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Glossaries

Term Definition
FCF

Free cash flow (FCF) is the cash that can be freely taken out of the company after it has paid for maintenance of its property, plant and equipment. Many investors believe that this figure is a more reliable figure for profitability than net income, because it is less prone to tampering by management.

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expiration date

The last day that an option contract is valid. After this day, the option can no longer be exercised by its owner and becomes worthless.

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exchange traded fund

A low-cost, flexible investment fund which trades on an exchange, much like a stock. Most ETFs track an index or commodity.

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EPS

Earnings per share (EPS) is the amount of net income a company has earned in the last 12 months, divided by the amount of shares outstanding.

Earnings per share = Net income / Shares outstanding
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Earnings per share

 

Earnings per share is the amount of net income a company has earned in the last 12 months, divided by the amount of shares outstanding.

Earnings per share = Net income / Shares outstanding
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Dividend yield

 

The return you earn from dividends paid out by a company. This percentage is calculated as follows:
 
Dividend yield = Annual dividend per share / Current share price
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Dividend payout ratio

The percentage of net income which is paid out to shareholders in the form of dividends, instead of being reinvested into the company.

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Discount rate

An imaginary interest rate, most often equal to the long-term historical return of the stock market, which is used to calculate how much a dollar amount in the future is worth in today's money. This is the minimum return you would have to earn to justify stock picking over investing in an index fund.

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Current ratio

A liquidity ratio which tells us whether a company is able to meet it short-term financial obligations.

The current ratio formula is:

current assets / current liabilities

A current ratio of 2 or higher is considered good.

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covered call

An option strategy where you hold a long position in a stock while also writing (selling) call options to generate extra income from the option premium.

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Cash from operating activities

A cash flow statement item which indicates the amount of cash a company earns from its core, ongoing business activities.

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Cash flow statement

A financial statement which depicts the actual cash inflows and outflows of the company.

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Capital expenditures

A cash flow statement item which includes investments in property, plant and equipment, either for maintenance or growth purposes. Used to calculate free cash flow in the Discounted Cash Flow model.

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call option

A contract which gives the holder the right (but not the obligation) to buy a stock at a specified price (strike price) within a specified time period (before exercise date). A call option increases in value if the underlying stock increases in value.

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Benjamin Graham

A Columbia Business School professor and mentor of Warren Buffett. Graham is the so called “father of value investing”. He wrote the best selling books Security Analysis and The Intelligent Investor in which he explains the value investing framework in detail.

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Value Investing Bootcamp - Online Investment Course