Financial metric glossary
38 metrics, each with its formula, a worked example, how investors read it, and where it misleads. Every example describes the same imaginary company, so the figures join up as you move between them.
Each page also says whether this product uses the metric and where. Several of them say it does not, and give the reason, which is the more useful answer.
The statements themselves
Revenue(Sales)
Everything the business charged its customers, before a single cost is taken off.
Net income(Net profit)
What is left of revenue once every cost, including tax, has been taken off.
Total assets
Everything the company owns, at what the books say it is worth.
Common-size statements(Percentage of revenue)
Every line shown as a percentage instead of a dollar amount, so businesses of any size compare directly.
Profitability
Revenue growth
How fast the top line is expanding, usually compounded across several years.
Gross margin
What share of revenue survives the direct cost of producing it.
Operating margin(EBIT margin)
Profit from running the business, before interest and tax, as a share of revenue.
EBITDA(Earnings before interest, tax, depreciation and amortisation)
Operating profit with depreciation and amortisation added back.
Return on equity(ROE)
Profit earned per dollar of shareholders' capital.
Return on invested capital(ROIC)
Profit earned per dollar of all capital in the business, debt and equity together.
Net margin(Net profit margin)
The share of every sales dollar that survives all the way to profit.
Return on assets(ROA)
Profit earned per dollar of everything the company owns.
Cash
Free cash flow(FCF)
Operating cash flow less capital expenditure: what the business actually generated for its owners.
Capital expenditure(Capex)
Cash spent on the physical assets the business runs on.
Operating cash flow(Cash from operations)
The cash the core business actually produced, with the accounting adjustments taken back out.
Balance sheet
Net debt
Total borrowings less the cash on hand: what a company would still owe if it paid down what it could today.
Interest coverage
How many times over operating profit covers the interest bill.
Debt to equity(D/E)
How much the company has borrowed for every dollar its owners have in.
Current ratio
Whether what is due to come in over the next year covers what is due to go out.
Valuation multiples
Free cash flow yield
Free cash flow as a percentage of what the company costs to buy.
Enterprise value(EV)
What it would cost to buy the whole business, debt included.
EV/EBITDA
What the whole business costs, per dollar of pre-depreciation operating profit.
Price to earnings(P/E ratio)
What you pay per dollar of annual profit, and the first number most people reach for when comparing two companies.
Market capitalisation(Market cap)
What the stock market says the equity is worth: price times shares.
Price to sales(P/S ratio)
What you pay per dollar of revenue, for companies where profit is not the point yet.
Price to book(P/B ratio)
The share price against the accounting value of what the owners own.
PEG ratio
The price to earnings ratio divided by growth, as a rough test of whether a rich multiple is earned.
Dividends
Shares
Diluted shares
The share count including everything that could reasonably become a share.
Stock-based compensation(SBC)
Employees paid in shares rather than cash, and why it complicates every cash flow figure.
Earnings per share(EPS)
The company's profit divided across its shares, and the only profit figure an owner actually receives a slice of.
Earnings surprise(EPS estimate)
How far the reported quarter landed from what analysts had pencilled in.
The valuation model
Intrinsic value(Discounted cash flow)
What a business is worth based on the cash it can produce, rather than on what it is currently priced at.
Discount rate(Required return)
The return you require, which is what makes a dollar in five years worth less than a dollar today.
Terminal growth(Perpetuity growth rate)
The rate a business is assumed to grow at forever, after the years anyone actually forecast.
Margin of safety
The gap between what you pay and what you think it is worth, which is the room to be wrong.
Risk
For how these are calculated on real filings rather than in the abstract, see the methodology. To put your own numbers through them, see the calculators.