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Glossary and List of Abbreviations
 
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Jack's glossary gives more than just strict definitions. It tells how each term is meaningful and how it is used.

Amortization - 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."

Asset - Informally, 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."

Auditor's 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 performance.

Beneficial Owner - One who legally owns or controls stock or has the ability to own or control stock through the exercise of stock options.

Book 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.

Cash 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.

Depreciation - 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.

Earnings 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 stock.

Earnings Yield - A stock's earnings per share 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.

EBITDA - 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 cash flow.

EPS - See Earnings Per Share.

FFO - See Funds From Operations.

Footnote - Information pertaining to financial statements, and located just below them, that may contain important facts affecting the interpretation of the financial statements.

Form 144 - A form on which holders of "restricted stock" notify the SEC of their intention to sell restricted stock. Holders of restricted stock are usually, but not always, Insiders.

Form 4 - The form on which an Insider reports changes in stock ownership to the SEC.

Free 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.

Funds 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 to GAAP 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.

GAAP (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.

Goodwill - 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.

Insider - 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.

Insider Trading (illegal) - 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.

Insider Transaction - 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.

Liability - Informally, a debt or obligation of a company.

OCF - See Operating Cash Flow.

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.

Options - See Stock Options.

P/E - See Price/Earnings Ratio.

PEG - See Price/Earnings-To-Growth Ratio.

Price/Earnings 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.

Price/Earnings-to-Growth Ratio (PEG) - 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 article, "The Deep Logic of PEG" on this web site.

Proxy Statement - 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 options by company officers and directors.

Real 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.

Recapture 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.

REIT - See Real Estate Investment Trust.

Restricted Stock - 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.

Return 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.

Return 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.

Return On Investment (ROI) - 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 on Assets

ROE - see Return on Equity

ROI - See Return On Investment.

SEC (Securities and Exchange Commission) - A regulatory body of the Federal Government that oversees the financial markets.

Short 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.

Stock Options - 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 activities.

Tangible Book Value - The book value of assets that have a readily determinable market value, such as manufacturing facilities, trucks, and land. Goodwill  and intellectual property, such as patent or trademarks, are  excluded from assets when determining tangible book value.

10K - The formal version of a company's annual report, issued to the SEC.

10Q - The formal version of a company's quarterly report, issued to the SEC.

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