's total net profits divided by the total number of shares
outstanding. It is generally considered the most useful measure of a
company's profitability. If a company has preferred stock, preferred
dividends are subtracted before calculating EPS for the common
Yield - A
divided by its price, expressed as a percentage. It shows what
percentage return the company earns on the money invested in it
right now, without consideration of past equity or assets. It is the
inversion of a P/E.
- A measurement
of earnings before interest, taxes, depreciation,
and amortization are subtracted. It is a useful measure of
the basic profitability of a company. Often erroneously equated
(even by analysts) with operating
- See Earnings Per Share.
See Funds From
- Information pertaining to
financial statements, and located just below them, that may contain
important facts affecting the interpretation of the financial
144 - A form
on which holders of "restricted
notify the SEC of their intention to sell restricted stock. Holders
of restricted stock are usually, but not always, Insiders.
4 - The form
on which an Insider reports changes in stock ownership to the SEC.
Cash Flow - A
stock analyst's term with a definition that varies somewhat
depending on the particular analyst. It usually approximates
operating cash flow minus necessary capital expenditures. It is, in
general, supposed to measure how much cash a company has left over
after making payments necessary to maintain normal operations.
From Operations (FFO)
- A measure of financial performance used by Real Estate
Investment Trusts. It consists of net earnings with some
depreciation and amortization charges added back. It does not equate
earnings or cash
flow. FFO is sometimes criticized because it is subject to some
manipulation in how it is applied. GAAP earnings, however, are also
subject to manipulation. If conservatively applied, FFO is a fair
and useful measurement in light of the fact that real estate has
important attributes not shared by other investments.
(Generally Accepted Accounting Principles) - A set of accounting
standards agreed upon by the professional accounting industry. These
standards are designed to ensure that financial statements are
reasonably accurate representations of a company's financial
condition and performance. There is, however, a great deal of leeway
in the application of GAAP, and adherence to GAAP does not guarantee
a company's financial statements won't fail to show financial
problems. Lack of adherence to GAAP, however, is a virtual giveaway
that a company's financial statements can't be relied upon.
- The price paid for a
company in excess of the value of its tangible assets, patents, and
trademarks. If you paid $200,000 for a business wherein the building
and machines were the only assets and were worth $150,000, the
remaining $50,000 would be "goodwill." It represents, in
theory, the intangible value the business accumulated by its
relationships with customers, etc. Goodwill is amortized
as an expense over a period of years, not to exceed 40.
- A person or entity who is
presumed by law to be privy to non-public information about the
internal operations and plans of a corporation. An insider is
usually an officer or director of a corporation, but may also be an
advisor, broker, or a beneficial
owner of 10%
or more of a class of a corporationís stock. Insiders are
required to report to the SEC,
when they buy or sell their company's stock or options.
- The act of trading securities based on important corporate
developments not known to the public. This is usually done by
passing the inside information to a person who is not a corporate
Insider, in order to avoid the scrutiny of the SEC.
The purchase or sale of securities of a corporation, or the exercise
of stock options, by a company insider. This is perfectly legal as
long as proper notification is made to the SEC.
- Informally, a debt or
obligation of a company.
- See Operating
Cash Flow (OCF) -
The inflows and outflows of cash from the normal sales operations of
a business. It differs from earnings because earnings may be
increased by orders for which payment has not yet been received.
Unpaid orders don't increase operating cash flow. OCF also differs
from earnings in that earnings are reduced by charges, such as
depreciation or amortization, that do not actually reduce cash in
the period the charge occurs.
- See Stock
- See Price/Earnings
- See Price/Earnings-To-Growth
Ratio (P/E) -
The price of a stock divided by its yearly earnings. A stock selling
at $12 per share that earns $1 per share has a P/E of 12. A P/E is,
in effect, a measure of investors' expectations for a stock's
performance. Stocks with high P/Es are ones from which investors
expect high future growth rates. Low P/Es imply that investors
expect low growth. For a greater understanding of the implications
of a P/E, please see the article, "The
Deep Logic of PEG"
on this web site.
- A company's price/earnings ratio divided by its earnings growth
rate. A company with a P/E of 40 and an earnings growth rate of 20%
annually would have a PEG of 2. The higher the PEG, the more danger
that a stock is overpriced. For more on this subject, please see the
Deep Logic of PEG"
on this web site.
A document sent to shareholders of a company. It contains proposals
to be voted upon by shareholders. It also contains useful
information about compensation of corporate officers and ownership
of stock and stock
company officers and directors.
Estate Investment Trust (REIT) -
A portfolio of professionally managed real estate properties
securitized into stock-like units, distributable for wide public
ownership. Usually designed principally to provide current income.
Rule - The SEC
rule that allows
the SEC to recapture gains made (or losses avoided) by an Insider
who trades based on non-public information. A recapture enforcement
is a civil action, not a criminal one, and is rare.
Estate Investment Trust.
- Stock which may
not be sold for a certain period of time. It is usually owned by
corporate Insiders. The holder of restricted stock must notify the
SEC prior to selling it by filing a Form 144.
on Equity (ROE) - The ratio of a company's annual net income
to the equity on its balance sheet. ROE is usually measured using
the equity on the balance sheet at the end of the prior year, since
the current year's income increases the current year's equity,
thereby making the percentage return look smaller. ROE of about 15%
is usually considered the sign of a well-managed company. ROE should
not be confused with profit margin or return on assets.
on Assets (ROA) - The ratio of a company's annual net income
to the total assets on its balance sheet. ROA is usually measured
using the assets on the balance sheet at the end of the prior year,
since the current year's income increases the current year's assets,
thereby making the percentage return look smaller. What may be
considered a good percentage return on assets varies widely with the
industry in question.
- Used informally here as
a synonym for earnings yield. It is the inversion of a P/E. That is,
it is a stock's earnings per share divided by its price. It is
expressed as a percentage, and shows what percentage return the
company earns on the money invested in it right now, without
consideration of past equity or assets.
ROA - see Return
ROE - see Return
- See Return
and Exchange Commission) - A regulatory body of the Federal
Government that oversees the financial markets.
Sale - An action wherein a party, by agreement, borrows
stock and sells it, hoping to buy it back later in the open market
at a lower price before returning it to the lending party. The
difference in the sell price and the later buy price, if lower, is
profit. Short-selling is speculative and is suitable only for very
well-informed and well capitalized investors. It can result in
margin calls and substantial losses for the unwary.
Securities issued by a company -- usually to its officers and
directors -- that allow the holder to buy stock in the company at a
specified price during a specified period of time. They are widely
used as part of a company's executive compensation plan. Their
general purpose is to motivate executives to perform well in order
to help raise the company's stock price, thereby increasing the
value of their stock options.
There are also publicly
traded stock options, not issued by the company itself. These are
generally used by non-Insiders for speculating and hedging
Book Value -
The book value of assets that have a readily determinable market
value, such as manufacturing facilities, trucks, and land.
and intellectual property, such as patent or trademarks, are
excluded from assets when determining tangible book value.
- The formal version of a
company's annual report, issued to the SEC.
- The formal version of a company's quarterly report, issued to
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