Although there are many terminologies which a stock market trader or investor should know, they are a handful of them which are used very often. Here I will provide a basic domain knowledge of these terms which is really important if you want to enter the stock market to succeed.
1. Universe companies In order to arrive at our universe of companies, we checked if the companies traded on all the days for the last two quarters. We considered the companies with a market capitalisation of more than `500 crores.
2. Price to book value (P/B) Price to book value is the ratio of the price of a stock to the book value per share of the company. It shows how much premium investors are willing to pay for the underlying net assets of the company.
3. Price to earnings (P/E) The price-to-earnings ratio, or the P/E ratio, is simply the ratio of the price of a stock to its earnings per share. It shows in multiples how much investors are willing to pay for the earnings. The thumb rule of valuing a stock is that a high-growth stock will have a high P/E ratio, while a value stock will have a relatively lower P/E ratio.
4. Earnings per share (EPS) Earnings per share, or EPS, is calculated by dividing the company’s net profit with the total number of outstanding shares.
5. EPS growth Growth of the EPS over a specified time period – trailing 12 months (TTM), a quarter or five years. Quarterly comparisons are on a year-on-year basis. For five years, the figures are annualised.
6. Price-earnings to growth (PEG) This ratio demonstrates how high a price we are paying for the growth that we are purchasing. It is the ratio of price to earnings to the EPS growth of the stock. In all our analyses, we have taken five-year historic EPS growth.
7. Debt-equity ratio The debt-equity ratio is calculated as the ratio of total outstanding borrowings of the company to its total equity capital. It essentially tells us which companies use excessive leverage to achieve growth. Conventionally, the debt-equity ratio of less than two is considered safe.
8. Return on equity (RoE) This is measured by taking profit after tax as a percentage of net worth of the company. It indicates how efficiently the company has been able to utilise investors’ money.
9. Dividend-payout ratio This is the total dividend paid to the shareholders as a percentage of net profit.
10. Dividend yield This is defined as the percentage of the dividend paid per share to the current market price of the stock. Since the denominator in this ratio is the market price, a stock’s dividend yield changes every day
11. Stock return Stock return is calculated by taking the percentage change in the price of the stock adjusted for bonus or split.
12. Earnings yield Earnings before interest and taxes (EBIT) divided by enterprise value. Enterprise value is market cap added to total debt and less cash and equivalents.
13. Dividend per share Total dividend declared during the year divided by the total number of outstanding shares.
14. Interest-coverage ratio (ICR) This indicator is generally used to gauge whether a company has the ability to service its debt. The interest-coverage ratio is calculated as the ratio of operating profit to interest outgo. A company with an ICR of more than two implies that it can service more than twice its current interest charges.
15. Net sales This is simply the income that a company derives by selling the goods and services that it produces. The downside of making sales as an indicator of growth is that it may not be matched by a similarly scintillating bottom-line (net profit) performance. A company may be earning revenue at a high rate. But if it is doing so by incurring a very high cost, the bottom line may not grow in proportion to the growth in the top line (sales).
16. Altman Z-Score Developed by Edward Altman of New York University, the Z-Score predicts a company’s financial distress or the possibility of its going bankruptcy within two years. A Z-Score of more than three is desirable.
17. Modified C-Score It tells the probability of financial manipulations. In order to develop it, we have modified James Montier’s C-Score. A C-Score of less than four is desirable.
18. Piotroski F-Score Developed by Joseph Piotroski, the F-Score highlights financial performance as compared to that in the previous year. It thus points out to the current outperformer in terms of profitability and financial improvement. An F-Score of seven or above is good.
19. Stock style It indicates the style of the stock. It is derived from a combination of the stock’s valuation — growth or value — and its market capitalisation — large, mid and small. For example, on the right, we have shown the stock style of a large-cap growth stock.
20. Portfolio A collection of investments owned by an investor.
21. Secondary offering This is another offering in order to sell more stocks and to raise more money from the public.
