Glossary Terms
Definitions of terms used in share trading
and technical analysis for traders
B
Balance Sheet
A Balance Sheet showcases three main items i.e., assets, liabilities, and a shareholder’s equity. The asset side represents what the company owns. This can be anything, fixed assets, investments, cash and bank balance, etc. A liability represents what the company owes to outsiders like banks, creditors, etc. A shareholder’s equity represents the money which the promoters or shareholders have invested in the company.
If the balance sheet is presented as of 31st March 2023, one would see the bank account balance till that date in the asset side of the balance sheet under bank balances (in current account section).
Book Value (BV)
Book Value is a part of the balance sheet. It is calculated by subtracting the total assets from total liabilities. For example, if the company has a total asset of ₹ 10,00,000 and a liability of ₹ 8,00,000. In that case, the BV of the company will be ₹ 2,00,000 (₹ 10,00,000 - ₹ 8,00,000). BV takes the historical value of the assets and not their current market value. A higher BV means a stronger balance sheet.
C
Cash Conversion Cycle (CCC)
Cash Conversion Cycle or CCC shows how many days it takes for the company to convert the cash into inventory and from inventory to cash again by selling the product to consumers. Shorter CCC is considered a good sign as less amount of money is tied into inventory and accounts receivables.
CCC is measured in days.
CCC = DIO + DSO – DPO
DIO = Days of Inventory Outstanding
DSO = Days Sales Outstanding
DPO = Days Payables OutstandingCash Flow Statement (CFS)
Cash Flow Statement or CFS provides a picture of how well the company is using its cash generated or how much the company is borrowing to fund its operations, invest in capex, and pay its obligations. Each company provides three Cash Flow Statements, Operating Cash Flow (OCF), Cash Flow from Investing (CFI), & Cash Flow from Financing (CFF).
Compound Annual Growth Rate (CAGR)
Compound Annual Growth Rate or CAGR is the annual rate of growth / return that one earns on the initial invested amount. It is the same rate of return by which an initial investment would grow each year to achieve the ending value. CAGR assumes a steady and consistent growth rate.
CAGR = (Ending Value / Initial Value) ^ (1 / Time Period) – 1
Contingent Liabilities
Contingent Liabilities are potential losses that depend on uncertain future events such as pending lawsuits, product warranties, or guarantees of loans.
Contingent liabilities are disclosed in the footnotes of the financial statements. These depend on the estimated rupee amount and the likelihood of the event occurring.
Cost of Funds
The cost of funds tells you the rate at which banks are sourcing funds for their operations Let’s say a bank has a cost of funds of 5%, this means the bank is paying ₹ 5 as interest for every ₹ 100 that it obtains. A bank with a Cost of Funds at 4% means it’s paying ₹ 4 for every ₹ 100 it obtains.
Current Ratio
Current Ratio is used to determine the short-term financial health of a company. Also, known as working capital ratio, it helps determine whether the company can convert its short-term assets and pay off its short-term obligation or not.
Current Ratio = Current Assets / Current Liabilities
D
Days Inventory Outstanding (DIO)
A lower DIO i.e., Days Inventory Outstanding is generally preferred by investors as it demonstrates management’s ability to convert its inventory quickly into cash, meaning cash is quickly available for reinvestments.
A high DIO means the company is not managing its inventory efficiently and must wait long for conversion of inventory into cash.
Days Payable Outstanding (DPO)
Days Payable Outstanding or DPO measures the number of days that a company needs to pay off its bills. Let’s say that a company has a DPO of 15 days. This means it takes 15 days for the company to pay off its bills.
Days Payable Outstanding = (Accounts Payable * 365) / Cost of Goods Sold
Days Sales Outstanding (DSO)
Days Sales Outstanding or DSO measures the number of days that it takes the company in collecting back payment from the customer for a sale. A higher DSO means that customers are delaying payments to the company, and a lower DSO means that the company is receiving quick payments.
DSO = Accounts Receivables / Total Credit Sales * Number of Days
Debt / Equity
Debt / Equity is a financial ratio that determines a company’s reliance on debt against its equity or capital or the extent to which a company is using debt to fund operations rather than relying on its capital.
Debt / Equity = Total Liabilities / Total Shareholders’ Equity
Degree of Operating Leverage
Degree of Operating Leverage is a multiple that measures how much Earnings Before Interest & Tax (EBIT) will change in response to a change in sales.
