StockScreening101
Investing Glossary

In Lewis Carroll's Through the Looking Glass, Humpty Dumpty tells Alice, "When I use a word it means just what I choose it to mean, neither more nor less." So does Carroll's maxim apply to an investing glossary?

Of course. So this investing glossary is included to get all of us on the same page.

American Depository Receipts (ADR) - A foreign security traded on an American stock exchange. Each ADR represents a number of shares of the foreign stock. Financial statements may be available in English.

Back-testing – historical testing of investing and trading strategies to examine how they performed in the past.

Book value (BV) – the liquidation value of a company. Notice this generally includes intellectual property and goodwill which may be difficult to liquidate. 

Current ratio – the ratio of current assets to current liabilities.  Often used as a measure of a company’s ability to pay short-term debt. Current ratio varies from industry to industry so although an absolute value may be interesting, the industry relative value is often more telling. A financial strength criteria.

Dow Jones Industry Average (DJIA) – the widely followed cap-weighted index of 30 large “blue chip” American based companies created by Charles Dow on May 26, 1896.

Earnings Yield - A value criteria defined as EBIT/EV. Higher is better in ranking system.

EBIT - Earnings before interest and taxes from the income statement.

EBITDA - Earnings before interest, taxes depreciation and amortization from the income statement.

EBITDA to EV ratio (EBITDATTM/EV) - the ratio of a company’s latest 12 months EBITDA to the company enterprise value. A value criteria; higher is better in ranking system. Generally one of the strongest stand-alone ranking factors.

Enterprise Value (EV) - The total value of a company calculated as the market value of common and preferred securities, the minority interest, and total debt less the cash on hand.  What it would cost to buy the company.

Free cash flow (FCF) – excess cash that companies generate beyond cash needed to pay their bills and meet their debt obligations. Strong free cash flow is generally a sign of a financially stable company.

Fundamental analysis – the technique of valuing stocks based on their “fundamental” information.

Liquidity – the ease at which shares of stock can be bought or sold at the asking price. In general it is simpler to buy an illiquid stock than to sell it.

Market Cap – the market value of a company’s stock determined by the number of shares of common stock and the current price per share.

Market timing – the technique of changing asset classes based on a defined methodology.

Net payout yield (shareholder yield) – the ratio of the net payout per share as a percentage of the stock price. The net payout is the amount a company spends on purchasing its own stock and paying dividends less the amount received from issuing new stock. Higher is better in ranking system.

Price to book ratio (P/BV) – the ratio of a stock’s current share price to the book value per share. A value criteria; lower is better in ranking system.

Price to cash flow ratio (P/CF) – the ratio of a stock’s current share price to the cash flow per share. A value criteria; lower is better in ranking system.

Price to earnings ratio (P/E or PE) – the ratio of a stock’s current share price to the latest 12 months earnings per share.  Other earnings per share values (e.g., projected earnings) may also be used for the PE ratio – confirm what is being used. A value criteria; lower is better in ranking system.

Price to free cash flow ratio (P/FCF) - the ratio of a stock’s current share price to the latest 12 months free cash flow per share. A value criteria; lower is better in ranking system.

Price to sales ratio (P/S) - the ratio of a stock’s current share price to the latest 12 months sales per share. A value criteria; lower is better in ranking system.

Quick ratio – similar to the current ratio except inventory is excluded from the current assets. This ratio generally represents a more liquid view of a company’s financial situation than the current ratio. Like the current ratio, the industry relative value may be more telling. A financial strength criteria.

Real return – The total return of an investment less the inflation.

Return on Tangible Capital - EBIT / (Net Working Capital + Net Fixed Assets). A quality factor; higher is better in ranking system.

Sales to EV ratio (SalesTTM/EV) - the ratio of a company’s latest 12 months sales to the company enterprise value. A value criteria; higher is better in ranking system.

Stock Ranking - the technique of ordering a group of stocks with the expectation that higher ranked stocks will outperform lower ranked stocks.

Stock screening – the technique of reducing the number of stocks to consider as a function of quantitative criteria.

Survivorship bias – the failure to include all stocks that were available at any point in time when examining strategies and back-testing.

Technical analysis (TA) – the practice of making investment/trading decisions based on the study of a stock’s price and volume movements.

Total return – the capital appreciation of the stock plus any dividends received.

Yield – the annual dividend received for a stock as a percentage of the price of the stock. A value criteria; higher is better in ranking system.

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