Accounts receivable turnover   Net sales divided by accounts receivable. It measures on average how many times receivables are collected during a year.

Amortization   A systematic, gradual reduction of the value of intangible assets over a given period of time. It is also used to describe the periodic repayment of debt, particularly when it is long-term.

Arbitrage   A trading strategy that makes a riskless profit from a zero investment.

Ask price, Asking price   The price at which an asset can be bought.

Asset   Something of value that is owned by or owed to the company.

At-the-money   An option on an asset with the strike of the option equal to the value of the asset.

Average collection period   Accounts receivable divided by net sales over 365. It is an estimate of the average number of days required to convert receivables into cash.

Balance sheet   A financial statement containing the three basic elements of a company: assets, liabilities and stockholders’ equity. These three elements must ‘balance’ according to the formula: Equity = Assets – Liabilities.

Basic earnings per share   The earnings of a company (quarterly, semi-annually or annually) divided by the number of shares outstanding not taking into account options or warrants issued by the company. See diluted earnings per share.

Basis points   See Points.

Beta   A measure of the riskiness of a stock in terms of the variability of a stock price with respect to the variability of the market as a whole. Using this measure of risk, assets with a beta exceeding 1 are riskier than average. Assets with a beta below 1 are considered safer than average. See the Capital Asset Pricing Model.

.

Bid price   The price at which an asset can be sold.

Bid-ask spread   The difference between the ask price and the bid price.

Book value   This term usually refers to the stockholders’ equity of a company, particularly on a per share basis. This is an accounting measure of value and the actual value may be quite different. See also the price to book ratio.

Call option   An option to buy an underlying asset.

Capital   The sum of the equity and long term debt of a company. It is sometimes referred to as invested capital or capital employed. For simplicity, capital can be measured as equity plus long-term liabilities.

Capital asset pricing model CAPM   The CAPM is a general model describing the relationship between risk and return in equity markets. For such a simple model it is surprisingly accurate. Nevertheless, the simple-minded definition of risk using beta, a statistical analyses of stock prices, is at variance with the goals of long-term investing. Buffett is extremely critical of CAPM.

Capital spending   Total outlay on such things as plant and equipment. It does not include funds spent on acquisitions. It could be expressed on a per share basis.

Cash   This is the most liquid of the assets of a company and appears as the first line in the current assets in a company’s balance sheet. It consists of money on hand and on deposit in banks.

Cash earnings   The earnings plus depreciation, depletion, amortization, and other non-cash charges less capital spending.

Cash equivalents   Security investments that can be readily converted to cash. Also referred to as marketable securities.

Cash earnings per share ceps   The cash earnings of a company divided by the number of shares outstanding.

Cash flow   The net earnings of a company plus depreciation, depletion and amortization less preferred dividends (if any). It may be stated for the entire company or on a per common share basis.

Cash flow adequacy   Cash flow from operating activities divided by the average annual long-term debt maturities. It is a measure of how many times average annual payments of long-term debt are covered by operating debt cash flow.

Cash flow liquidity ratio   This is cash plus marketable securities plus cash flow from operating activities divided by current liabilities.

Comprehensive income  It is the change in equity or net assets of a business during a period except those resulting from transactions with shareholders such as such as dividends, stock repurchases or stock offerings. It can be calculated from the net income or net profit by including the changes in equity from items that are not included in the income statements such as foreign currency translation adjustments and certain pension liability adjustments. Also called net comprehensive income or net comprehensive profit.

Cost of capital   See Weighted average cost of capital.

Cost of carry   The cost of financing an instrument compared to the interest received. If such a cost is lower than the interest received, the cost of carry is said to be positive; otherwise it is said to be negative.

Cost of equity   The rate of return that investors require to purchase common stock in a firm. It is usually calculated using the capital asset pricing model.

Cost of sales    The cost of producing a company’s inventory such as the cost of raw materials, labor and production overhead. For nonmanufacturing companies, it is the cost of merchandise purchased for resale.

