Financial Glossary

The extra return you earned on a stock above what was expected given the risk you took. If you expected 10% but got 15%, your abnormal return is 5%.

How much of your sales revenue comes from goods you've received but haven't paid for yet. A high ratio means the company is using supplier credit heavily to fund its operations.

How much of your sales are still uncollected — money owed to you by customers. A rising ratio can signal that the company is struggling to collect cash or being too generous with credit.

The return you earned above what the market expected, after adjusting for risk. Positive alpha means you beat the market on a risk-adjusted basis. It's what every active investor is chasing.

The gradual write-off of an intangible asset (like a patent or brand) over time. Similar to depreciation but for non-physical assets. It reduces reported profits but is not a cash expense.

The total return you earned on an investment during one year, including both price gains and dividends received.

The risk of a company's business operations alone, stripped of the effect of debt. Also called unlevered beta. It tells you how risky the underlying business is before financing choices come into play.

A measure of how much a stock moves relative to the overall market. A beta of 1.5 means when the market goes up 10%, the stock tends to go up 15%. It captures the risk you cannot diversify away.

The proportion of a company's total book capital that comes from debt, using accounting values rather than market prices.

The total amount of money that has been invested into a company according to its accounting books — the sum of debt and equity as recorded on the balance sheet.

The accountant's estimate of what the equity in a company is worth — the original money invested plus accumulated profits retained over the years. Not the same as market value.

The money invested in a company's actual operating business — excluding cash, which earns a separate return. This is what generates the operating income.

A more reliable way to estimate beta — instead of using a single stock's regression history, you take the average beta of peer companies in the same business and adjust for the company's own debt level.

A ratio comparing how much a company is spending on new assets versus the accounting write-off of old ones. A ratio above 1 means the company is investing more than it's writing off — typically a sign of growth.

Money spent on assets that will benefit the company for multiple years — factories, machinery, equipment, R&D, and acquisitions. This is the investment that drives future growth.

Cash and near-cash investments held by the company. It's a neutral asset — earns a low return but provides a cushion for difficult times. Investors sometimes worry that poor management will waste large cash piles.

How closely a stock's price moves with the overall stock market. A correlation of 1 means perfect lockstep. A correlation of 0 means no relationship. Most Indian stocks have positive correlation with Nifty.

The blended cost of financing a company — combining the cost of equity and the after-tax cost of debt, weighted by how much of each is used. This is the minimum return the company must earn on its investments.

The actual cost of borrowing after accounting for the tax savings — because interest paid is tax-deductible, the government effectively subsidises a portion of the interest cost.

The interest rate at which a company can borrow money today — what lenders demand to compensate for the risk of not being repaid.

The return that shareholders expect to earn for investing in your company given its risk. It's the implicit cost of equity capital — unlike interest on debt, it doesn't show up in financial statements.

The return demanded by preferred shareholders — computed as the annual preferred dividend divided by the current price of the preferred share.

The proportion of total capital that comes from debt. A D/(D+E) of 30% means for every ₹100 of capital, ₹30 comes from debt and ₹70 from equity.

How many rupees of debt a company uses for every rupee of equity. A higher ratio means more financial risk — the company is more reliant on borrowed money.

Borrowed money that must be repaid with interest. In finance, only interest-bearing obligations count as debt — trade payables do not. Failure to repay debt can result in bankruptcy.

What the company's debt is actually worth in the market today, as opposed to what's written in the books. For most companies, book value and market value of debt are similar — unless the company's credit quality has changed significantly.

How much debt the company has for every rupee of equity. It's a popular leverage measure but can become misleading when equity is small or negative.

The fraction of a company's book capital that is funded by debt. It's the accountant's view of leverage and can sometimes be misleading if the book value of equity is distorted.

The fraction of a company's market capital that is funded by debt — the more meaningful measure of financial leverage since it uses current market prices.

The extra interest rate a company must pay over and above the riskfree rate — a premium demanded by lenders to compensate for the possibility that the company might not repay.

A future tax benefit — the company has overpaid taxes in the past and expects a credit (lower tax payments) in future years.

A future tax obligation — the company has underpaid taxes in the past (by deferring income recognition) and will face higher tax payments in future years.

The annual accounting write-off of the cost of assets purchased in previous years. Depreciation applies to physical assets (machinery, buildings) and amortization to intangible assets (patents, brand value). It reduces reported profit but is not a cash outflow.

The fraction of earnings a company pays out to shareholders as dividends. A low payout means the company is retaining earnings to reinvest. A high payout suggests limited reinvestment opportunities.

The cash return you get from holding a stock through dividends — expressed as a percentage of the stock price. It's only part of the total return; price appreciation is the other part.

