Value investing glossary
Forty terms you will meet on every company page, each with a plain-language definition and a worked example. Nothing here assumes you already know finance.
Revenue (Total Sales)
The total money a company earns from selling its products or services, before subtracting any costs. It's the 'top line' of the income statement.
If Apple sells 10 million iPhones at $1,000 each, that's $10B in revenue, regardless of how much it cost to make them.
Net Income (Bottom Line)
The actual profit left after subtracting ALL costs: production, salaries, taxes, interest, and everything else. This is what shareholders truly earn.
A company with $10B revenue and $7B in total costs has $3B net income. That's 30 cents of profit for every dollar of sales.
Free Cash Flow (FCF)
The real cash a company generates after paying for operations and investments. Unlike net income, it's very hard to manipulate with accounting tricks.
A company earns $5B profit but spends $2B on new factories. FCF = $3B. That's the cash available for dividends, buybacks, or debt reduction.
Total Equity (Book Value)
What shareholders actually own: total assets minus total liabilities. Think of it as the company's net worth if it sold everything and paid all debts.
A company with $50B in assets and $30B in debts has $20B equity. If it has 1B shares, book value is $20 per share.
Total Liabilities (Total Debt)
Everything the company owes: loans, bonds, accounts payable, lease obligations, and other financial obligations. High liabilities increase risk in downturns.
A company with $40B in liabilities and $20B in equity has a 2:1 debt-to-equity ratio, meaning it owes twice as much as it owns.
Current Ratio (Liquidity)
Short-term assets divided by short-term debts. Shows if the company can pay bills due within 12 months. Above 1.5 is healthy, below 1.0 is a warning.
A company with $6B current assets and $4B current liabilities has a current ratio of 1.5, so it can comfortably cover its near-term obligations.
Interest Coverage Ratio
Operating profit divided by interest payments. Shows how easily the company can pay interest on its debt. Above 3x is comfortable, below 1.5x is risky.
If a company earns $9B operating income and pays $3B in interest, coverage = 3x. It earns three times its interest payments.
Debt-to-EBITDA Ratio
Total debt divided by earnings before interest, taxes, depreciation, and amortization. Shows how many years of earnings it would take to pay off all debt. Below 3x is healthy.
A company with $15B debt and $5B EBITDA has 3x ratio, meaning it would take 3 years of earnings to pay off debt (if nothing else changed).
Price-to-Earnings Ratio (P/E)
Stock price divided by earnings per share. Shows how much investors pay for each dollar of profit. Lower P/E may signal a bargain, but always compare within the same industry.
A stock at $150 earning $6/share has P/E = 25. You pay $25 for every $1 of earnings. Tech averages ~25-30, utilities ~15-18.
Return on Equity (ROE)
Net income divided by shareholder equity. Measures how efficiently the company uses shareholders' money to generate profit. Above 15% is excellent.
A company with $3B profit and $20B equity has ROE = 15%. Every $1 shareholders invested generates 15 cents of annual profit.
Price-to-Book Ratio (P/B)
Stock price divided by book value per share. Below 1.0 means you're paying less than the company's net assets. This could indicate it is potentially undervalued, or it could be a sign of deeper problems.
A stock at $40 with book value of $50/share has P/B = 0.8. You're buying $50 of assets for $40, but investigate WHY it's cheap.
Price-to-Free Cash Flow (P/FCF)
Stock price divided by free cash flow per share. Like P/E but uses real cash instead of accounting earnings. More reliable for spotting true value.
A stock at $100 with $5 FCF/share has P/FCF = 20. Compare this to P/E: if P/FCF is much higher, profits may not be backed by real cash.
Gross Profit Margin
Revenue minus cost of goods, divided by revenue. Shows the basic profitability before overhead. High margins (>40%) often signal strong competitive advantages or pricing power.
A software company with 80% gross margin keeps $0.80 of every dollar sold. A retailer at 25% keeps only $0.25. Very different business models.
Return on Invested Capital (ROIC)
Operating profit (after taxes) divided by all invested capital (equity + debt). The best measure of how efficiently management uses ALL capital. Above 10% is strong.
A company with $4B operating profit on $30B invested capital has ROIC = 13%. It generates $0.13 of return for every $1 invested.
Estimated Fair Value
An estimate of what the stock is truly worth, calculated by combining multiple methods (DCF, Graham, EPV). It's an educated guess, not a guarantee.
If fair value is $120 and the stock trades at $95, there's a 26% margin of safety, meaning you're potentially buying at a discount.
Margin of Safety (MoS)
How much cheaper the stock price is compared to fair value, as a percentage. Positive = potential bargain. Benjamin Graham recommended buying only with 25%+ margin.
Fair value $100, current price $75 → MoS = +25%. You're buying with a 25% cushion if your estimate is slightly wrong.
Relative Strength Index (RSI)
A momentum indicator from 0-100 that measures speed and magnitude of recent price changes. Below 30 = potentially oversold (buy signal). Above 70 = potentially overbought (caution).
RSI at 25 means the stock has fallen sharply recently and may be oversold. This is a potential entry point if fundamentals are still strong.
50-Day Simple Moving Average
The average closing price over the last 50 trading days. Acts as short-term trend indicator. Price above SMA 50 = short-term uptrend.
If stock is at $150 and SMA 50 is $140, the price is trending upward. If it crosses below, it might signal a short-term reversal.
200-Day Simple Moving Average
The average closing price over the last 200 trading days. The gold standard for identifying long-term trends. Price above SMA 200 = long-term uptrend.