Coupon   The regular interest payment made on a bond. It could be paid quarterly, semi-annually, or annually.

Coupon bond   A bond which makes coupon payments.

Current asset   An asset of a company that is cash or is reasonably likely to be turned into cash within the next twelve months.

Current liability   A liability of a company that is due within the next twelve months.

Current ratio   The ratio of current assets to current liability.

Debt cover   See interest cover.

Debt ratio   The ratio of total liabilities to total assets. Also called debt to assets ratio.

Debt to equity ratio   The ratio of total liabilities to stockholders’ equity.

Default risk   The risk that a loss will occur if a counterparty to a transaction does not fulfill, that is, defaults on, its financial obligations.

Delivery date   The date at which the underlying asset is (theoretically) exchanged for a cash payment on a forward or futures contract.

Delta   The derivative of the price of an option with respect to the price of the underlying asset.

Depletion   This is the equivalent of depreciation applied to the use of natural resources such as oil and gas, minerals and forests. It is the allowance in a balance sheet that these assets will eventually be used up.

Depreciation   The accounting procedure that allocates the cost of a fixed asset such as plant and equipment (land is not depreciated) over its estimated useful life. It is generally included in the cost of sales item in the income statement.

Derivative   A financial contract or security whose value depends on the value of an underlying asset. Examples are futures and options.

Diluted earnings per share   The earnings of a company (quarterly, semi-annually or annually) divided by the number of shares outstanding plus the number of unexercised options and warrants issued by the company. See basic earnings per share.

Discontinued operations   These are operations that have been or will be discontinued. They are reported separately from continuing operations in the income statement to improve the comparability of earnings from year to year.

Discount bond   A zero-coupon bond.

Dividend   A payment in the form of cash or stock by a company to its shareholders.

Dividend payout rate   See payout rate.

Dividend yield   The percentage formed by dividing the annual dividend by the market price of the stock .

Duration   A measure of the average life of the cash flows of a bond.

Earnings   A term used interchangeably with income and profit. Also they are often referred to as net earnings, net income or net profit. It is all the revenue of a company (operating and nonoperating) less all the expenses (direct, indirect, taxes, etc). It may or may not include income from discontinued operations. For investment purposes it is usually stated as earnings per share.

Earnings per share (EPS)   The net earnings (after preferred dividends, if any) per share of common stock. It usually means the sum of the earnings for the previous twelve months, called trailing earnings, although it can mean the earnings per share for a particular quarter. Earnings per share can be quoted as basic or diluted. The difference is that diluted EPS increases the number of shares outstanding to incorporate options that may have been issued by the company. See also cash earnings per share.

Earnings per share trailing twelve months (EPSttm)   The sum of the quarterly earnings per share for the previous four quarters. In Australia , the sum of the two most recent semi-annual earnings per share.

Economic Value Added EVA   This is a measure of the surplus value created by a company. It is computed as the amount of invested capital multiplied by the difference between the return on capital and the weighted average cost of capital.

EBDIT   A standard abbreviation for earnings before depreciation, interest and taxes. See also EBIT and EBITDA. Warren Buffett refers to EBDIT as an abomination. He wrote that it is a sawed-off yardstick since it ignores depreciation as an expense on the theory that it does not require a current cash outlay.

EBIT   A standard abbreviation for earnings before interest and taxes.

EBITDA   A standard abbreviation for earnings before interest, taxes, depreciation and amortization. Warren Buffett said that EBITDA is a nonsense figure. “It is absolute folly to take any notice of it.”

Efficient markets   A theory or hypothesis that the prices of assets accurately reflect the information in the market place.

Equity   The general term used to describe the theoretical value of the investment that the shareholders have in a company. Also referred to as net worth and stockholders’ equity. It is the difference between total assets and total liabilities. See also book value.

Eurodollars   U.S. dollars deposited in banks outside the U.S.

Exchange-traded option   Standardized options traded on a futures or options exchange. Commonly referred to as an ETO. See over-the-counter market.

