Understanding the Financials
The Investment terminology of a company you need to understand before investing in it.
The Financials of a Stock
Valuation
Explanation: Valuation is the process of determining the current worth of a company. It is often done by analyzing various financial metrics and market indicators to estimate the company’s intrinsic value.
Significance: Valuation helps investors assess whether a stock is overvalued, undervalued, or priced fairly, aiding in investment decision-making.
Market Capitalization:
Explanation: Market Cap is the total market value of a company’s outstanding shares of stock. It is calculated by multiplying the current stock price by the total number of outstanding shares.
Significance: Market Cap gives an indication of a company’s size in the market and is used to categorize stocks as large-cap, mid-cap, or small-cap.
Enterprise Value (MRQ):
Explanation: Enterprise Value is the total value of a company, including its market capitalization and net debt. It provides a more comprehensive picture of a company’s value than market cap alone.
Significance: Enterprise Value is useful for assessing the true cost of acquiring a company and comparing the relative value of different companies.
Enterprise Value/EBITDA (TTM):
Explanation: This ratio compares a company’s enterprise value to its Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) over the trailing twelve months (TTM).
Significance: It is a valuation metric that helps investors evaluate a company’s overall financial performance, factoring in debt and operating profitability.
Total Shares Outstanding:
Explanation: Total Shares Outstanding represents the total number of a company’s shares held by investors.
Significance: It is crucial for calculating market capitalization and understanding the ownership structure of a company.
Number of Employees:
Explanation: The total count of individuals employed by a company.
Significance: Employee count can provide insights into the scale and operational capacity of a company.
Number of Shareholders:
Explanation: The total count of individuals or entities holding shares in the company.
Significance: A higher number of shareholders may indicate broader market participation and interest in the company.
Price to Earnings Ratio (TTM):
Explanation: P/E ratio measures the current stock price relative to its earnings per share (EPS) over the trailing twelve months (TTM).
Significance: It is a widely used valuation metric, helping investors gauge whether a stock is overvalued or undervalued based on its earnings.
Price to Revenue Ratio (TTM):
Explanation: P/S ratio compares the stock price to the company’s revenue per share over the trailing twelve months (TTM).
Significance: It provides insights into how the market values a company’s revenue generation.
Price to Book (FY):
Explanation: P/B ratio compares a company’s market price to its book value (total assets minus total liabilities) per share.
Significance: It helps investors assess whether a stock is trading at a premium or discount to its book value.
Price to Sales (FY):
Explanation: P/S ratio compares the stock price to the company’s sales per share over the fiscal year (FY).
Significance: Similar to P/E and P/B ratios, P/S ratio provides insights into the market’s perception of a company’s financial health.
Balance Sheet
Quick Ratio (MRQ):
Explanation: Quick Ratio, also known as the Acid-Test Ratio, measures a company’s ability to cover its short-term liabilities with its most liquid assets (excluding inventory).
Significance: It provides insight into a company’s short-term liquidity and its capacity to meet immediate financial obligations.
Current Ratio (MRQ):
Explanation: Current Ratio compares a company’s current assets to its current liabilities.
Significance: It indicates the company’s ability to cover its short-term obligations with its short-term assets.
Debt to Equity Ratio (MRQ):
Explanation: Debt to Equity Ratio measures the proportion of a company’s financing that comes from debt compared to equity.
Significance: It assesses the financial leverage and risk associated with a company, indicating how much of the operations are funded by debt.
Net Debt (MRQ):
Explanation: Net Debt is the difference between a company’s total debt and its cash and cash equivalents.
Significance: It provides a clearer picture of a company’s debt burden, factoring in its available cash.
Total Debt (MRQ):
Explanation: Total Debt represents the sum of a company’s short-term and long-term debt.
Significance: It gives a comprehensive view of a company’s overall debt obligations.
Total Assets (MRQ):
Explanation: Total Assets represent the sum of a company’s current and non-current assets.
