Definitions
Cash Flow
Cash flow is an accounting term that refers to the amounts of cash being received and spent
by a business during a defined period of time, sometimes tied to a specific project. Measurement
of cash flow can be used
- to evaluate the state or performance of a business or project
- to determine problems with liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable
- to generate project rate of returns. The time of cash flows into and out of projects are used as inputs to financial models such as internal rate of return, and net present value
- to examine income or growth of a business when it is believed that accrual accounting concepts do not represent economic realities. Alternately, cash flow can be used to 'validate' the net income generated by accrual accounting
Cash flow as a generic term may be used differently depending on context, and certain cash
flow definitions may be adapted by analysts and users for their own uses. Common terms
(with relatively standardized definitions) include operating cash flow and free cash flow.
Earnings Per Share (EPS)
The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.
Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.
Free Cash Flow
- definition by Wikipedia
- how to compute: [Free Cash Flow] = [Cash Flow] - [Capital Expenditures]
In corporate finance, free cash flow (FCF) is a cash flow available for distribution among all
the security holders of a company. They include equity holders, debt holders, preferred stock
holders, convertibles holders, and so on. It is a cash that is left after financing all
the NPV-positive projects.
Intrinsic Value
An intrinsic theory of value is any theory of value in economics which holds that the value of
an object, good or service, is intrinsic or contained in the item itself. Most such theories look
to the process of producing an item, and the costs involved in that process, as a measure of the
item's intrinsic value.
For instance, the labor theory of value - the most influential of the intrinsic theories -
holds that the value of an item comes from the amount of labor spent producing said item.
For example, if a chair is produced by two workers in 6 hours, then that chair is worth
2 x 6 = 12 man-hours (this is a simplified case; the labor theory of value takes into
consideration only the "necessary" amount of labor that must go into the production of an item,
which may be less than the actual expended labor due to inefficiency).
Value investors use a variety of analytical techniques to estimate the intrinsic value of
securities in the hope of finding where the "true value" exceeds current market value.
In general, the Value Price of a business is determined by the kind of surplus cash it can produce for its owners in the future.
Investment Recovery Time (IRT)
- definition by stock2own.com
The number of years it would take for a company's cumulative earnings (beginning at a base level of $1.00) to equal the stock's current P/E ratio, assuming that the company continues to increase its annual earnings at the projected growth rate. A Recovery Time of six years, for example, means that it would take six years for an investor to recoup the price paid now for $1 of corporate earnings (the P/E ratio).
Just like PE ratio, investors can use the Investment Recovery Time to compare the value of stocks: if one stock has a P/E twice that of another stock, all things being equal (especially the earnings growth rate), it is a less attractive investment. Basically, the smaller IRT is the better investment it is.
Investment Recovery Time shows the correlation between current market price and EPS. Phil Town, the author of "Rule #1" and "Payback Time" said "A payback time of ten years or less is an attractive price. The Payback Time of less than six years is very attractive. Very."
MOS Price
- definition by Phil Town, "Rule #1"
- how to compute: [MOS Price] = [Value Price] / 2
MOS Price - Margin of Safety Price. Nice MOS is buying a dollar of value for fifty cents.
In other words, you'd better be able to buy this business cheap enough that you can sell it later without losing
money - even if you were wrong to buy it in the first place.
P/E Ratio (PE)
The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", "PER", "earnings multiple", or simply "multiple")
is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share.
It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net
income, so the stock is more expensive compared to one with lower P/E ratio. The P/E ratio has units of years, which
can be interpreted as "number of years of earnings to pay back purchase price", ignoring the time value of money. In
other words, P/E ratio shows current investor demand for a company share.
The average U.S. equity P/E ratio from 1900 to 2005 is 14 (or 16, depending on whether the geometric mean or the
arithmetic mean, respectively, is used to average). An oversimplified interpretation would conclude that it takes about 14
years of earnings to recoup the price paid for a stock [not including any additional income from the reinvestment of those
earnings].
Normally, stocks with high earning growth are traded at higher P/E values.
Rate of Return
In finance, rate of return (ROR) or return on investment (ROI), or sometimes just return, is
the ratio of money gained or lost on an investment relative to the amount of money invested.
The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net
income/loss. The money invested may be referred to as the asset, capital, principal, or the cost
basis of the investment.
ROI is also known as rate of profit. Return can also refer to the monetary amount of gain or
loss. ROI is the return on a past or current investment, or the estimated return on a future
investment. ROI is usually given as a percent rather than decimal value.
ROI does not indicate how long an investment is held. However, ROI is most often stated as an
annual or annualized rate of return, and it is most often stated for a calendar or fiscal year.
ROI is used to compare returns on investments where the money gained or lost -- or the money
invested – are not easily compared using monetary values. For instance, a $1,000 investment
that earns $50 in interest obviously generates more cash than a $100 investment that earns $20 in
interest, but the $100 investment earns a higher return on investment.
- $50/$1,000 = 5% ROI
- $20/$100 = 20% ROI
Since rates of return are percentages, negative rates cannot be averaged with positive rates
for purposes of calculating monetary returns. However, it is common practice in finance to
estimate monetary returns by averaging periodic rates of return; these estimations are most useful
when the averaged periodic returns are all positive, all negative, or have low variances.
Stock Symbol or Ticker Symbol
A stock symbol or ticker symbol is a short abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both. "Ticker symbol" refers to the symbols that were printed on the ticker tape of a ticker tape machine.
The Rule on Debt
- definition by Phil Town, "Rule #1"
To determine whether a business's debt is reasonable, find out if it can pay off its debt within
three years by dividing total long-term debt by current free cash flow.
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