Money words, in plain English

What each term means, why people check it, and when a high or low number is good or bad.

65 terms, A to Z. Ratios marked “both sides” show when a high or low figure can be good or bad.

10-K (annual report)The detailed yearly report US public companies must file with the SEC. It covers the business, its risks and audited financial statements.
10-Q (quarterly report)The report US public companies file with the SEC for each of the first three quarters of their year. It is shorter than the annual report and not fully audited.
8-K (announcement)A filing companies make with the SEC within days of a major event, such as results, a new chief executive or a big acquisition.
AcquisitionsBuying other companies or businesses.
Why it matters: Buying other companies can be a fast way to grow, but it's expensive and doesn't always work out.
Why people check itBuying other companies is a big use of cash. People usually look at what was paid and whether the purchases add to growth and profit.What the number can suggestSensible purchases can add new products or customers quickly.Devil's advocateMany acquisitions destroy value because the buyer overpays. Growth from purchases can hide slowing growth in the original business.
AssetsEverything the company owns that has value: cash, buildings, equipment, money owed to it, and more.
Why it matters: Comparing what a company owns with what it owes shows how solid its finances are.
Why people check itAssets are everything the company owns or is owed. People usually compare them with what it owes to judge its financial strength.What the number can suggestAssets well above liabilities suggest a solid cushion.Devil's advocateAssets are recorded at accounting values; some (like goodwill from past purchases) may be worth much less in a crisis, while brands built in-house may not be counted at all.
AuditorAn independent accounting firm that checks a company's financial statements every year and says whether they are fairly presented.
Why it matters: An independent check on the accounts. Changing auditors isn't unusual, but it's worth knowing about.
Balance sheetThe part of a company's report that lists what it owns and what it owes on one date.
Why it matters: It shows whether the company is on solid ground or stretched thin.
Why people check itIt's a snapshot of what the company owns and owes on one date. People usually use it to judge financial strength and risk.What the number can suggestPlenty of cash and manageable debt suggest the company can survive a downturn.Devil's advocateIt's a snapshot on one day, and it records many things at past prices, so it can miss what they're worth today.
Business modelWhat a company sells, who it sells to, and how that turns into money.
Why it matters: Everything else on this page only makes sense once you know how the company earns its money.
Why people check itThe business model is how a company makes its money. People usually start here because every number makes more sense once you know what is being sold, to whom and how.What the number can suggestA model with repeat customers, pricing power or high switching costs tends to produce steadier results.Devil's advocateA great model on paper still depends on how well it's run and on competitors not copying it.
Capital allocationHow a company's leaders decide to use its money: investing, buying other companies, paying shareholders or paying off debt.
Why it matters: It shows what management thinks matters most, and whether they treat shareholders' money carefully.
Why people check itIt's how management decides to use the company's money: reinvesting, buying other companies, paying dividends, buying back shares or repaying debt. People usually see it as a test of management's judgment.What the number can suggestConsistent, well-funded choices that match the company's growth opportunities suggest disciplined management.Devil's advocateBig payouts can look owner-friendly but leave too little for future growth; heavy reinvestment only helps if it earns a good return.
Capital spendingboth sidesCash spent on long-lasting things the company will use for years, like factories, stores, data centres and equipment. Often shortened to capex.
Why it matters: It's how a company invests in its future. Heavy spending can mean growth plans, or a business that needs a lot of upkeep.
Why people check itThis is spending on long-lasting things like factories, stores, data centres and machines. People usually look at it to see how much the business must reinvest just to keep going and grow.What the number can suggestHigh spending can mean the company is expanding. Low spending relative to its size can mean it needs little investment to grow, which leaves more spare cash.Devil's advocateHigh spending only pays off if the new capacity earns a good return; it can also be a sign of an expensive business that must keep spending to stand still.Both sides of the numberHigh capital spendingCan be good: The company is investing in its future: new equipment, factories, stores or data centres that can drive growth.Can be bad: It eats into spare cash today, and the investment may not pay off. Some industries must keep spending heavily just to stand still.Low capital spendingCan be good: A business that needs little equipment to grow (software, for example) can turn more of its profit into spare cash.Can be bad: The company may be underinvesting, letting equipment age to make today's cash flow look better, which can hurt it later.
Cash and cash equivalentsboth sidesMoney in the bank plus very safe investments that can be turned into cash almost immediately.
Why it matters: Cash is a safety cushion for bad times and a source of money for new plans.
Why people check itCash is the company's safety cushion. People usually compare it with debts and with what the company spends each year.What the number can suggestPlenty of cash suggests it can survive a bad year, pay bills and take opportunities. Very little cash can leave it dependent on borrowing.Devil's advocateLarge cash piles can also mean the company has no good use for its money. Some cash may be held abroad or needed for day-to-day running, so not all of it is truly spare.Both sides of the numberA large cash pileCan be good: A safety cushion for hard times, and money ready for opportunities like buying another company.Can be bad: Cash sitting idle earns little. Investors may prefer it to be invested or returned to them.Little cashCan be good: A company with steady cash coming in may not need a big pile, and may already have put its cash to good use.Can be bad: If cash runs low and business slows, the company may need to borrow or issue new shares on bad terms.
Cash flow statementThe part of a company's report that shows the actual cash coming in and going out.
Why it matters: Profit can be shaped by accounting rules; cash is harder to disguise.
Why people check itIt shows the actual cash moving in and out. People usually use it to check that profits are real and to see where the money goes.What the number can suggestCash from the business that matches or beats profit suggests good-quality earnings.Devil's advocateCash flow can be lumpy from year to year, for example when a company pays for a big project or collects a large one-off payment.
Cash from operationsboth sidesThe cash that came in from customers minus the cash paid out to suppliers, staff, landlords, lenders (interest) and the tax office during the period. It differs from profit because of timing, such as customers paying later, and because some costs in profit, like wear and tear on equipment, aren't paid in cash.
Why it matters: Profit is an accounting figure; this is real cash. A company that earns profit but brings in little cash can run into trouble.