Cash paid by a company directly to its shareholders. Dividends are discretionary — companies are not obligated to pay them. Many companies now prefer share buybacks as an alternative way to return cash.

The inverse of the PE ratio — earnings per share divided by price. It tells you how much the company earns for every rupee you invest. Often compared to bond yields to assess whether equities are cheap or expensive.

Earnings before interest, taxes, depreciation, and amortization. A rough measure of a company's operating cash generation — but it ignores the real investment needs of the business and taxes.

The true profit of a business — earnings above and beyond the cost of all capital employed. A positive EVA means the company is genuinely creating wealth. A negative EVA means it is destroying value even if it shows accounting profit.

The average tax rate actually paid by a company — total taxes divided by total taxable income. Usually lower than the marginal rate due to tax planning and deferrals.

The total value of the operating business — what it would cost to buy the entire company including its debt, minus any cash. It's what an acquirer actually pays for the business.

A popular valuation multiple — how many years of EBITDA is the market willing to pay for the business. Lower is generally cheaper but comparisons must be within the same sector.

How much the market values the operating assets relative to what was originally invested in them. A ratio above 1 means the market believes the business earns more than its cost of capital.

What the market pays for every rupee of the company's revenue. Useful when earnings are negative or volatile. High values indicate the market expects strong future profitability.

The value created for equity investors specifically — the excess return earned on equity above what shareholders required for taking the risk.

The proportion of net income that goes back into growing the business — accounting for both capital expenditure needs and any new debt raised or repaid.

The extra return that investors demand for investing in stocks rather than riskfree government bonds — compensation for the additional uncertainty and volatility of equity investments.

The actual extra return that stocks delivered over bonds in the past, averaged over a long period. A backward-looking estimate that may not reflect current market conditions.

A forward-looking estimate of the equity risk premium — calculated from today's stock prices and expected future earnings. It rises when markets fall and falls when markets rise.

The return a company earns above and beyond what investors require for the risk taken. It's the source of true value creation. In a perfectly competitive market, excess returns quickly disappear.

How much return equity investors earned above what they required for the risk they took.

The total market value of everything a company owns — both its operating assets and non-operating assets like cash. It's larger than enterprise value because it includes cash.

The proportion of a company's assets that are physical and long-term — factories, land, machinery. Manufacturing companies have high ratios; software companies have low ones.

The actual cash left for equity shareholders after paying taxes, reinvesting in the business, and meeting debt obligations. This is what can be paid out as dividends or used for buybacks.

The cash generated by the business for all providers of capital — both debt holders and equity shareholders — after taxes and reinvestment needs. This is what a DCF valuation is based on.

The sustainable earnings per share growth rate a company can achieve based on how much it retains and reinvests and what return it earns on that reinvestment.

The growth in net income from operating assets, driven by how much equity is being reinvested and what return is being earned on it.

The sustainable growth rate of the business's core operating profits, determined by how much it reinvests and what return it earns on that reinvestment.

The premium paid when acquiring another company above its book value — representing intangible assets, synergies, and sometimes plain overpayment. Goodwill is an accounting plug that balances the balance sheet post-acquisition.

The percentage of revenue remaining after deducting the direct costs of making or delivering the product or service. A high gross margin means the product itself is highly profitable before overhead.

Revenue minus the direct cost of producing goods or services. It shows the profit before accounting for selling expenses, administrative costs, interest, and taxes.

How fast a company's earnings have grown in the past. It's a reference point but not a reliable predictor of future growth — past growth and future growth have a weak relationship.

A financial instrument that combines features of both debt and equity — like convertible bonds or preference shares. In valuation, these are typically split into their debt and equity components.

The percentage of shares held by promoters or insiders. High insider holding typically indicates confidence in the business but can also mean low liquidity and limited influence for outside investors.

The percentage of a company's shares held by mutual funds, insurance companies, and other institutional investors. High institutional ownership often signals validation of the company's quality.

How many times a company can pay its annual interest expense from its operating profits. A ratio of 3x means operating profit is 3 times the interest bill — a comfortable cushion.

How much inventory the company must hold relative to its revenues. A high ratio means capital is tied up in unsold goods — a drag on cash flows.

The total capital deployed in the operating assets of a business — the sum of debt and equity minus cash. This is what generates the operating income. Same as Book Value of Invested Capital.

Leases that are so long-term or substantial that accounting rules require them to be shown directly on the balance sheet as assets and liabilities — like owning the asset with borrowed money.

Rent-like payments for using assets — shops, equipment, vehicles — without owning them. Under modern accounting, these are treated like debt because the company is committed to future payments regardless of performance.

The tax rate applied to the next rupee of income earned — the rate used in financial analysis because it reflects the true cost of new investment decisions. Usually the statutory corporate tax rate.