Significance: It reflects the total value of resources owned by the company, providing a snapshot of its financial health.
Operating Metrics:
Return on Assets (TTM):
Explanation: Return on Assets (ROA) measures a company’s ability to generate profits from its assets.
Significance: It indicates the efficiency of asset utilization in generating earnings.
Return on Equity (TTM):
Explanation: Return on Equity (ROE) evaluates the profitability of a company in relation to its equity.
Significance: It measures how well a company is using its shareholders’ equity to generate returns.
Return on Invested Capital (TTM):
Explanation: Return on Invested Capital (ROIC) assesses a company’s ability to generate returns from its total invested capital, including both equity and debt.
Significance: It provides insight into the efficiency of capital utilization in generating profits.
Revenue per Employee (FY):
Explanation: Revenue per Employee measures a company’s revenue generated per employee.
Significance: It gauges the productivity and efficiency of a company’s workforce in generating revenue.
Price History
Average Volume (10 day):
Explanation: Average Volume (10 day) represents the average number of shares traded per day over the last 10 days.
Significance: It provides insights into the recent trading activity and liquidity of a stock. Higher average volume often indicates increased market interest or volatility.
1-Year Beta:
Explanation: Beta measures a stock’s volatility in relation to the overall market. A beta above 1 indicates higher volatility than the market, while a beta below 1 suggests lower volatility.
Significance: Investors use beta to assess a stock’s risk compared to the market. A beta greater than 1 implies higher risk, while a beta less than 1 suggests lower risk.
52 Week High:
Explanation: 52 Week High represents the highest price at which a stock has traded over the past 52 weeks.
Significance: It gives an indication of a stock’s recent peak performance and can be used to assess its current valuation.
52 Week Low:
Explanation: 52 Week Low represents the lowest price at which a stock has traded over the past 52 weeks.
Significance: It provides insights into a stock’s recent bottom performance, helping investors gauge its historical price range.
Dividends
Dividends Paid (FY):
Explanation: Dividends Paid (FY) represents the total amount of dividends distributed by a company during its fiscal year.
Significance: It shows the cash returned to shareholders in the form of dividends, reflecting the company’s dividend distribution policy.
Dividend Yield Forward:
Explanation: Dividend Yield Forward is the expected annual dividend income expressed as a percentage of the current stock price.
Significance: It helps investors assess the income they can potentially earn from holding the stock based on expected future dividends.
Dividends per Share (FY):
Explanation: Dividends per Share (FY) is the total dividends paid divided by the number of outstanding shares, indicating the dividend amount per share.
Significance: It helps investors understand the dividend distribution on a per-share basis, facilitating comparison across different stocks.
Margins
Net Margin (TTM):
Explanation: Net Margin (TTM) represents the percentage of revenue that translates into net profit after all expenses.
Significance: It indicates the company’s efficiency in converting revenue into profit, considering all costs.
Gross Margin (TTM):
Explanation: Gross Margin (TTM) is the percentage of revenue remaining after deducting the cost of goods sold (COGS).
Significance: It reveals how well a company manages its production costs and is a key indicator of profitability.
Operating Margin (TTM):
Explanation: Operating Margin (TTM) measures the percentage of revenue that remains after covering operating expenses.
Significance: It reflects the efficiency of a company’s core operations in generating profit.
Pretax Margin (TTM):
Explanation: Pretax Margin (TTM) represents the percentage of revenue that remains after deducting all operating expenses and interest but before taxes.
Significance: It provides insights into a company’s profitability before the impact of income taxes.
Income Statement:
Basic EPS (FY):
Explanation: Basic Earnings Per Share (EPS) for the fiscal year (FY) is the net income attributable to common shareholders divided by the weighted average number of shares outstanding.
Significance: It indicates the company’s profitability on a per-share basis.
Basic EPS (TTM):
Explanation: Basic Earnings Per Share (EPS) for the trailing twelve months (TTM) is similar to FY EPS but covers the most recent 12-month period.
