Glossary

The price-to-earnings (P/E) ratio is what investors pay for each dollar of a company’s earnings — the usual shorthand for how cheap or expensive a stock is.

EV/EBITDA values a whole business — including its debt — against its operating cash earnings, making it the capital-structure-neutral cousin of the P/E ratio.

Book value is a company’s net worth on the balance sheet — total assets minus total liabilities — and the anchor for the price-to-book ratio.

The price-to-sales ratio compares a company’s market value to its annual revenue — the multiple of last resort, usable on a business that earns nothing yet.

The price-to-free-cash-flow ratio compares a company’s market value to the cash left after it pays to run and maintain itself — harder to flatter than P/E.

The price-to-operating-cash-flow ratio compares market value to the cash a company’s trading generates before capital spending — steadier than free cash flow.

Enterprise value is what it would cost to buy a whole business — its market capitalisation plus the debt an acquirer inherits, less the cash that comes with it.

A valuation percentile says where today’s multiple sits in the range the company has traded on over a chosen period — cheap or dear against its own history.

WACC is the blended rate a company pays to finance itself across debt and equity — the discount rate that turns future cash flows into a present value in a DCF.

Intrinsic value is what a business is worth on its own numbers — the cash it is expected to produce for its owners — rather than what the market pays today.

Fair value is a reasonable price for a share given its earnings and what that kind of business has normally been worth — the benchmark for the market price.

A discounted cash flow values a business as the cash it is expected to generate in future years, each year restated in today’s money and added up.

Terminal value is what a business is assumed to be worth at the end of an explicit forecast — one figure standing in for every year after the model stops.

The discount rate is the annual return an investor requires for tying money up in an asset — the rate that converts future cash into what it is worth today.

The margin of safety is the discount to estimated value an investor insists on before buying — room for the estimate itself to be wrong.

The dividend discount model values a share as its expected dividends, grown at an assumed rate and discounted to today — what the company keeps is ignored.

The Graham formula values a share as its earnings times a multiple that rises with expected growth — one line of arithmetic, later revised for bond yields.

A reverse DCF takes today’s share price as given and works out the growth that price already assumes — then you judge whether the company can deliver it.

Earnings per share is a company’s net profit divided by its share count — the per-share profitability figure that feeds the P/E ratio and many other metrics.

Free cash flow is the cash left after a business funds its operations and capital spending — money available to repay debt, buy back shares or pay dividends.

Return on equity measures the profit a company earns on each dollar of shareholder capital — a gauge of how efficiently management compounds owners’ money.

Return on assets shows the profit a company earns from its entire asset base, however those assets are financed — a cleaner efficiency read than ROE.

An economic moat is a durable competitive advantage. Lemma reads its quantitative signs from the filings: returns on capital above their cost, year after year.

Return on invested capital measures the after-tax operating profit a business earns on all its debt and equity — the cleanest test of value creation.

Gross margin is the share of revenue left after the direct cost of what was sold — the first, widest measure of a business’s room to cover everything else.

Net margin is the share of revenue that reaches the bottom line after every cost, interest and tax — pricing power and cost discipline in one number.

The debt-to-equity ratio compares a company’s borrowing with its shareholder capital — the headline measure of financial leverage and balance-sheet risk.

The current ratio measures whether a company can cover its short-term bills with its short-term assets — a quick liquidity and solvency check.

Net debt to EBITDA measures borrowings net of cash in years of cash earnings — roughly how long a company would need to repay what it owes out of what it earns.

Dividend yield is the annual dividend expressed as a percentage of the share price — the cash income a shareholder earns for each dollar invested.

The payout ratio is the share of earnings a company pays out as dividends — the single best gauge of whether a dividend is sustainable or stretched.

CAGR is the smoothed yearly growth rate of a portfolio since inception — the single rate that would compound the starting value into the ending value.

Alpha is the yearly return a portfolio earns above what its market exposure alone would explain — the classic measure of investing skill.

Win rate is the share of months a portfolio closed with a gain — a consistency measure that says nothing about the size of wins and losses.

Batting average is the share of periods a portfolio beat its benchmark outright — a measure of how often you win, deliberately blind to how much you win by.

Market capitalization is the total market value of a company’s shares — price times share count — and how stocks are sorted into large, mid and small caps.

Beta measures how much a stock tends to move relative to the overall market — a beta above 1 amplifies market swings, below 1 dampens them.

The Sharpe ratio measures how much return a portfolio earns per unit of volatility — higher means the risk taken is better paid.

The Sortino ratio measures return per unit of downside risk — unlike Sharpe, it only penalizes falling months, not rallies.

Maximum drawdown is the worst peak-to-trough decline a portfolio has suffered — the deepest hole an investor would have sat through.

Tracking error measures how differently a portfolio behaves from its benchmark — a gauge of how active the portfolio is, not how good.

Correlation measures how closely two assets move together, from -1 to +1 — the test of whether a portfolio is diversified or one bet in several wrappers.

Capture ratios split a portfolio in two: how much of the market’s gain it takes in rising periods, and how much of the market’s loss it takes in falling ones.

Short interest is the share of a company’s freely traded stock that has been sold short — how much of the register is positioned for the price to fall.