Exercise price   The price at which the underlying asset may be purchased (for a call option) or sold (for a put option) when an option is exercised.

Extraordinary item   An entry in the income statement relating to transactions or events of a type that are outside the ordinary operations of the business, and are not of a recurring nature. Keeping them separate improves the comparability of earnings from year to year.

Expiration date   The maturity date of a derivative contract.

Face value   The principal payment on a bond at maturity.

Financial Accounting Standards Board (FASB)   The FASB is the primary organization for the development of generally accepted accounting principles .

First in, first out (FIFO)   A common method of valuing inventory as the cost of the goods purchased or produced earliest and still in inventory. In an inflationary environment it tends to maximize earnings since it understates current production costs. See LIFO.

Fixed assets   See property, plant and equipment.

Fixed asset turnover   Net sales divided by fixed assets. A measure of how well the firm manages its fixed assets.

Fixed charge coverage   Operating profit plus lease payments divided by interest expense plus lease payments. A broader measure of ability to pay debt than interest cover formed by including lease payments as a fixed expense.

Forward contract   A financial contract that requires the owner to purchase some underlying asset for a specified price at a fixed future date (the delivery date). No payments in either direction are made until the delivery date.

Free cash flow   The net earnings of a company plus depreciation, depletion, and amortization less the amount of capital expenditures. Other non-cash charges also need to be added back. These could arise from deferred tax assets and deferred tax liabilities. Increments in working capital should be removed. Free cash flow may be stated for the entire company or on a per common share basis. See also owner earnings.

Friction less market   An assumption that the market has no transaction costs and no trading restrictions.

Futures contract   A marked-to-market financial contract requiring the owner to purchase some underlying asset for a specified price at a fixed future date.

Gamma   The second derivative of the price of an option with respect to the price of the underlying asset.

Generally Accepted Accounting Principles GAAP   These are principles that have evolved and been developed over the years which are now agreed upon by the accounting profession in the USA .

Goodwill   Goodwill is an intangible asset which arises from the when the cost of acquisition of a company exceeds the equity value of the company.

Greeks   The partial derivatives of the value of an option with respect to its input parameters.

Gross margin   The ratio of the gross profit and a company’s sales .

Gross profit   The difference between a company’s sales and its cost of sales .

Hedge   A position in one asset used to remove the price risk from a position in another asset.

Implied volatility   The volatility implied by the price of an option.

Income   See earnings.

Income Coverage   See interest coverage.

Index fund   A mutual fund that holds stocks in the same proportion as in a major index such as the Standard and Poor 500 (S&P 500).

Index option   An option written on a stock index.

Intangible assets   Assets in a balance sheet for “nonphysical” items such as patents, financing costs and purchased goodwill. The value of these assets is reduced by amortization over a given period of time. Intangible assets are often byproducts of acquisitions.

In-the-money   A call (put) option on an asset with the strike of the option below (above) the value of the asset.

Initial public offering (IPO)   A corporation’s first equity offering to the public.

Interest coverage   Net earnings before interest and taxes (EBIT) divided by interest expense. Also referred to as interest cover, debt cover and times interest earned. It measures how many times EBIT covers the interest expense. Some sources replace EBIT by net earnings before interest and after taxes. It is also referred to as income coverage.

Inventory   A company's merchandise, raw materials, and finished and unfinished products which have not yet been sold.

Inventory turnover   cost of goods sold divided by inventory. A measure of the efficiency of the firm in managing and selling inventory.

Last in, first out (LIFO)   A common method of valuing inventory as the cost of the item most recently purchased or produced earliest. In an inflationary environment it tends to minimize earnings since it overstates average production costs. See FIFO.

Liability   A debt or obligation of the company. See current liability and long-term liability.

LIBOR   London Interbank Offer Rate: the rate at which a bank is willing to lend Eurodollars.

LIFFE   London International Financial Futures Exchange.