Significance: It provides a more recent and dynamic view of the company’s earnings per share.
EPS Diluted (FY):
Explanation: Diluted Earnings Per Share (EPS) for the fiscal year (FY) considers potential dilution from stock options and convertible securities.
Significance: It reflects the impact of potential dilution on earnings per share.
Net Income (FY):
Explanation: Net Income for the fiscal year (FY) is the company’s total profit after all expenses, taxes, and interest.
Significance: It represents the bottom line of the income statement, indicating overall profitability.
EBITDA (TTM):
Explanation: Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the trailing twelve months (TTM) measures operating performance without accounting for interest, taxes, and non-cash expenses.
Significance: It provides a measure of a company’s operational profitability and cash flow.
Gross Profit (MRQ):
Explanation: Gross Profit for the most recent quarter (MRQ) is the revenue remaining after deducting the cost of goods sold (COGS).
Significance: It gives a snapshot of the profitability from core business operations.
Gross Profit (FY):
Explanation: Gross Profit for the fiscal year (FY) is the total revenue minus the cost of goods sold (COGS).
Significance: It reflects the overall profitability from the sale of goods or services.
Last Year Revenue (FY):
Explanation: Last Year Revenue represents the total revenue generated by the company in the last fiscal year.
Significance: It provides a reference point for assessing the company’s current revenue performance.
Total Revenue (FY):
Explanation: Total Revenue for the fiscal year (FY) is the sum of all sources of income for the company.
Significance: It represents the top line of the income statement, indicating the total income generated.
Free Cash Flow (TTM):
Explanation: Free Cash Flow for the trailing twelve months (TTM) is the cash generated by the company’s operations after deducting capital expenditures.
Significance: It measures the cash available for dividends, debt repayment, and investments.
Abbreviations
(FY):
Explanation: (FY) stands for Fiscal Year. A fiscal year is a 12-month period that a company uses for financial reporting, not necessarily coinciding with the calendar year. It helps businesses align their financial reporting with their operational cycles.
(TTM):
Explanation: (TTM) stands for Trailing Twelve Months. It represents the most recent 12-month period ending on the last day of any given month. TTM is often used to assess a company’s performance over the most recent and continuous year.
(MRQ):
Explanation: (MRQ) stands for Most Recent Quarter. It refers to the financial data for the latest quarter, providing a snapshot of a company’s recent performance within the last three months.
EBITDA (TTM):
Explanation: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA (TTM) refers to the trailing twelve months’ total EBITDA, which is a measure of a company’s operating performance, excluding certain non-operational expenses.
EBITDA (TTM):
Explanation: EPS stands for Earnings Per Share. It represents the portion of a company’s profit allocated to each outstanding share of common stock. EPS is a key indicator of a company’s profitability on a per-share basis.
P/E Ratio:
Explanation: P/E Ratio stands for Price to Earnings Ratio. It compares a company’s current stock price to its earnings per share (EPS). The ratio helps investors assess the valuation of a stock by indicating how much investors are willing to pay for each dollar of earnings.
P/B Ratio:
Explanation: P/B Ratio stands for Price to Book Ratio. It compares a company’s current market price to its book value per share. The book value is the net asset value of the company, representing total assets minus total liabilities. P/B Ratio helps assess whether a stock is overvalued or undervalued.
P/S Ratio:
Explanation: P/S Ratio stands for Price to Sales Ratio. It compares a company’s stock price to its revenue per share. The ratio is useful for evaluating a company’s valuation relative to its revenue-generating capacity, providing insights into market expectations for sales growth.
Understanding these abbreviations is crucial for interpreting financial metrics and ratios effectively. They offer a standardized way to express and compare financial information across different companies and industries. If you have any more questions or need further clarification, feel free to ask!
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Cory has been a professional trader since 2005, and holds a Chartered Market Technician (CMT) designation. He has been widely published, writing for Technical Analysis of Stock & Commodities magazine, Investopedia, Forbes, Benzinga, and others.