When SMA 50 crosses above SMA 200 it's called a 'Golden Cross', a bullish signal. The opposite ('Death Cross') is bearish.
Moving Average Convergence Divergence
Shows the relationship between two moving averages. The histogram shows momentum strength. Positive and rising = bullish momentum. Negative and falling = bearish.
MACD histogram at +2.5 and growing means upward momentum is accelerating. At -1.0 and shrinking, downward pressure is easing.
Price Volatility
Measures how much the stock price swings up and down. High volatility = bigger price swings (more risk and opportunity). Low volatility = more stable price.
A stock with 40% volatility might swing 40% up or down in a year. A utility stock at 15% volatility is much more stable.
12-Month Price Momentum (ROC)
How much the stock price has changed over the last 12 months, as a percentage. Positive = price has gained. Negative = price has declined.
Momentum of +25% means the stock is up 25% from one year ago. Strong momentum often persists, but can also mean the stock is expensive.
Dividend Yield (Annual)
Annual dividend per share divided by the stock price, expressed as a percentage. Shows the cash return you earn just by holding the stock, independent of price changes.
A stock at $100 paying $3/year in dividends has a 3% yield. That's $3,000/year on a $100,000 investment, before any price appreciation.
Dividend Payout Ratio
Percentage of net income paid out as dividends. Below 60% is sustainable, as the company retains enough to reinvest. Above 80% may signal the dividend is at risk of being cut.
A company earning $5/share and paying $2 in dividends has a 40% payout ratio. It keeps $3 to reinvest in growth while rewarding shareholders.
Free Cash Flow Payout Ratio
Dividends paid as a percentage of free cash flow. More reliable than the earnings-based payout ratio because FCF represents real cash. Below 70% is healthy.
If FCF is $4/share and dividends are $2/share, FCF payout is 50%. The company generates twice the cash it needs to cover dividends. Very safe.
5-Year Dividend Growth Rate (CAGR)
The compound annual growth rate of dividends over the last 5 years. Shows how fast the company has been increasing its dividend payments to shareholders.
A 10% CAGR means dividends have doubled roughly every 7 years. Companies with consistent dividend growth often outperform the market long-term.
Consecutive Years of Dividend Payments
How many years in a row the company has paid dividends without interruption. Long streaks (10+ years) signal financial stability and management commitment to shareholders.
Companies with 25+ consecutive years are called 'Dividend Aristocrats'. They've maintained dividends through recessions, showing exceptional financial resilience.
Piotroski F-Score (Financial Strength)
A 0-9 score based on 9 binary criteria covering profitability, leverage, and operating efficiency. Created by Professor Joseph Piotroski to identify financially strong companies. Higher is better.
A company scoring 8/9 passes almost all financial health tests: positive cash flow, improving margins, low debt, and growing asset turnover. A score of 2/9 fails most, which is a warning sign.
Earnings Quality (OCF/Net Income)
Operating cash flow divided by net income. Measures whether reported profits are backed by real cash. A ratio above 1.0 means the company generates more cash than it reports as profit, indicating high quality earnings.
A company with $5B cash flow and $4B net income has earnings quality of 1.25, where cash exceeds reported profits. If reversed ($3B cash, $5B profit), quality is 0.6, which is a red flag.
Composite Score (0-100)
The overall rating of the stock: 70% fundamental score plus 30% technical score. It answers 'how attractive is this company right now, all things considered?'. Above 70 is strong, below 40 is weak.
A company with a fundamental score of 80 and a technical score of 50 gets a composite of 71 (0.7×80 + 0.3×50).
Fundamental Score (0-100)
How healthy the business is, scored on 30+ criteria taken from its financial statements: earnings growth, margins, return on capital, debt and cash generation. It ignores the share price entirely.
A company with rising profits, low debt and fat margins scores 85. A loss-making, heavily indebted one scores 25 — even if its stock looks cheap.
Technical Score (0-100)
How the share price is behaving, scored on trend and momentum indicators: moving averages (SMA 50/200), MACD, RSI, rate of change and volatility. It ignores the business entirely.
A stock trading above both its 50- and 200-day averages with positive momentum scores high, no matter how profitable the company is.
Overall Signal
A plain-language summary of the composite score: POSITIVE, NEUTRAL or NEGATIVE. It is a starting point for your research, never a buy or sell recommendation.
POSITIVE means fundamentals and price action both look constructive — it still deserves your own checks before you invest.
Valuation Signal
Compares today’s price with the estimated fair value (DCF, Graham, EPV and P/E based). Undervalued = trading below fair value, Fair Value = roughly in line, Overvalued = trading above it.
A stock priced at $70 with an estimated fair value of $100 is flagged Undervalued, with a 30% margin of safety.
Stock Category
What kind of investment this is: Value (cheap versus fundamentals), Growth (fast expansion, high multiples), GARP (growth at a reasonable price) or Speculative (unprofitable or very volatile).
A company growing 20% a year at a P/E of 18 is GARP: it grows quickly but you are not overpaying for it.
Current Share Price
The latest closing price of a single share, from the most recent daily data update. On its own it says nothing about whether the stock is cheap — only the price versus fair value does.
A $2,430 share is not "expensive" and a $5 share is not "cheap": what matters is the price relative to the company’s earnings and assets.
Sector
The industry the company operates in (Technology, Healthcare, Energy...). Useful for comparing like with like and for spreading your portfolio across different areas.
A P/E of 30 is normal in Technology but high in Energy — always compare a company with its own sector.
Drawdown opportunity
Current drawdown, the share of past episodes at that same depth that recovered within the chosen horizon, and how many episodes that share is based on. A high percentage on few episodes is not evidence.