Market capitalization (or market cap)
The total value of the issued shares of a publicly traded company; it is equal to the share price times the number of shares outstanding. As outstanding stock is bought and sold in public markets, capitalization could be used as a proxy for the public opinion of a company’s net worth and is a determining factor in some forms of stock valuation .
Enterprise value (EV)
Total enterprise value (TEV), or Firm value (FV) is an economic measure reflecting the market value of a whole business. It is a sum of claims of all the security-holders: debt holders, preferred shareholders, minority interest, common equity holders, and others. Enterprise value is one of the fundamental metrics used in business valuation, financial modelling, accounting, portfolio analysis, etc.
EV is more comprehensive than market capitalization (market cap), which only includes common equity.
Think of enterprise value as the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company’s debt, but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm’s value. The value of a firm’s debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.
A measure of a company’s value, often used as an alternative to straight forward market capitalization. Enterprise value is calculated as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.
Net Profit Margin
the profit margin tells you how much profit a company makes for every $1 it generates in revenue. Profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better. Several financial books, sites, and resources tell an investor to take the after-tax net profit divided by sales. While this is standard and generally accepted, some analysts prefer to add minority interest back into the equation, to give an idea of how much money the company made before paying out to minority “owners”. Either way is acceptable, although you must be consistent in your calculations. All companies must be compared on the same basis.
A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Holding everything else equal, it is better to have a high profit margin. This means your firm is more competitive and more money is left for shareholders from every sale. In practice, though, profit margin is a trade-off between sales volume and gross margin. You can specialize in highly specialized and differentiated goods that carry high gross margins but low sales volume or you can be a mass producer selling a standard product for a low price that produces low sales margins but high sales volume.
TTM Profit Margin
Instead of just taking the profit margin of the quarter or time period a company is reporting, you can get a better view of what profit margins have been by taking it over the last four quarters or 12 months. Calculate this by taking the sum of the net income of the past four quarters divided by the sum sales number over the past four quarters.
Using TTM profit margin as your main analytical tool may be misleading. It fails to communicate why the TTM profit margin is moving in one direction or the other. It could also include restructuring and other one-time items that may depress the TTM profit margin for the period. If a company took on a higher debt load, this may give a misleading view that the company’s TTM profit margin is decreasing. Interest expense is a line item on the income statement and the higher the interest expense, the lower the TTM profit margin
also known as operating income margin, operating profit margin and return on sales (ROS) — is the ratio of operating income divided by net sales, usually presented in percentage.
The amount of profit realized from a business’s operations after taking out operating expenses – such as cost of goods sold (COGS) or wages – and depreciation. Operating income takes the gross income (revenue minus COGS) and subtracts other operating expenses and then removes depreciation. These operating expenses are costs which are incurred from operating activities and include things such as office supplies and heat and power. Operating Income is typically a synonym for earnings before interest and taxes (EBIT) and is also commonly referred to as “operating profit” or “recurring profit.”
Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company’s yearly or quarterly figures to those of its competitors. If a company’s margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.
Operating income would not include items such as investments in other firms, taxes or interest expenses. In addition, non-recurring items such as cash paid for a lawsuit settlement are often not included.
Operating income is required to calculate operating margin, which describes a company’s operating efficiency.
A measure of a company’s financial leverage calculated by dividing its total liabilities by stockholders’ equity. It indicates what proportion of equity and debt the company is using to finance its assets.
A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.
Earnings Before Interest, Taxes, Depreciation and Amortization – EBITDA
EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.
A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company’s earnings. When using this metric, it’s key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA.
Value At Risk – VaR
A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame. Value at risk is used by risk managers in order to measure and control the level of risk which the firm undertakes. The risk manager’s job is to ensure that risks are not taken beyond the level at which the firm can absorb the losses of a probable worst outcome.
Value at Risk is measured in three variables: the amount of potential loss, the probability of that amount of loss, and the time frame. For example, a financial firm may determine that it has a 5% one month value at risk of $100 million. This means that there is a 5% chance that the firm could lose more than $100 million in any given month. Therefore, a $100 million loss should be expected to occur once every 20 months.
Price-Earnings Ratio – P/E Ratio
A valuation ratio of a company’s current share price compared to its per-share earnings.
Market Value per Share / Earnings per Share (EPS)
For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
– Generally a high P/E ratio means that investors are anticipating higher growth in the future.
– The average market P/E ratio is 20-25 times earnings.
– The p/e ratio can use estimated earnings to get the forward looking P/E ratio.
– Companies that are losing money do not have a P/E ratio.