Why people check itProfit is an accounting figure; this is the cash the business actually brought in. People usually compare the two to check that profits turn into real money.What the number can suggestCash from operations close to or above profit suggests good-quality profits. Much lower cash than profit can mean customers are slow to pay or stock is piling up.Devil's advocateIt can be flattered for a while by paying suppliers later or collecting from customers faster, which can't continue for ever.Both sides of the numberHigh operating cash flow (compared with profit)Can be good: Profits are turning into real cash, often a sign of good-quality earnings and customers who pay on time.Can be bad: It can be boosted for a while by paying suppliers later or cutting stock, which can't go on for ever.Low operating cash flow (compared with profit)Can be good: A fast-growing company may be building up stock or waiting for customers to pay, which can turn into cash later.Can be bad: Profit that doesn't arrive as cash can be a warning that customers are slow to pay, stock is piling up, or the profit relies on estimates.
CompetitionOther companies trying to win the same customers.
Why it matters: Strong competition can force a company to cut prices or spend more, squeezing its profit.
Why people check itCompetitors limit how much a company can charge and how many customers it keeps. People usually look for what protects the company from rivals.What the number can suggestA company that keeps its margins while rivals compete suggests a lasting advantage.Devil's advocateAdvantages can disappear quickly with new technology or new entrants; past strength is no guarantee.
Consumer demandHow much people and businesses are willing and able to buy. It depends a lot on jobs, wages and confidence.
Why it matters: When people feel less secure they spend less, and companies selling things people can put off feel it first.
Why people check itDemand drives sales. People usually watch jobs and spending figures to judge whether customers will buy more or less.What the number can suggestLow unemployment and rising wages usually support spending; rising unemployment usually weakens it.Devil's advocateSome companies sell things people buy in good times and bad (food, medicines), so the economy matters much less for them.
Cost of salesThe direct cost of making or buying the products and services a company sold: materials, factory work and delivery.
Why it matters: The less a company spends to make what it sells, the more is left over for everything else.
Why people check itIt's the direct cost of what the company sold. People usually watch it against sales to see if it can keep its costs under control as prices change.What the number can suggestCost of sales growing slower than sales means each sale keeps more money (a rising gross margin).Devil's advocateChanges in what the company sells (more of a cheap or an expensive product) can move it, without any change in efficiency.
Costs and expensesEverything a company spends to make and sell its products and run the business, plus interest and tax.
Why it matters: Sales minus all of these is the profit. Two companies with the same sales can keep very different amounts.
Why people check itTotal costs set how much of each sale is left as profit. People usually split them into product costs and running costs to see where the money goes.What the number can suggestCosts rising faster than sales squeeze profit; costs rising slower widen it.Devil's advocateSome costs are one-offs (restructuring, legal settlements) that won't repeat, so a single year can look worse than normal.
Current ratioboth sidesCurrent assets (cash, money customers owe it, stock and anything else it expects to turn into cash within a year) divided by current liabilities (bills it must pay within a year). 1.5 means $1.50 coming in for every $1 due.
Why it matters: It shows whether the company can comfortably pay what's due soon. Below 1 isn't automatically a problem, but it leaves less room for surprises.
Why people check itIt compares what the company can turn into cash within a year with the bills due within a year. People usually use it as a quick check on short-term safety.What the number can suggestAbove about 1 suggests it has enough to cover bills due soon. Well below 1 can mean it relies on new money coming in to pay its bills.Devil's advocateStrong businesses like big retailers often run below 1 because customers pay them before they pay suppliers. A very high ratio can mean cash is sitting idle.Both sides of the numberA high current ratioCan be good: Plenty of cash and short-term assets to pay bills due within a year, so a short-term cash squeeze is unlikely.Can be bad: Too much money may be sitting idle in cash or unsold stock, instead of being invested or returned to owners. Piles of unsold stock can be a warning sign too.A low current ratioCan be good: Strong companies that get paid quickly by customers and pay suppliers later (like big retailers) often run below 1 safely.Can be bad: The company may struggle to pay bills due soon, especially if sales slow or lenders become less willing to lend.
Debt-to-equity ratioboth sidesLong-term borrowing divided by shareholders' equity (what the accounts say belongs to the owners). 0.5 means $0.50 borrowed for every $1 of owners' money; higher means it relies more on borrowed money.
Why it matters: Borrowing can help a company grow, but debt must be repaid with interest. The higher this is, the more a bad year can hurt.
Why people check itIt compares borrowed money with the owners' money in the business. People usually use it to judge how much the company relies on debt.What the number can suggestA low figure suggests it is mainly funded by its owners. A high figure means more borrowing, which can increase both returns and risk.Devil's advocateShare buybacks shrink the owners' share on paper, so a company that buys back a lot of shares can show a very high figure without being in trouble. Compare it with similar companies.Both sides of the numberHigh debt-to-equityCan be good: Borrowing can boost returns for owners when the business earns more on the money than the interest it pays. Steady businesses (utilities, for example) can safely carry more debt.Can be bad: More debt means more interest to pay and less room for error. In a downturn or when interest rates rise, heavy borrowing can become dangerous.Low debt-to-equityCan be good: Little borrowing makes the company sturdy in hard times and gives it room to borrow later if a good opportunity comes up.Can be bad: It may be too cautious, missing chances to grow. Note too that buybacks can shrink equity and make this ratio look worse than the company's real health.
Dividendboth sidesCash a company pays out to its shareholders, usually every quarter, from its profits.
Why it matters: Dividends are one way owners get paid back. Some companies pay them regularly; others keep the cash to grow.
Why people check itDividends are cash paid directly to owners. People usually check whether the company can afford them from its spare cash.What the number can suggestA steady or rising dividend paid comfortably from spare cash suggests a mature, reliable business.Devil's advocateA dividend bigger than spare cash may not last. Some excellent companies pay none because they reinvest everything to grow.Both sides of the numberLarge dividendsCan be good: A steady stream of cash to owners, and a sign management is confident about future cash flow.Can be bad: If the dividend is bigger than the company can afford, it may be cut later, and a cut usually hits the share price. Money paid out also can't be reinvested to grow.Small or no dividendCan be good: The company may be reinvesting its cash in growth, which can be worth more to owners over time.Can be bad: In a mature company it can mean cash is tight, or the dividend was recently cut because of trouble.
Dividend yieldboth sidesThe yearly dividend per share divided by the share price. A 3% yield means you get about $3 a year in dividends for every $100 of shares.
Why it matters: It shows how much cash income a share pays you compared with what it costs to buy.