DOL = % Change in EBIT / % Change in Sales
Or
DOL = (Sales – Variable Cost) / (Sales – Variable Cost – Fixed Cost)A company with a higher DOL has a large proportion of fixed costs. This is often used to determine what the impact on the company’s profitability will be if there is a change in sales.
Discounted Cash Flow (DCF)
Discounted Cash Flow or DCF valuation is used to calculate the intrinsic value of any company’s share by discounting the future cash flows into the present by using a discount rate that is usually the cost of capital. It is based on the concept of the time value of money and is widely used in making investment decisions.
Dividend Yield
The Dividend Yield is the amount of dividends distributed by a company to its shareholders divided by its current market value. It is often denoted in percentage terms. Dividends are the amount of profits that are distributed to the shareholders.
Dividend Yield = Dividend Per Share / Current Market Price
Let’s say that the share price of a company is ₹ 150 and it has distributed ₹ 10 as dividend. Then, the dividend yield will be 6.67 % (10 / 150).
E
Earnings Before Interest (EBITDA)
Earnings Before Interest, Tax, Depreciation, and Amortization or EBITDA is a way of calculating profit before accounting for interests, taxes, and non-cash expenses. EBITDA showcases cash profit which the company has earned from the operations.
EBITDA = Operating Income + Non-Cash Expense
Or
EBITDA = Net Profit + Non-Cash Expense + Taxes + InterestEarnings Before Interest & Taxes (EBIT)
EBIT or operating income measures a company’s profitability before paying for any interest and taxes. EBIT is helpful in comparing companies from the same sector. This metric is not recommended to compare two companies across different sectors.
EBIT = Sales – COGS – Operating Expenses
Or
EBIT = Net Income + Interest + TaxesEarnings Per Share (EPS)
Earnings Per Share or EPS represents what the company’s net income is per share. In other words, let’s say that a company has an EPS of ₹ 20. So every share has earned ₹ 20. Let’s say, there are 10,000 shares. Then, the company’s net income will be ₹ 2,00,000 (i.e., ₹ 20 * 10,000).
Earnings Per Share = (Net Income – Preferred Dividends) / Common shares outstanding end of the period
Enterprise Value (EV)
Enterprise Value or EV takes into consideration the entire company’s total value by considering both the claims and ownership of equity shareholders and creditors. EV is often used by the acquiring company when they want to acquire another firm.
Enterprise Value = Market Capitalization + Market Value of Preferred Shares + Market Value of Debt + Noncontrolling Interest – Cash & Cash Equivalent.
EV/EBITDA
Enterprise Value signifies how much the company is worth for someone willing to buy. Let’s say, a company has a market capitalization of ₹ 1000 Cr, so one can buy the entire company for ₹ 1000 Cr. But when you acquire it, you also become the owner of its assets and are also liable for its payment to the creditors. Let's say that the company has a cash of ₹ 300 Cr and a liability of ₹ 500 Cr, in that case, the EV of the company is ₹ 1,200 Cr (1,000 + 500 - 300).
Earnings Before Interest, Taxes, Depreciation & Amortization is the net profit of the company plus taxes and interest that the company paid plus any non-cash expense. Let's say, the net profit stands at ₹ 50 Cr, interest at ₹ 3 Cr, taxes at ₹ 15 Cr, and depreciation at ₹ 2 Cr. In that case, EBITDA is ₹ 70 Cr.
(50 + 3 + 15 + 2)EV/EBITDA is used to gauge the valuation of any company. It tells how much money the investors are willing to pay for each rupee of EBITDA earned by the company. EV/EBITDA is also used in comparing companies within the same industry or sector.
F
Financial Statements
Financial Statements tell you what the company has done, how much profit and cash the company has generated, what the company owns and how much it owes.
It has three major statements i.e., Income Statement (tells how much profit or loss that the company has made in a given fiscal year), Balance Sheet (how it owns and how much it owes), Cash Flow Statement (how much cash the company has generated).
Free Cash Flow from Equity (FCFE)
Free Cash Flow from Equity or FCFE is the amount available to a company’s shareholders after accounting for all operating expenses, capex and after debt related adjustments. FCFE can be used for dividend payments or even for buybacks.
FCFE = Net Income – Net Capex – Change in Net Working Capital + Net Debt
Although, FCFE may calculate the amount available to shareholders, it does not necessarily equate to the amount paid out to shareholders. Growing and positive FCFE is a sign of a growing company.
Free Cash Flow to the Firm (FCFF)
Free Cash Flow to the Firm or FCFF measures the company’s profits or the cash flow that is available for equity holders and debt holders after accounting for depreciation, taxes, capex, and investments. Positive FCFF indicates that the firm has cash left after meeting all expenses.
