Glossary

The price-to-earnings (P/E) ratio measures how much investors pay for each dollar of a company’s earnings — the most common 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.

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.

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.

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 a business generates after funding its operations and capital spending — the money actually available to pay down debt, buy back shares, or pay dividends.

Return on equity measures how much profit a company generates for each dollar of shareholder capital — a core gauge of how efficiently management compounds owners’ money.

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

The debt-to-equity ratio compares how much a company funds itself with borrowing versus 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.

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 the standard way to size a company and sort stocks 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, on a scale from -1 to +1 — the core diagnostic behind whether a portfolio is truly diversified or just 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.