Why people check itPeople usually compare yields across companies and with interest on savings or bonds, to see how much of a share's return comes as cash.What the number can suggestA higher yield means more cash income for the price. A low yield is common for companies that reinvest to grow.Devil's advocateYield goes up when the share price falls, so a very high yield can be a warning that investors expect the dividend to be cut.Both sides of the numberA high dividend yieldCan be good: A healthy business paying out a generous, well-covered dividend gives you strong cash income.Can be bad: The yield may be high only because the share price has fallen on bad news, and the dividend itself may be about to be cut.A low dividend yieldCan be good: The company may be reinvesting its cash in growth, which can reward owners through a rising share price instead.Can be bad: If you want income, there is little of it, and in a mature company it may mean cash is tight.
Earnings per share (EPS)both sidesNet income divided by the average number of shares during the period. "Diluted" EPS also counts shares that could still be created, for example from staff stock awards, so it's usually slightly lower.
Why it matters: It turns the company's profit into a per-share figure, so you can see what each share 'earns'. It's also half of the P/E ratio.
Why people check itEarnings per share splits the profit across every share. People usually track it because it's what share prices are most often compared with, in the P/E ratio.What the number can suggestSteady growth in earnings per share suggests owners are getting more profit for each share they hold.Devil's advocateIt can rise just because the company bought back shares, even if total profit didn't grow. One-off items affect it in the same way they affect profit.Both sides of the numberRising EPSCan be good: The company is earning more for each share, which over time tends to support a higher share price.Can be bad: It can rise because the company bought back shares, not because the business grew, or because of a one-off gain. Check whether total profit and sales also grew.Falling EPSCan be good: It can be a planned dip: heavy spending now on new products, factories or marketing that may pay off later.Can be bad: Profit per share is shrinking, from weaker sales, higher costs or new shares diluting existing owners. If it keeps falling, the share price usually follows.
EBITDAboth sidesEarnings before interest, tax, depreciation and amortisation: profit from the main business before paying interest and tax, and before the yearly wear-and-tear charge on buildings and equipment.
Why it matters: It shows how much the core business earns before decisions about borrowing and tax, so companies with different debts can be compared.
Why people check itPeople usually use it as a rough measure of the cash-like earnings of the main business, and it's the bottom half of the EV/EBITDA ratio.What the number can suggestGrowing EBITDA suggests the core business is earning more each year.Devil's advocateIt ignores the real cost of replacing worn-out equipment and the interest the company must pay, so a business can show strong EBITDA and still be short of cash.Both sides of the numberHigh EBITDA (compared with sales)Can be good: The main business earns a lot before interest and tax, which gives room to pay debts and invest.Can be bad: It can flatter companies that must keep spending heavily on equipment, because that spending isn't subtracted.Low EBITDA (compared with sales)Can be good: Some businesses, like retailers, run on thin earnings but sell very large volumes and turn their stock over quickly.Can be bad: Little is left to cover interest, tax and new equipment, so a small fall in sales can wipe it out.
EV/EBITDAboth sidesThe value of the whole company, including its debt minus its cash (enterprise value), divided by its profit before interest, tax, depreciation and amortisation (EBITDA).
Why it matters: Unlike the P/E, it counts debt, so it lets you compare companies that borrow very different amounts.
Why people check itInvestors and buyers of whole companies use it to compare valuations across companies with different debt and tax situations.What the number can suggestA higher figure means the market pays more for each dollar of operating earnings; a lower one, less.Devil's advocateEBITDA ignores the cost of replacing equipment and the interest the company must pay, so it can flatter companies that spend heavily on equipment or carry lots of debt.Both sides of the numberA high EV/EBITDACan be good: Investors expect strong growth or see the business as especially safe and high quality.Can be bad: The whole company, debt included, is expensive, and there is little margin for disappointment.A low EV/EBITDACan be good: The company may be cheap even after counting its debt, a possible target for a takeover.Can be bad: Earnings may be expected to fall, or heavy spending on equipment may eat most of that EBITDA before any cash reaches owners.
External factorsForces outside a company's control: competitors, laws and governments, new technology, suppliers, world events and nature.
Why it matters: These can change a company's prospects suddenly, whatever its management does.
Why people check itPeople usually read the risks a company lists in its annual report to see which outside forces it is most exposed to.What the number can suggestA company exposed to many serious outside risks deserves a closer look at how it protects itself.Devil's advocateCompanies list nearly every possible risk for legal reasons, so the list alone doesn't show which ones are likely.
Fiscal yearThe 12-month period a company uses for its accounts. It doesn't have to match the calendar year; Apple's ends in late September, for example.
Free cash flowboth sidesOperating cash flow minus capital expenditure: the cash left after the business pays for the buildings and equipment it needs. It's what the company can use to pay dividends, buy back shares, repay debt or save.
Why it matters: It's the money a company can actually choose what to do with: pay shareholders, pay off debt or grow. Many investors watch it more closely than profit.
Why people check itSpare cash is what's left after the company has paid to keep and grow its buildings and equipment. People usually see it as the money truly available for owners, debt repayment or growth.What the number can suggestStrong, steady spare cash suggests the company can fund dividends, buybacks or growth without borrowing. Negative spare cash means it needed other money to cover its spending.Devil's advocateA company can boost spare cash by cutting investment, which may hurt it later. Young, fast-growing companies often have negative spare cash on purpose because they are investing heavily.Both sides of the numberStrong free cash flowCan be good: Real spare cash the company can use to pay dividends, buy back shares, pay off debt or grow, without borrowing.Can be bad: It can be flattered by cutting needed investment, delaying payments to suppliers or one-off items. Check whether it holds up across several years.Weak or negative free cash flowCan be good: A growing company may spend heavily on new factories or stores today that will produce cash later.Can be bad: The business may not be producing enough cash to fund itself, which can lead to more borrowing or new shares that dilute owners.
FundamentalsThe company's own business and finances: its sales, profit, cash, debt and how well it is run.
Why it matters: Over long periods, a company's share price tends to follow how its business performs, so fundamentals are where people start.
Why people check itPeople usually study fundamentals to judge what a business is worth on its own merits, separate from the day-to-day mood of the market.What the number can suggestGrowing sales, healthy margins, strong cash flow and manageable debt suggest a solid business.Devil's advocateStrong fundamentals don't stop a share price falling if investors already expected them, or if the whole market drops.
Gross marginboth sidesGross profit (sales minus the direct cost of making or buying what was sold) as a share of sales. A 40% gross margin means $40 of every $100 of sales is left to pay for everything else.
Why it matters: It shows how much room a company has to pay for everything else. A high gross margin often means a strong brand or something hard to copy.