FCFF = Net Income + Depreciation + (Interest* (1 -Tax Rate)) – Long-Term Investments – Investments in Working Capital
Or
FCFF = Cashflow from Operations + (Interest* (1 -Tax Rate)) – Capex
G
Grey Market Premium (GMP)
Grey Market Premium or GMP is the price at which shares are traded before getting listed on the exchanges. GMP reflects an investor’s sentiments about the IPO stock. Note: The grey market is not regulated by SEBI and has a shallow volume with very few participants and volumes.
For example, if the IPO price of the share is fixed at ₹ 153 whereas, in the grey market, it is trading at ₹ 180, that means the grey market premium is ₹ 27 (₹ 180 - ₹ 153). In this case, the stock is undervalued. If the grey market price of that stock is below ₹ 153, in that case, the GMP would be 0. Anything below ₹ 153, would mean GMP is 0 and there is a high chance that the share may list below ₹ 153.
Let’s take another example. A company named ABCDE Co. is coming up with its IPO at ₹ 95. In the grey market, the share is trading at ₹ 105 which means the Grey Market Premium (GMP) is ₹ 10 (₹ 105 - ₹ 95). If the Grey Market Premium is below ₹ 95 (let’s say ₹ 90), in that case the GMP will be 0. Anything below ₹ 95, would mean a GMP is 0 and there is a high chance that the share may list below ₹ 95.
Gross Domestic Product (GDP)
Gross Domestic Product or GDP is the final market value of goods and services produced within a country in any fiscal year. GDP growth is often viewed as a sign of economic health of a country. If GDP is increasing year-on-year, then the country is showing signs of growth and development.
Gross Margin
Gross Profit is what the company has earned on its sales after deducting direct operating expenses.
Gross Profit Margin = (Revenue – COGS) / Revenue
If gross profit margin of a company is 30 %, it means that the company has earned ₹ 30 on sales of ₹ 100. Higher the Gross Profit Margin, the better it is for any company. The Gross Profit Amount is what is left to pay other than non-operating expenses and other obligations.
I
Initial Public Offering (IPO)
Initial Public Offering or IPO is a process whereby a private company decides to go public by offering its stake or ownership in the business to the public in exchange for capital. IPO allows a company to raise capital, this capital raised can be used for debt repayment, growing business, giving promoters partial exit from the business, etc. The purpose of the IPO is generally listed in DHRP, especially about why the company is coming up with its IPO whether it is to fund capex or to give partial exit to its existing shareholders.
For example:
JSW Infrastructure Limited came up with its IPO on September 25, 2023, to raise ₹ 2,800 Cr by offering 23.53 Cr shares to public investors. The objective of the IPO was to prepay or repay borrowings, fund capital expenditure, and gain exposure to company listing on exchanges.Interest Coverage Ratio (ICR)
Interest Coverage Ratio or Times Interest Earned is how comfortably a company pays back its interest expense. Higher Interest Coverage Ratio indicates that the company has good financial health whereas low ICR (generally below 1.5) questions the company’s ability to pay its creditors.
Interest Coverage Ratio = Earnings Before Interest & Taxes / Interest Expenses
N
Net Block
Net Block is the total value of the company’s fixed assets after deducting for accumulated depreciation and any impairment charges. Net block represents the net value of fixed assets on the balance sheet.
Net Block = Gross Block – Accumulated Depreciation
This helps an analyst in knowing the remaining value of long-term assets. It is also helpful in calculating Return on Assets.
Net Interest Income
Net Interest Income (NII) is a term used in the lending industry. Net Interest Income is the interest income earned by banks / NBFCs on the loans they lent minused from the Interest Expense paid to the depositors on their deposits. Banks take deposits from common people and corporations (let’s say at 4% p.a.) and lend them to the ones that require the money at a higher interest rate (let’s say at 10% p.a). The difference between Interest Income and Interest Expense is called Net Interest Income.
Net Interest Income = Interest Income - Interest Expense
Let’s say a bank earned ₹ 10,000 in the form of interest and paid
₹ 4,000 as interest to its depositors. In this case, NII will be ₹ 6,000
(₹ 10,000 - ₹ 4,000).Net Interest Margin (NIM)
Net Interest Margin (NIM) is a measure of profitability used for banking and financial institutions. Net Interest Margin is the Net Interest Income divided by the average earning asset of banks. Growing and improving Net Interest Margin is considered a positive indicator for banks.