Long-term debt   Borrowed funds that are due for payment after one year, usually over several years. It usually forms the main component of the long-term liabilities on the balance sheet.

Long-term debt to capitalization ratio   Long term debt divided by stockholders’ equity plus long-term debt.

Long-term liability   A liability that is due after one year. See current liabilities.

Long position   A position in an asset that has been purchased.

Margin   The dollar amount of cash or securities used as collateral to purchase a derivative security or asset.

Mark-to-market   The process to record daily changes in futures or options markets and to debit or credit the margin accounts accordingly.

Net profit margin   Net profit divided by net sales . A measure of the profit after allowing for taxes and expenses.

Net sales    This is the value from a company’s sales of goods and services. It is the gross funds from the sale of goods and services less such items as allowances, discounts and returns. Sales and net sales are usually interchangeable.

Net worth   Same as equity. In some cases net worth is defined as the value of common equity plus the value of the preferred shares.

Nonrecurring   An expression used to describe earnings that are unusual or one-time events.

NOPAT   This is an abbreviation for the net operating profit after taxes. The ‘net’ here indicates that it is the operating profit after depreciation. In the calculation of EVA, the return on capital is defined as NOPAT divided by capital.

Open interest   The total number of outstanding futures or options contracts.

Operating earnings   A company’s net sales less the cost of sales and operating expenses. Depreciation may also be subtracted. In this case, operating earnings equal EBIT.

Operating expenses   See selling, general and administration SG&A expenses.

Operating margin   Operating earnings as a percentage of sales or revenues.

Opportunity cost   It is a measure of the sacrifice an investor must make if he or she is to forgo the liquidity and relative safety of government securities in favor of common-stock investments. See also cost of equity.

Option   A financial contract that gives the right for a particular transaction at some time in the future but without any obligation.

OTC   Over the counter; see over-the-counter market.

OTC derivatives   Derivative securities traded in the over-the-counter market.

Out-of-the-money   A call (put) option on an asset with the strike of the option above (below) the value of the asset.

Over-the-counter market   Trading in assets with a commercial or investment bank not using an exchange or stock market. Commonly referred to as OTC market. See  exchange-traded option.

Owner earnings   A term introduced by Warren Buffett defined as the “reported earnings plus depreciation, depletion, amortization and certain other non-cash charges less the average amount of capitalized expenditures for plant and equipment that the business requires to fully maintain its long-term position and its unit volume.” If the business requires additional working capital, the increment should also be subtracted. Apart from asking for the average amount of capitalized expenditures instead of the actual amount, this definition is the same as free cash flow. See also cash earnings.

Payout rate   The portion of the income of a company paid out as dividends rather than retained in the company.

Preferred stock   A security similar to stock except that it gives the owner a prior claim over stockholders with regard to dividend payments and distribution of assets should the company be liquidated. Preferred stock is normally entitled to specified dividend payments.

Price to book ratio, P/B ratio   The ratio of the market price of the stock and its book value.

Price to cash earnings ratio, P/CE ratio   The ratio of the market price of the stock and its cash earnings per share.

Price to earnings ratio, P/E ratio   The ratio of the market price of the stock and its earnings per share. The earnings are generally stated for the previous year.

Pro forma earnings per share  The earnings per share of a company (quarterly, semi-annually or annually) including an estimate of the cost of the unexercised options and warrants issued by the company divided by the number of shares outstanding. The number of shares outstanding may or may not include the number of options and warrants issued by the company.

Profit   See earnings.

Points   This can have different meanings depending on the context. Relating to stocks, it means $1. If a stock goes up by 3 points, then the price has risen by $3 per share. Relating to interest rates, it means 1/100 of one percent. If interest rates increase by 75 basis points, then they have increased by 0.75 percent.

Property, plant and equipment   The collection of assets of a permanent nature required to operate the business. They are also referred to as fixed assets. Land, buildings, plant facilities, machinery equipment, furniture are capital lease equipment are considered to be fixed assets.