Why people check itIt shows how much is left from each sale after the direct cost of making or buying the product. People usually use it to judge pricing power and how costly the product is to make.What the number can suggestA high gross margin (software often has 70% or more) suggests the company can charge well above its costs. A low one (shops, airlines) means it must sell a lot to cover its other costs.Devil's advocateDifferent industries have very different normal levels, so compare with similar companies, not across industries. A rising margin can also come from a change in what it sells rather than better pricing.Both sides of the numberA high gross marginCan be good: The company can charge well above what its products cost to make, often a sign of a strong brand, patents or software that is cheap to copy.Can be bad: A high margin attracts competitors, who may cut prices. It also says nothing about the other costs (staff, marketing, research) that can still eat up the profit.A low gross marginCan be good: Some excellent businesses run on thin margins by selling huge volumes cheaply, like warehouse clubs and supermarkets.Can be bad: There is little room for mistakes: a small rise in costs or a price war can wipe out profit. It can also mean the product has no real edge.
Income statementThe part of a company's report that shows what it sold and what it kept as profit over a period.
Why it matters: It answers the most basic question about a business: is it making money?
Why people check itIt's the first of the three main financial statements and shows sales, costs and profit over a period. People usually start here to see whether the business makes money and is growing.What the number can suggestGrowing sales and stable or rising margins suggest a healthy, growing business.Devil's advocateProfit on the income statement includes estimates and one-off items; it should always be checked against the cash flow statement.
InflationPrices rising across the economy, usually measured as how much more a typical basket of goods costs than a year earlier.
Why it matters: It pushes up a company's costs. Companies that can raise their own prices without losing customers cope best.
Why people check itRising prices affect both a company's costs and what it can charge. People usually look at whether it can pass higher costs on to customers.What the number can suggestCompanies with strong brands or essential products often keep their margins when prices rise; others see them squeezed.Devil's advocateInflation can make sales grow on paper while the amount actually sold stays flat.
Interest coverage ratioboth sidesOperating profit divided by the interest the company pays on its debt. A ratio of 5 means profit covers interest five times over.
Why it matters: It shows how comfortably a company can pay the interest on what it has borrowed.
Why people check itLenders and people use it to judge how risky a company's borrowing is.What the number can suggestA high ratio means interest is easy to pay. A ratio near or below 1 means profit barely covers, or doesn't cover, the interest.Devil's advocateOne good or bad year can swing it a lot, and it ignores when the loans themselves must be repaid.Both sides of the numberHigh interest coverageCan be good: Interest payments are easy to meet, so the company is unlikely to get into trouble with lenders.Can be bad: It may be so cautious that it passes up cheap borrowing that could fund growth.Low interest coverageCan be good: It can be temporary, after a big borrowing to buy a business that will soon add profit.Can be bad: A small dip in profit or a rise in rates could leave the company struggling to pay its interest.
Interest ratesThe cost of borrowing money. In the US they are steered by the Federal Reserve and set day to day in markets.
Why it matters: Higher rates make borrowing more expensive for companies and their customers, and tend to pull share prices down.
Why people check itRates set the cost of borrowing for the company and its customers, and affect how investors value future profits. People usually watch them closely.What the number can suggestHigher rates usually hurt companies with lots of debt and those whose profits are far in the future.Devil's advocateBanks and insurers can earn more when rates rise, and companies with lots of cash earn more interest on it.
Long-term debtboth sidesMoney the company has borrowed and must pay back over more than a year, such as bonds and bank loans.
Why it matters: Debt isn't bad on its own, but it has to be repaid with interest whatever happens to sales.
Why people check itDebt has to be repaid with interest whatever happens to the business. People usually check how big it is compared with profit, cash and what the owners have put in.What the number can suggestModest debt that the company can easily cover with its profit is normal and can boost returns. Debt growing faster than profit increases the risk in a downturn.Devil's advocateSome steady businesses (utilities, drink makers) safely carry a lot of debt because their income is reliable. What matters is when it must be repaid and at what interest rate.Both sides of the numberA lot of long-term debtCan be good: Borrowing can fund growth and boost returns to owners when the business earns more than the interest it pays.Can be bad: Interest must be paid in good years and bad, and the loans must eventually be repaid or refinanced, possibly at higher rates.Little long-term debtCan be good: The company is less exposed to rising interest rates and has room to borrow if it needs to.Can be bad: It may be missing out on cheap funding that could have helped it grow faster.
Macroeconomic factorsConditions in the whole economy that affect almost every company: interest rates, inflation, jobs and economic growth.
Why it matters: A good company can still struggle in a recession or when borrowing becomes expensive.
Why people check itPeople usually check how sensitive a company is to the economy, for example whether people keep buying its products in a downturn.What the number can suggestCompanies selling essentials are usually less affected; companies selling things people can put off, or with lots of debt, are usually more affected.Devil's advocateEconomic forecasts are often wrong, and markets tend to move before the economic data does.
Market sentimentThe overall mood of investors: how optimistic or worried they feel about a company or the market.
Why it matters: Mood can move a share price a lot in the short run, even when the business itself hasn't changed.
Why people check itSentiment is how investors feel about a company or the market. People usually watch it because it can move share prices far from what the business is doing.What the number can suggestVery optimistic sentiment can push prices and P/E ratios up; very negative sentiment can push them down.Devil's advocateSentiment can change quickly and often reverses; a share falling on bad mood doesn't mean the business got worse.
Market value (market cap)both sidesThe share price multiplied by the number of shares: what the whole company is worth on the stock market at that moment.
Why it matters: It's how much the whole company is worth according to the stock market, so you can compare its size with other companies.
Why people check itMarket value is the price of the whole company at today's share price. People usually use it to compare company sizes and in valuation ratios.What the number can suggestA larger figure means a bigger company in the market's eyes. Big changes usually reflect the share price moving.Devil's advocateIt reflects what investors are willing to pay today, which can swing with mood and news, not just with how the business is doing. It ignores the company's debts.Both sides of the numberA large market capCan be good: Big companies are often more established and stable, with more resources to survive hard times.Can be bad: Growing a very large company quickly is hard, so big share price gains may be harder to come by.A small market capCan be good: Smaller companies have more room to grow, so their shares can rise faster when things go well.Can be bad: They are often riskier: less established, more affected by a single setback, and their share prices can swing more.
