Stock Market Terms | E - I

This Glossary page of stock market terms is aimed to evolve into a useful resource page for beginner investors. Will keep updating this page with relevant links for further reading up!

Meanwhile Happy Learning! Hope you find this resource page as useful as I have enjoyed putting this up!

Profit after Tax, or Net Profit earned by the company on a per share basis

Practical Use
Indicator of a company's profitability and used to compute the price-to-earnings (P/E) valuation multiple. Considered the most important variable used in determining the share price, it's not the end-all, be-all of corporate financial performance as it is made out to be though.

In fact, just looking at EPS without poring over cash flow and many other factors, its pretty much pointless. So when you read in the paper/hear on TV, that a company "beat" or "missed" earnings per share estimates, don't get excited. Find out why instead.

If we invert the P/E ratio i.e. divide a company’s Earnings per share (EPS) by its market price, we get the earnings-yield.

Practical Use
The nice thing about yields, as opposed to P/Es, is that we can compare them with alternative investments such as fixed deposits, to see what kind of a return we can expect from each investment. (The difference is that earnings generally grow over time, whereas fixed deposit payments are fixed).

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Enterprise Value is considered sometimes as a more accurate value of a company than its Market Capitalisation, because it includes the Total Debt net of all cash and cash equivalents.

Practical Use
An investor buying the whole company would not only need to buy all the shares at market value, but also would be taking on the burden of any debt (net of cash and cash equivalents) the company has. You can think of Enterprise Value as the theoretical takeover price.

Equity Capital is the owner’s equity in the company and the most permanent source of finance for the company.

Face Value is the par value of a stock, and only has symbolic value today. The par value of a stock was the share price upon initial offering; the issuing company promised not to issue further shares below par value, so investors could be confident that no one else was receiving a more favorable issue price.

The degree to which a business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt.

Practical Use
Financial Leverage is something you need to watch carefully. As with any kind of debt, a judicious amount can boost returns, but too much can lead to disaster. Look at the kind of business a firm is in. If it's fairly steady, a company can probably take on large amounts of debt without too much risk because there's only a small chance of the business falling off a cliff and the company being caught short when interest payments become due. On the flip side, be very wary of a high financial leverage ratio if a company's business is cyclical or volatile. Because interest payments are fixed, the company has to pay them whether business is good or bad.

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Percentage of shareholding in a company that is owned by Foreign Institutional Investors (FII).

Practical Use
FII ownership in a company indicates some level of reputation for the company, that it is considered investment worthy by foreign institutional investors. However this can be a double edged sword. Too much FII ownership can lead to volatility, with FIIs selling in bulk, as we have seen.

Free cash flow (FCF) is calculated by subtracting Capital Expenditure from Operating Cash Flow. Cash Flow from Operations measures how much cash a company generates. It is the true touchstone of corporate value creation because it shows how much cash a company is generating from year to year. As useful as the Cash Flow statement is, it does not take into account the money that a firm has to spend on maintaining and expanding its business. To do this, we need to subtract Capital Expenditures, which is money used to buy fixed assets.

Practical Use
Free Cash Flow enables us to separate out businesses that are net users of Capital - ones that spend more than they take in- from businesses that are net producers of Capital, because its only that excess cash that really belongs to shareholders. Free Cash Flow is sometimes referred to as "Owners Earnings" because that's exactly what it is: the amount of money the owner of a company could withdraw from the treasury without harming the company's ongoing business.

There is a view that most analysts myopically focus on earnings while ignoring the real cash that a firm generates. While earnings can often be clouded by accounting tricks, it's much tougher to fake cash flow. For this reason, seasoned investors believe that FCF gives a much clearer view of the ability to generate cash (and thus profits).

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Percentage of shareholding in a company that is owned by Govt/Financial Institutions (FI) like LIC

Practical Use
Unlike foreign institutional investors ownership which has been seen to lead to volatility, Govt./FI ownership often indicates a measure of stability for the company.

The total value of all the fixed assets that a company owns, at the cost of acquisition. As opposed to Net Block, this does not take into account the effects of accumulated Depreciation

This is Gross profit as a percentage of Sales Turnover

Practical Use
Gross Margins vary across industries and even among individual companies in the industry. Typically gross margin would be less for companies selling commodity products and higher for those that sell differentiated products.

This is simply Sales Turnover minus Cost of Sales. Essentially this tells us how much a company is able to mark up its goods.

This includes interest cost for the debt carried by a company and other charges such as financial transaction fees.

Also known as Times Interest Earned, the Interest Coverage ratio is a measure of a company's ability to pay its debt. Divide PBIT by Interest Expense, and you will know how many times the company could have paid the interest expense on its debt.

Practical Use
The more times the company can pay its interest expense, the less likely that it will run into difficulty if earnings should fall unexpectedly.

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There are several types of inventories, including raw materials that have not yet been made into a finished product, partially finished products, spare parts and finished products that have not yet been sold.

Practical Use
Inventories are especially important to watch in manufacturing and retail firms, and their value on the balance sheet should be taken with a pinch of salt. Because of the way Inventories are accounted for, their liquidation value may very well be a far cry from their value on the balance sheet

Inventories soak up capital. Cash that’s been converted into inventory sitting in a warehouse can't be used for anything else. Inventory Days is a metric defined to indicate how long a company takes to convert its inventory into sales. Essentially the same metric as Inventory Turnover. Another related cash conversion efficiency metric is Debtor Days.

Practical Use
The speed at which a company turns over its inventory can have a huge impact on profitability because the less time cash is tied up in inventory, the more time its available for use elsewhere. Average Inventory days varies from one industry to another. Comparing Inventory days within the industry may show up the more efficient player.

Inventories soak up capital. Cash that’s been converted into inventory sitting in a warehouse can't be used for anything else. Inventory Turnover is a metric defined to measure the efficiency or speed with which a company converts its inventory into sales. Essentially the same metric as Inventory Days.

Practical Use
The speed at which a company turns over its inventory can have a huge impact on profitability because the less time cash is tied up in inventory, the more time its available for use elsewhere. Average Inventory turns varies from one industry to another. Comparing Inventory turns within the industry may show up the more efficient player.

This is money invested in either longer term bonds, mutual funds or in the stock of other companies, ranging from a token amount to a substantial stake. It is not nearly as liquid as cash and might be worth more or less on the market than the amount shown on the balance sheet

Practical Use
You can dig into Schedules to the Balance Sheet to see what exactly is in this account and with how much skepticism you should view its value.