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Investment Terms

Debt to equity ratio:

The debt to equity ratio shows the proportions of debt and equity of a company. A higher ratio indicates that a company is getting more of its financing by borrowing money and the more the company’s operations rely on borrowed money, the higher their risk of bankruptcy.

To calculate the debt to equity ratio (d/e ratio), a company’s total liabilities are divided by its total shareholder equity.

Dividend:

The dividend is the sum of money paid regularly by a company to its shareholders. Dividends could be interpreted as a form of cash flow to the investor, and therefore they can be considered as a reflection of a company’s value.

Dividend payout ratio:

The dividend payout ratio shows how much money the company pays to its shareholders in terms of its dividend compared to how much stays in the company to reinvest in growth, pay off debts, or add to cash reserves. The dividend payout ratio is calculated by dividing the dividend per share by the earnings per share.

The dividend payout ratio is very important for investors because on the one side it shows how much of the company’s profit is given back to its shareholders and on the other side it shows if there is still possibilities for future dividend enhancements.

Dividend yield:

The dividend yield is calculated by dividing the dividend per share by the price per share.

Earnings before interests and taxes (EBIT):

The earnings before interests and taxes (EBIT) is an indicator of the profitability of a company. The EBIT is calculated as revenue minus expenses (excluding tax and interest).

Economic moat:

The word “economic moat” was popularized by investor Warren Buffet and it refers to a company’s ability to maintain competitive advantages over its competitors.

Equity ratio:

The equity ratio is an important measurement, which indicates how much of a company‘s assets have been generated by issuing equity capital rather than by taking on debt. The lower the ratio, the more debt the company has used to pay for its assets. It can be used as an indicator of the financial stability of a company. The equity ratio is calculated by dividing the total shareholder equity by the total assets. The lower the equity ratio of a company, the more the capital of the company is financed from debt, and the higher the risk for the investor.

Free cash flow yield:

The cash flow is the measure of money into and out of a company‘s bank accounts. The free cash flow is the amount of cash left over after a company has paid all its expenses and capital expenditures. The free cash flow yield is calculated by dividing the company`s free cash flow by its market capitalization.

Market capitalization:

Market capitalization refers to the total market value of a company‘s outstanding shares. To calculate the market capitalization, you multiply its current stock price by the total number of outstanding shares. Market capitalization is an important indicator for the investors, because investments in companies with a higher market capitalization tend to have a lower risk than investments in companies with a smaller market capitalization.

Operating cash flow (OCF):

The operating cash flow (OCF) is a measure of the amount of cash generated by a company‘s core business operations. The OCF shows us the success of a company‘s core business activities.

Operating margin:

A company‘s operating margin can provide investors important insight into the value and profitability of a company. The operating margin can be calculated as EBIT divided by revenue. The higher the operating margin, the more profitable the business, and the better the market position of the company in its business segment.

Price to book ratio (P/B ratio):

The price to book ratio (P/B ratio) is used to compare a firm’s market capitalization to its book value. It is calculated by dividing the company‘s stock price per share by its book value per share (BVPS).

Price to earnings ratio (P/E ratio):

The P/E ratio is an important indicator for investors. It shows the market value of a company’s stock compared to the earnings of the company. The P/E ratio is calculated by dividing the price of the share by the earnings per share.

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