Net debtboth sidesLong-term borrowing minus the cash the company holds. A negative figure means it holds more cash than it owes long-term (net cash).
Why it matters: Cash in the bank could be used to pay back debt, so net debt shows the borrowing that cash wouldn't cover.
Why people check itPeople usually compare net debt with profit and cash flow to see how many years it would take to pay off what the company owes.What the number can suggestLow or negative net debt suggests a strong cushion; high net debt means the company depends more on lenders.Devil's advocatecandor uses long-term debt only, so short-term borrowing and leases are left out; and not all cash is free to use (some may be needed day to day or held abroad).Both sides of the numberHigh net debtCan be good: Stable businesses with reliable income can borrow cheaply to grow or pay owners, which can lift returns.Can be bad: Interest must be paid in good years and bad, and refinancing can get expensive when interest rates rise.Low or negative net debtCan be good: Plenty of cash and little borrowing gives safety in a downturn and freedom to invest.Can be bad: Large idle cash can mean management has no good use for it, and it earns little.
Net incomeThe profit left over a period (such as a year or a quarter) after paying every cost, including wages, interest and taxes. Often called the bottom line.
Why it matters: It's the money that's actually left for the owners after every bill is paid. A company can sell a lot and still make little or none.
Why people check itProfit is what is left for the owners after every cost, so it's the basis for the earnings per share and P/E ratio that investors quote.What the number can suggestRising profit suggests the business is growing, getting more efficient, or both. A loss means costs were bigger than sales over the period.Devil's advocateProfit includes one-off items (a sale of a building, a write-down, a tax change), so one year can look much better or worse than the business really is. Compare it with the cash the business actually brought in.
Net lossWhen a company's costs, including interest and taxes, add up to more than it earned during the period.
Why it matters: A loss isn't always bad (young companies often lose money while growing), but a company can't lose money forever.
Why people check itA loss shows the company spent more than it earned. People usually ask whether that is temporary, planned (a young company investing to grow) or a sign of trouble.What the number can suggestA shrinking loss can mean the company is moving towards profit. A growing loss for a mature company is usually a warning sign.Devil's advocateSome strong companies lose money for years on purpose while they grow. Others report a loss only because of a one-off accounting charge, while their cash flow is healthy.
Operating expensesThe cost of running the business beyond making the products: staff, research, marketing, offices.
Why it matters: Keeping these under control lets more of each sale turn into profit.
Why people check itThese are the costs of running the business: staff, research, marketing and offices. People usually check whether they grow slower or faster than sales.What the number can suggestExpenses growing slower than sales suggest the business gets more efficient as it grows.Devil's advocateCutting research or marketing lowers expenses now but may hurt future sales.
Operating incomeSales minus the cost of what was sold and the cost of running the business (staff, rent, marketing, research). It's the profit from the main business, before interest and tax.
Why it matters: It shows whether the core business makes money, separate from one-off gains or interest.
Why people check itOperating profit shows what the main business earns before interest and tax. People usually use it to compare companies that borrow different amounts or pay different tax rates.What the number can suggestGrowing operating profit suggests the core business is doing better, not just the financing or tax side.Devil's advocateCompanies sometimes leave costs out of 'adjusted' operating profit figures in their announcements. The SEC numbers used here follow the standard rules, which can differ from the headline figures in press releases.
Operating marginboth sidesOperating income as a share of sales: of each $100 of sales, what's left after paying for what was sold and for running the business, before interest and tax.
Why it matters: It shows how profitable the main business is on its own, before borrowing costs and taxes.
Why people check itIt shows how much of each sale is left after running the business, before interest and tax. People usually treat it as a measure of how well the business itself is run.What the number can suggestA steady or rising operating margin suggests costs are under control as the company grows. A falling one can mean costs are growing faster than sales.Devil's advocateHeavy spending on research or marketing lowers the margin today but may build the business for later. A cut in such spending can lift the margin while weakening the future.Both sides of the numberA high operating marginCan be good: The core business earns well from each sale, before interest and tax, a sign of an efficient operation or pricing power.Can be bad: It may be high because the company is cutting spending on research or upkeep that it will need later.A low operating marginCan be good: It can be low because the company is spending now to grow, which may pay off in later years.Can be bad: The everyday business barely covers its own costs, leaving little cushion if sales fall.
P/E ratio (price-to-earnings)both sidesThe share price divided by earnings per share. It shows how many dollars investors are paying for each dollar of yearly profit. It describes the price; it doesn't say whether the price is right.
Why it matters: It helps you judge whether a share looks expensive or cheap compared with the profit behind it. A high P/E usually means people expect profits to grow.
Why people check itIt shows how many dollars investors are paying for each dollar of yearly profit. People usually use it to compare how highly the market values different companies.What the number can suggestA high P/E suggests investors expect strong growth. A low P/E suggests lower expectations, or doubts about the company.Devil's advocateA low P/E can be a 'value trap' if profits are about to fall, and a high P/E can be justified if profits really do grow fast. It's meaningless when profit is very small or negative, and it says nothing on its own about whether a share is a good buy.Both sides of the numberA high P/ECan be good: Investors expect profit to grow fast, often for good reason: a strong brand, a growing market or a business that is hard to copy. If that growth arrives, today's high price can turn out to be fair.Can be bad: The share is priced for perfection. If growth slows even a little, the P/E can fall sharply and the share price with it. It can also be high simply because profit dipped this year.A low P/ECan be good: The share may be cheap for what it earns, a possible bargain the market has overlooked, especially if profit is steady.Can be bad: It may be cheap for a reason: profit could be about to fall, the industry could be shrinking, or the company could have problems (a 'value trap'). It can also look low because of a one-off boost to this year's profit.
Payout ratioboth sidesThe share of a company's profit that it pays out as dividends. A 40% payout ratio means $40 of every $100 of profit goes to owners as dividends.
Why it matters: It shows whether a dividend is comfortably affordable or stretched.
Why people check itPeople usually use it to judge how safe a dividend is and how much profit is kept to grow the business.What the number can suggestA moderate payout leaves room to keep paying in a bad year. A payout above 100% means the company is paying out more than it earns.Devil's advocateProfit can be distorted by one-off items, so people also compare dividends with free cash flow.Both sides of the numberA high payout ratioCan be good: Mature, steady companies with few growth projects can afford to hand most of their profit to owners.Can be bad: There is little cushion: if profit falls, the dividend may have to be cut. Above 100% is usually not sustainable.A low payout ratioCan be good: The dividend is well covered and has room to grow, and profit kept back can fund growth.Can be bad: Owners get little cash now, and the kept profit only helps if management invests it well.