Net Interest Margin = Net Interest Income / Average Interest Earnings Asset
Net Interest Income = Interest Income - Interest Expense
Net Profit Margin
Net Profit Margin or PAT Margin is a financial ratio that is calculated to determine how much % of the sales has been converted into profits.
Net Profit Margin = Profit After Tax / Net Sales
Let’s say that a company has earned ₹ 1000 Cr in sales and ended up earning ₹ 70 Cr after paying all dues. These include operating expenses, interest, and taxes. So, here the PAT Margin will be 7 % (70 / 1000).
Increasing PAT Margin is considered favourable whereas deteriorating PAT Margin is considered unfavourable.
O
Operating Cash Flow (OCF)
Operating Cash Flow or OCF is a cash flow statement that measures how much cash the company has generated from its core business operations. These include selling inventory and purchasing raw materials, paying salaries & taxes, etc. Positive OCF and the one closer to the net income is considered a positive sign about the company’s financials.
OCF = Net Income + Depreciation & Amortization – Net Working Capital
Operating Margin / EBIT Margin
Operating Margin or EBIT Margin is the margin that the company earns after paying for all the operating expenses but before interest and taxes. Operating Margin is expressed in percentage (%) and is measured against sales.
Operating Margin / EBIT Margin = EBIT / Sales
Growing and stable operating margin is generally appreciated by the investor community and investors.
P
P/E (TTM)
Trailing Twelve Months / TTM is used to represent the last four quarters’ performance of any company (last 12-months’ performance). Price-to-Earnings Ratio is the ratio of the company’s current market price divided by its earnings per share of the last 4 quarters.
P / E (TTM) will tell how much price the investors are willing to pay for the earnings of the last 4 quarters.
P / E (TTM) changes every time that the company announces its earnings.Price / Book Value (P / BV)
Price / Book Value is a financial metric that is used to determine the valuation of a company’s share relative to its book value. Price / BV can be calculated as Current Market Price / Book Value per share.
Book Value per share is nothing but (Total Assets – Total Liabilities / No of outstanding shares)
Let’s say that the share price of a company is ₹ 150 whereas the book value is ₹ 50. Then, P / BV of the company is 3x (i.e., ₹ 150 / ₹ 50).
Price-to-Earnings Ratio (P / E)
Price-to-Earnings Ratio or P / E is the ratio of the company’s share price that is relative to its earnings per share. Let’s say that a company is trading at a P / Ex of 19x. That means the price or the market capitalization of that company is 19 times the earnings.
Price / Earnings Ratio = Price / Earnings Per Share or Market Capitalization / Net Income
Let’s say a company has a share price of ₹ 150 and EPS is at ₹ 10.
In this case, the P / E is 15x ( ₹ 150 / ₹ 10).Profit After Tax / Net Income
Profit After Tax (PAT) is the amount remaining with the company after paying off all operating expenses, non-operating expenses, interest, dividends, and taxes from sales. PAT is what is left for the equity shareholders after paying all the stakeholders like suppliers, vendors, creditors, etc.
Profit and Loss Statement (P&L Statement)
A Profit and Loss Statement provides a picture of a company’s sales, expenses, profit earned, or losses incurred during a given quarter or fiscal year. In India, most of the companies follow the financial year starting from 1st April to 31st March.
Profit Before Tax (PBT)
Profit Before Tax or PBT is the profit which the company earns after deducting all the operating, admin expenses, non-cash expenses, and interest but excluding taxes.
PBT = Net Income + Taxes
Or
PBT = Sales – Expenses – Non Cash Expense – Interest
Q
QIBs
Qualified Institutional Buyers (QIBs) are big financial institutions that have the financial expertise along with big financial pockets to invest in capital markets. QIBs include Mutual Funds, Insurance Companies, Pension Funds, Provident Funds, Foreign Institutional Investors, etc.
Whenever QIBs invest in any stock, it is considered as a positive sentiment and the same can be seen in the stock price rally.
Whenever a QIB sells any share, it is considered as a negative sentiment followed by a decline in share price. One never knows why the QIBs have sold their stake. Maybe they have found another opportunity, maybe they need the money, or maybe they don't like the stock anymore. It could be due to any of the reasons mentioned above.
Quick Ratio
Quick Ratio is also known as Acid Test Ratio. It measures a company’s ability to meet short-term obligation with its liquid assets without the inventory. Higher quick ratio represents strong financial health of the company whereas a low quick ratio represents weak financial conditions.