Put option   An option to sell an underlying asset.

Quick ratio or quick test   A ratio similar to the current ratio except that the numerator is restricted to the current assets that are cash or cash equivalents and trade receivables . As for the current ratio, the denominator is current liabilities. A more rigorous test of short-term liquidity than the current ratio by eliminating inventory, usually the least liquid of the current assets.

Relative PE ratio   A comparison of the company's average P/E ratio with the market's P/E ratio. It is measured by dividing the average P/E for the year by the average P/E for the overall market or a major market index. For each company P/Es will vary over time, particularly with movements in interest rates. Using the relative ratio helps to adjust for these overall factors which influence all companies.

Retained earnings   The earnings of a company that are not paid out as dividends but are ‘retained’ within the company as working capital or to finance fixed investment. It is also referred to as undistributed earnings or profits, accumulated profits and retained income.

Return on …   There are four major ratios used to describe the return of a company: earnings divided by assets, equity, capital or sales . These would be referred to as return on assets and so on. There are another four ratios formed by replacing earnings by operating profit.

Return on capital ROC   The simples t definition is the ratio of earnings to capital. In some cases it is modified by replacing earnings with earnings plus the interest on the long-term debt. In this case, comparison with return on equity determines whether the company benefited from the extra debt. If return on equity is higher than return on capital, the debt has added value to the company. If the opposite is true, the extra debt has reduced returns to shareholders. (Value Line use one-half of the earnings on long-term debt.)

Revenues   Generally this term refers to the gross or total inflow of funds to the company, usually sales plus nonoperating income sources such as interest income.

Rho    The derivative of the price of an option with respect to the interest rate.

Risk-free rate   A ``default-free" interest rate such as the rates of U.S. treasury bonds. See  default risk.

Sales    See Net sales .

Selling, general and administration (SG&A) expenses   A grouping of expenses in an income statement representing a company's operating expenses. They generally consist of salaries, advertising, sales commissions, marketing costs, office expenses, rents, insurance, travel and entertainment.

Stockholders’ equity   The equity in a company less value of preferred stock.

Short position   A position in an asset that has been sold short. Also a position in which a derivative has been written.

Short sale   A transaction in which a security is borrowed from a broker and sold. At a later date the security must be re-purchased and returned to the broker.

Spot price   The price of some asset for immediate delivery.

STAEGR   A proprietary function in Conscious Investor that measures of the stability of the growth of historical data from year to year expressed as a percentage. See the main documentation for more details.

Stockholders’ equity   The equity in a company. May also need to subtract value of preferred stock.

Strike price   See exercise price.

Swap   A financial contract requiring both counterparties to a series of cash payments for a specified period of time, the size and direction of the payments depending on the value of some underlying asset.

10K form   Each public company in the USA is required to submit annually a 10K form to the Securities and Exchange Commission. Much of it is similar to the financial portion of the Annual Report, but with more detail.

10Q form   This is the quarterly report that each public company is required to submit to the Securities and Exchange Commission.

Total asset turnover   Net sales divided by total assets. A measure of well the firm manages its assets.

Total return   The average annual return, capital gains plus dividends, that an investor would have received from holding an asset assuming that each dividend is reinvested in the asset at the time of its payment. The calculation is done before tax.

Trailing earnings per share   The total earnings per share for the previous year divided by the total number of shares outstanding. See also basic earnings per share, diluted earnings per share, and pro forma earnings per share.

Weighted average cost of capital WACC   The average cost of the different components of financing  a company including debt, equity and other securities used by it to fund its financial requirements. The costs are weighted according to the amounts required.

Working capital   The capital required to run the daily affairs of the company and is a measure of its liquidity. It is defined as the difference between a company’s current assets and current liabilities.

Yield   The rate of return of a bond.

Yield curve   The yield on bonds, particularly discount bonds, as a function of their maturities.

Zero coupon bond   A bond that makes no coupon payment. Also referred to as discount bond.