PEG ratioboth sidesThe P/E ratio divided by the expected yearly growth in profit. It adjusts the P/E for how fast profit is expected to grow.
Why it matters: A high P/E can be fair for a fast grower. The PEG puts price and growth side by side.
Why people check itPeople usually use it to compare companies growing at different speeds on a fairer footing.What the number can suggestAround 1 is often treated as fair, below 1 as cheap for the growth, and well above 1 as expensive.Devil's advocateIt depends on growth forecasts, which are often wrong, and it is meaningless when profit is falling or negative.Both sides of the numberA high PEGCan be good: Investors may be paying up for quality and reliability that the growth figure alone doesn't capture.Can be bad: You are paying a lot for each bit of expected growth, and if growth disappoints, the share has far to fall.A low PEGCan be good: You may be getting strong growth at a fair price.Can be bad: The growth forecast may be too optimistic, so the share is only cheap if the forecast comes true.
Price-to-book ratio (P/B)both sidesThe share price compared with shareholders' equity per share (the company's 'book value'). It shows how much investors pay for each dollar the accounts say owners own.
Why it matters: It helps judge price against what the company owns, especially for banks and companies with lots of physical assets.
Why people check itPeople usually use it most for banks, insurers and asset-heavy companies, where book value is a fair guide to what the business is worth.What the number can suggestAbove 1 means investors pay more than book value, expecting good returns. Below 1 means the market values the company below its accounts.Devil's advocateBook value leaves out brands, patents and know-how, so it misleads for software and consumer brands. Buybacks also shrink book value and push P/B up.Both sides of the numberA high P/BCan be good: The company earns strong returns on what it owns, often thanks to brands or ideas the accounts don't count.Can be bad: Investors may be paying far more than the assets are worth, leaving the share exposed if returns slip.A low P/BCan be good: You may be buying assets for less than their stated value, a classic bargain sign.Can be bad: The assets may be worth less than the accounts say (old stock, bad loans), or the business may earn poor returns on them.
Price-to-sales ratio (P/S)both sidesThe company's market value divided by its yearly sales. It shows how many dollars investors pay for each dollar of sales.
Why it matters: It works even when a company makes no profit, so it is often used for young, fast-growing companies.
Why people check itPeople usually use it to value companies with little or no profit and to compare companies in the same industry.What the number can suggestA higher P/S means investors pay more for each dollar of sales, usually expecting strong growth or high margins.Devil's advocateSales aren't profit: a company with a low P/S may still never make money, and margins differ hugely between industries.Both sides of the numberA high P/SCan be good: Investors expect sales to grow fast and to turn into high profit margins later.Can be bad: If growth slows or profit never comes, the share price has a lot of expectation to lose.A low P/SCan be good: The company may be cheap for the business it does, especially if margins could improve.Can be bad: Low-margin businesses always trade on low P/S ratios, so it may not be cheap at all.
Profit marginboth sidesNet income as a share of sales: what's left after every cost, including interest and tax. A 10% net profit margin means $10 of final profit for every $100 of sales.
Why it matters: It lets you compare companies of any size: $27 of profit per $100 of sales means the same thing for a small company and a giant.
Why people check itIt shows how much of each sale ends up as profit after all costs. People usually compare it over time and against competitors to see how efficient the company is.What the number can suggestA higher margin than rivals can point to a stronger brand, better pricing or lower costs. A falling margin can mean rising costs it can't pass on, or price cuts to keep customers.Devil's advocateOne-off gains or charges can push the margin up or down for a single year. A low margin isn't always bad: some businesses deliberately keep prices low to win volume.Both sides of the numberA high profit marginCan be good: The company keeps a lot of each sale as profit, which suggests pricing power and good cost control.Can be bad: It can be boosted by one-off gains or a low tax rate that may not last, and high margins invite competitors.A low profit marginCan be good: Thin margins are normal in some industries, and a company that is investing heavily for growth may have low margins on purpose.Can be bad: Little is left after costs, so a small rise in costs or fall in prices can push the company into a loss.
QuarterA three-month period. US public companies report their results every quarter.
Quick ratioboth sidesLike the current ratio, but counting only cash, investments and money owed by customers, leaving out stock waiting to be sold. It compares these with bills due within a year.
Why it matters: It is a stricter test of whether a company could pay its near-term bills without relying on selling its stock.
Why people check itPeople usually use it when stock might be hard to sell quickly, to check short-term safety.What the number can suggestAbove 1 means quick assets cover bills due within a year. Below 1 means the company relies on selling stock or new cash coming in.Devil's advocateMany healthy retailers run below 1 because they sell stock fast and pay suppliers later.Both sides of the numberA high quick ratioCan be good: The company could pay its near-term bills quickly, even if sales stalled.Can be bad: Too much money may be sitting idle rather than being used to grow the business or rewarded to owners.A low quick ratioCan be good: Businesses that turn stock into cash quickly can run safely with a low ratio.Can be bad: If sales slow, the company may struggle to pay what it owes in the coming months.
RegulationLaws and rules set by governments, including taxes, tariffs and safety or competition rules.
Why it matters: New rules can add costs or limit what a company may sell.
Why people check itLaws, taxes and court cases can change what a company is allowed to do and what it costs. People usually look at what is pending and how much it could cost.What the number can suggestHeavy or growing regulation can raise costs or limit growth.Devil's advocateRules can also protect established companies by making it harder for newcomers to compete.
Restatement noticeA filing where a company says financial statements it published earlier contained errors and should no longer be relied on.
Why it matters: It means earlier numbers were wrong. It's one of the more serious warning signs a company can report.
Why people check itPeople usually check for restatements and auditor changes because the whole analysis rests on the accounts being reliable.What the number can suggestNo restatements and a steady auditor suggest the published figures can be relied on. A restatement means earlier figures were wrong.Devil's advocateSome restatements are small technical corrections; others reveal serious problems. Read what was corrected before drawing conclusions.
Return on assets (ROA)both sidesProfit divided by everything the company owns (its total assets). It shows how much profit each dollar of assets produces.
Why it matters: It shows how well a company uses what it owns, whether that was paid for by owners or by lenders.