The total market value of all shares outstanding — what the stock market says the equity of the company is worth right now.

The total value of all equity claims on a company at current market prices — includes the market cap plus the value of any options or warrants outstanding.

The portion of a subsidiary that belongs to other shareholders — not the parent company. When a company consolidates a subsidiary it controls but doesn't fully own, minority interest represents the outside shareholders' share.

The net investment in long-term assets after accounting for the value of existing assets that are written off. Positive net capex means the company is growing its asset base; zero means it's just maintaining it.

The percentage of revenue that becomes net profit after all expenses — operating costs, interest, and taxes. The bottom line of profitability.

Return on equity calculated after removing cash from the equation — a cleaner measure of how well the business's actual operations are performing, unclouded by large cash hoards earning negligible returns.

The short-term operating investment a company needs to run its business — inventory plus receivables minus payables. Excludes cash (not wasting) and short-term debt (separate from operations).

The increase or decrease in working capital from one year to the next. An increase represents new investment (cash outflow); a decrease represents cash released from the business.

The profit generated by the core business operations before accounting for interest payments or taxes. Also called EBIT. It's the purest measure of business performance.

Operating income after paying taxes — but critically, without the tax benefit of debt. Used in DCF valuation to treat the business as if it were all-equity financed.

After-tax operating profit as a percentage of revenue — a clean measure of operational efficiency that is comparable across companies regardless of their debt levels.

Pre-tax operating profit as a percentage of revenue. Tells you how much the business earns on its core operations before taxes and financing costs.

A hybrid security that sits between debt and equity — it pays fixed dividends like debt, but failure to pay doesn't lead to bankruptcy. In India, preference shares with no voting rights but dividend priority are common.

How many times the company's annual earnings investors are willing to pay per share. A PE of 20x means investors pay ₹20 for every ₹1 of earnings — pricing in future growth and safety.

The ratio of the market's valuation of a company's equity to the accountant's valuation. A PBV above 1 means the market believes the company earns more than its cost of equity.

The market capitalisation as a multiple of annual revenues. Used for companies with no earnings. Internally inconsistent since revenues belong to all capital providers, not just equity shareholders.

An accounting charge taken today to prepare for expected future losses — unpaid customer bills, legal settlements, or product warranties. It smooths out earnings but is not a cash expense when recognised.

The percentage of a stock's price movements that can be explained by overall market movements. A high R-squared means the stock largely moves with the market; a low one means it's driven by company-specific factors.

The proportion of after-tax operating income reinvested back into the business to fund growth. The higher the rate, the more the company is ploughing back into expansion.

Money spent on developing new products, technologies, or processes. In accounting, this is expensed immediately even though the benefits may last many years — making it a capital expenditure in economic reality.

The fraction of earnings kept by the company rather than paid out as dividends. The complement of the payout ratio. Retained earnings are the primary fuel for organic growth.

How much after-tax operating income is generated per rupee of total assets owned by the company. A broader measure than ROIC because it includes all assets, not just operating ones.

The most important measure of a company's quality — how much after-tax operating income it generates for every rupee of capital invested in operations. Compare to WACC: ROIC > WACC means value creation.

How much net income is generated per rupee of equity invested. Measures the return that equity shareholders earn on their investment in the company.

Overhead costs of running the business — sales team salaries, advertising, office expenses, management costs. A rising SG&A as a percentage of revenue can signal declining operating efficiency.

How much a stock's price bounces around over time — a measure of total risk including both market risk and company-specific risk. Higher standard deviation means more uncertainty about future returns.

How much the total value of the firm (debt + equity) fluctuates over time. Used in options-based valuation models for distressed companies.

A measure of total risk — used for valuing private companies where the owner is not well-diversified. It assumes the investor bears all risk of the investment, not just market risk.

The beta of a company's assets stripped of the effect of financial leverage. It answers: how risky is this business, ignoring how it's financed? This is the starting point for building up the cost of equity.

The beta of only the operating assets — after also removing the effect of cash (which has a beta of zero). This is the purest measure of business risk used in DCF models.

Total firm value (equity + debt) relative to the book value of all assets — what the market thinks the entire business is worth versus what the accountants say was invested.

How many years of pre-tax operating cash flow the market is willing to pay for the entire business. A lower multiple generally means cheaper relative valuation. Always compare within the same sector.

The market value of operating assets as a multiple of revenue. Used when earnings are negative or volatile. A higher ratio implies the market expects strong future profitability or margins.

The square of the standard deviation in equity returns — the statistical measure of how widely scattered equity returns are around their average. Used in options pricing and risk models.

How widely the total firm value (equity + debt) varies over time. A higher variance means more uncertainty about the firm's total worth — important in distressed company analysis.