Quick Ratio = Quick Assets / Current Liabilities
Quick Asset = (Cash & Cash Equivalents + Marketable Securities + Net Accounts Receivables)
R
Return on Assets (RoA)
Return on Assets or RoA tells you how well the company is using its assets in generating profits. It is often wise to compare the ROA of companies that are operating in the same industry. Often, they have the same asset base. Higher ROA equates to better performance of the company.
ROA (in %) = Net Income / Total Average Assets
Return on Capital Employed (RoCE)
Return on Capital Employed or RoCE assesses how well a company is generating profits from its capital. This capital includes both equity capital and debt.
Higher and sustainable stable ratios indicate that the company is profit-making and is generally favoured by investors.ROCE = EBIT / Capital Employed
Capital Employed = Total Assets – Current Liabilities
Return on Equity (RoE)
Return on Equity or RoE showcases how much return that the management has made on a shareholder’s equity. A shareholder’s equity is the net worth of the shareholders. This means Total Assets – Total Debt will yield to you a shareholder’s equity.
RoE = Net Income / Equity Shareholders
RoE can be used in peer comparison to gauge which company is doing better and in generating the highest return of its equity shareholders.
Return on Invested Capital (ROIC)
Return on Invested Capital or ROIC is assigning how well a company allocates its capital to profitable ventures. ROIC gives a perception about how the company is using investors’ money to generate income.
ROIC = Net Operating Profit After Tax / Invested Capital
Net Operating Profit After Tax = EBIT * (1 – Tax Rate)
Rights Issue
A company comes up with a Rights Issue to raise additional capital from its existing shareholders. This can be done to repay debt, for expansion, or any other reason.
In Rights Issue, the existing shareholders can buy more shares of that company at a discount to its current market price. Let’s say, the share of ABC Inc. comes up with a Rights Issue, and its current market value is ₹ 90. The company is offering additional shares to its existing shareholders at ₹ 75 at a 3 for 10 Rights Issue. So, for every 10 shares one has, one can apply for 3 shares for ₹ 75.
As a shareholder you can participate in the Rights Issue if you want. You can ignore it if you don't wish to invest in it or sell those rights to someone else. A Rights Issue is tradeable. Mostly people who don't wish to participate in the Rights Issue, usually sell their rights for money. If you ignore it altogether, it will expire worthless.
S
Stock Keeping Unit (SKU)
Stock Keeping Unit or SKU is used in retail and manufacturing. It’s a unique number or a code that is assigned to a product for inventory tracking. The SKU consists of an alphanumeric combination of eight or so characters. E.g.: SKU for 1 kg of chocolate peanut butter would be PB-1KG-CHOC.
Syndicated Loan
A Syndicated Loan is a form of loan financing offered by a group of lenders. Whenever a lender lends money to a borrower, there is a risk that the borrower might default, and the lender ends up getting partial payment of what he lent or nothing at all.
Suppose a company wants to borrow ₹ 3,000 Cr and goes to State Bank of India for the same, so instead of lending him the entire ₹ 3000 Cr, SBI will form a syndicate with other lenders like HDFC Bank, ICICI Bank, Kotak Bank, Bank of Baroda, Axis Bank, wherein all the banks have decided to lend ₹ 500 Cr each, adding ₹ 3,000 Cr in total. In this way, the risk gets reduced and distributed among the other players. So, this form of financing is called Syndicated Loans.
T
Trailing Twelve Months (TTM)
Trailing Twelve Months or TTM is the term that is used for the past 12 consecutive months of a company’s performance data. TTM figures are used in a variety of metrics like P / E, P / BV, EPS, and Yield.
Types of Valuation
There are many types of valuation used in the stock market, but the two most common types of valuation are DCF Valuation and Relative Valuation.
Y
Year-To-Date (YTD)
In India, Year-To-Date means the period beginning from 1st Jan of that year to today’s date. For example, let's say that today is 1st Nov 2024, then YTD will be 10 months starting from 1st Jan 2024 till 1st Nov 2024.
Let's say that today is 1st Apr 2023, then YTD will be 3 months starting from 1st Jan 2023 till 1st Apr 2023.
Yield
Yield refers to the return generated on the invested amount. Yield is usually associated with dividend / interest earned. It is denoted in the form of a percentage.
Let’s say that the share price of JKL Ltd is ₹ 500. The company had a good quarter and decided to pay ₹ 30 as a dividend for every share that you own. Now, the yield on this dividend will be 6% (₹ 30 / ₹ 500).
Yield = Net Realized Return / Invested Amount