Why people check itPeople usually use it alongside ROE: because it isn't boosted by borrowing, it is a cleaner view of how efficient the business is.What the number can suggestA higher ROA means the company squeezes more profit from its assets. Asset-heavy industries naturally have lower ROAs.Devil's advocateCompare ROA only within the same industry: a bank and a software company will never look alike.Both sides of the numberA high ROACan be good: The company gets a lot out of what it owns, a sign of an efficient or asset-light business.Can be bad: It may be high because assets are old and fully written down, not because the business is great, and may fall once they are replaced.A low ROACan be good: It is normal in asset-heavy industries like banks, utilities and railways.Can be bad: The company may own a lot that isn't earning much, such as idle factories or unsold stock.
Return on equity (ROE)both sidesNet income for a year divided by the average shareholders' equity over that year. A 20% ROE means $20 of profit for every $100 of owners' money in the business.
Why it matters: It shows how well a company turns its owners' money into profit. Higher is generally better, though heavy borrowing can push it up too.
Why people check itIt shows how much profit the company makes for each dollar the owners have in the business. People usually use it to judge how well management uses that money.What the number can suggestA consistently high figure (often above 15%) can point to a strong business. A low one suggests the owners' money isn't earning much.Devil's advocateLots of debt or large buybacks can make it look high because they shrink the owners' share. Check it together with how much the company has borrowed.Both sides of the numberA high ROECan be good: The company turns the owners' money into a lot of profit, often a sign of a high-quality business.Can be bad: ROE can be pushed up by heavy borrowing or by buybacks that shrink equity, not by a better business. Check debt-to-equity alongside it.A low ROECan be good: It may be temporary, during a period of heavy investment, or normal for a capital-heavy industry like banks or utilities.Can be bad: The business may not be earning enough on the money owners have put in, and that money might do better elsewhere.
Revenueboth sidesAll the money a company takes in from selling its products and services, before paying any costs. Also called sales.
Why it matters: It's the starting point for everything else: a company can't make a profit without selling something first. Growing sales usually means more customers or higher prices.
Why people check itSales are the top line that every other figure depends on. People usually look at how fast they grow, how steady they are from year to year, and where they come from.What the number can suggestSteady growth suggests customers want more of what it sells, or that it can raise prices. Falling sales can mean lost customers, weaker demand or tougher competition.Devil's advocateSales can grow while profit shrinks, if the company is buying growth with discounts or heavy spending. Growth from buying other companies is not the same as customers buying more.Both sides of the numberFast-growing salesCan be good: Customers want more of what it sells, or it can raise prices. Growing sales give a company room to grow profit too.Can be bad: Growth can be bought with discounts, heavy marketing or buying other companies, and may not be profitable. Very fast growth is also hard to keep up.Slow or falling salesCan be good: A mature, steady business may grow slowly but still make reliable profit and pay dividends. A dip can also be temporary, from a weak economy.Can be bad: It can mean lost customers, a shrinking market or stronger competitors. Costs rarely fall as fast as sales, so profit often drops more.
Revenue growthboth sidesHow much sales rose or fell compared with the year before, as a percentage.
Why it matters: It shows whether more customers are buying, or paying more, over time.
Why people check itPeople usually look at the growth rate and how steady it is, and whether it comes from the existing business or from buying other companies.What the number can suggestSteady growth suggests strong demand; shrinking sales can mean lost customers or a weaker market.Devil's advocateGrowth can come from price rises during inflation, from buying other businesses, or from currency moves, rather than from selling more.Both sides of the numberFast revenue growthCan be good: Customers want more of what it sells, and growth can lead to bigger profits as the business scales up.Can be bad: Very fast growth can be bought with discounts or heavy spending, and is hard to keep up for long.Slow or negative revenue growthCan be good: Mature companies can still earn steady profits and pay generous dividends without growing much.Can be bad: Shrinking sales can mean customers are leaving or the market is getting smaller.
Risk factorsThe section of a report where the company lists the things that could hurt its business or its share price.
Why it matters: Companies must list what could go wrong. Reading them helps you understand what could hurt the business.
Why people check itEvery business faces risks from its market, competitors and the wider world. People usually read the risk section of the annual report to see what management itself says could go wrong.What the number can suggestNew or growing risks deserve closer attention.Devil's advocateCompanies list almost every possible risk for legal reasons, so a long list doesn't mean trouble. Look for what's new or specific to this company.
Risks and outlookWhat the company says could go wrong, and what it says lies ahead.
Why it matters: Every company faces risks; knowing the main ones helps you understand what could change the picture.
Why people check itEvery business faces risks from its market, competitors and the wider world. People usually read the risk section of the annual report to see what management itself says could go wrong.What the number can suggestNew or growing risks deserve closer attention.Devil's advocateCompanies list almost every possible risk for legal reasons, so a long list doesn't mean trouble. Look for what's new or specific to this company.
SECThe US Securities and Exchange Commission, the government agency that oversees stock markets and collects company filings.
Share buybackboth sidesWhen a company buys its own shares from the market. It leaves fewer shares, so each remaining share owns a bigger slice of the company.
Why it matters: Buybacks are another way to reward owners: with fewer shares left, each one owns more of the company.
Why people check itBuying back shares is one way a company returns money to its owners. People usually look at how much it spends and at what prices.What the number can suggestRegular buybacks funded by spare cash suggest management thinks it has more cash than it needs. Each remaining share then owns a slightly bigger part of the company.Devil's advocateBuybacks at high prices can waste money, and buybacks funded by borrowing add risk. They can also make earnings per share grow even when profit doesn't.Both sides of the numberLarge buybacksCan be good: Each remaining share owns a bigger slice of the company, and buybacks suggest management thinks the shares are good value.Can be bad: Buying back shares when they are expensive wastes money, and buybacks funded by borrowing add risk. They can also mainly offset shares handed to staff.Few or no buybacksCan be good: The company may have better uses for its cash, such as growth, paying down debt or keeping a safety cushion.Can be bad: If shares keep being issued to staff without buybacks, existing owners' slices slowly shrink.
Share priceWhat one share of the company costs on the stock market. It moves every trading day as people buy and sell.
Why it matters: On its own the price says little: $10 isn't 'cheaper' than $500. It only means something next to the company's profit or size, which is why ratios like P/E exist.
Why people check itThe price is what the market will pay for one share today. People usually compare it with profit, sales and cash to judge whether expectations look high or low.What the number can suggestA rising price shows investors becoming more optimistic; a falling one, less so.Devil's advocatePrices can move a lot for reasons that have little to do with the business, such as interest rates or general mood. A price on its own doesn't say whether a share is cheap or expensive.
Shareholders' equityTotal assets minus total liabilities, as valued in the company's accounts (also called book value): what the accounts say belongs to the shareholders. It isn't the same as what the stock market says the company is worth.
Why it matters: It's the owners' share on paper. Many other measures, like return on equity, are worked out from it.
Why people check itIt's the value that would belong to the owners if all debts were paid from what the company owns, according to its accounts. People usually use it in ratios like return on equity.What the number can suggestEquity growing over time usually means the company is keeping profits in the business.Devil's advocateIt's based on accounting values, not what the business is worth on the market. Buybacks and dividends reduce it, and some valuable things like brands may not be counted at all.
Total liabilitiesEverything the company owes: loans, bonds, bills to suppliers, taxes due, and other obligations.
Why it matters: Comparing what a company owes with what it owns shows how stretched it is.
Why people check itLiabilities are everything the company owes: debts, bills, and promises like pensions. People usually compare them with assets and cash.What the number can suggestLiabilities growing faster than assets can mean the company is becoming more stretched.Devil's advocateNot all liabilities are equally risky: money customers paid in advance is a liability, but often a sign of a healthy business.
ValuationWorking out what a company is worth and comparing it with its share price.
Why it matters: A great company can still be a poor investment if its shares already cost too much. candor shows the measures but never says what to do.
Why people check itValuation compares the price of the shares with what the business earns or owns. People usually use it to judge what the market already expects.What the number can suggestA high valuation means the market expects a lot; a low one means it expects little.Devil's advocateValuation measures say what the market expects, not what will happen. candor doesn't say whether a price is right.

65 terms, A to Z. Ratios marked “both sides” show when a high or low figure can be good or bad.

10-K (annual report)The detailed yearly report US public companies must file with the SEC. It covers the business, its risks and audited financial statements.
10-Q (quarterly report)The report US public companies file with the SEC for each of the first three quarters of their year. It is shorter than the annual report and not fully audited.
8-K (announcement)A filing companies make with the SEC within days of a major event, such as results, a new chief executive or a big acquisition.
AcquisitionsBuying other companies or businesses.
Why it matters: Buying other companies can be a fast way to grow, but it's expensive and doesn't always work out.
Why people check itBuying other companies is a big use of cash. People usually look at what was paid and whether the purchases add to growth and profit.What the number can suggestSensible purchases can add new products or customers quickly.Devil's advocateMany acquisitions destroy value because the buyer overpays. Growth from purchases can hide slowing growth in the original business.
AssetsEverything the company owns that has value: cash, buildings, equipment, money owed to it, and more.
Why it matters: Comparing what a company owns with what it owes shows how solid its finances are.
Why people check itAssets are everything the company owns or is owed. People usually compare them with what it owes to judge its financial strength.What the number can suggestAssets well above liabilities suggest a solid cushion.Devil's advocateAssets are recorded at accounting values; some (like goodwill from past purchases) may be worth much less in a crisis, while brands built in-house may not be counted at all.
AuditorAn independent accounting firm that checks a company's financial statements every year and says whether they are fairly presented.
Why it matters: An independent check on the accounts. Changing auditors isn't unusual, but it's worth knowing about.
Balance sheetThe part of a company's report that lists what it owns and what it owes on one date.
Why it matters: It shows whether the company is on solid ground or stretched thin.
Why people check itIt's a snapshot of what the company owns and owes on one date. People usually use it to judge financial strength and risk.What the number can suggestPlenty of cash and manageable debt suggest the company can survive a downturn.Devil's advocateIt's a snapshot on one day, and it records many things at past prices, so it can miss what they're worth today.
Business modelWhat a company sells, who it sells to, and how that turns into money.
Why it matters: Everything else on this page only makes sense once you know how the company earns its money.
Why people check itThe business model is how a company makes its money. People usually start here because every number makes more sense once you know what is being sold, to whom and how.What the number can suggestA model with repeat customers, pricing power or high switching costs tends to produce steadier results.Devil's advocateA great model on paper still depends on how well it's run and on competitors not copying it.
Capital allocationHow a company's leaders decide to use its money: investing, buying other companies, paying shareholders or paying off debt.
Why it matters: It shows what management thinks matters most, and whether they treat shareholders' money carefully.
Why people check itIt's how management decides to use the company's money: reinvesting, buying other companies, paying dividends, buying back shares or repaying debt. People usually see it as a test of management's judgment.What the number can suggestConsistent, well-funded choices that match the company's growth opportunities suggest disciplined management.Devil's advocateBig payouts can look owner-friendly but leave too little for future growth; heavy reinvestment only helps if it earns a good return.
Capital spendingboth sidesCash spent on long-lasting things the company will use for years, like factories, stores, data centres and equipment. Often shortened to capex.
Why it matters: It's how a company invests in its future. Heavy spending can mean growth plans, or a business that needs a lot of upkeep.
Why people check itThis is spending on long-lasting things like factories, stores, data centres and machines. People usually look at it to see how much the business must reinvest just to keep going and grow.What the number can suggestHigh spending can mean the company is expanding. Low spending relative to its size can mean it needs little investment to grow, which leaves more spare cash.Devil's advocateHigh spending only pays off if the new capacity earns a good return; it can also be a sign of an expensive business that must keep spending to stand still.Both sides of the numberHigh capital spendingCan be good: The company is investing in its future: new equipment, factories, stores or data centres that can drive growth.Can be bad: It eats into spare cash today, and the investment may not pay off. Some industries must keep spending heavily just to stand still.Low capital spendingCan be good: A business that needs little equipment to grow (software, for example) can turn more of its profit into spare cash.Can be bad: The company may be underinvesting, letting equipment age to make today's cash flow look better, which can hurt it later.
Cash and cash equivalentsboth sidesMoney in the bank plus very safe investments that can be turned into cash almost immediately.
Why it matters: Cash is a safety cushion for bad times and a source of money for new plans.
Why people check itCash is the company's safety cushion. People usually compare it with debts and with what the company spends each year.What the number can suggestPlenty of cash suggests it can survive a bad year, pay bills and take opportunities. Very little cash can leave it dependent on borrowing.Devil's advocateLarge cash piles can also mean the company has no good use for its money. Some cash may be held abroad or needed for day-to-day running, so not all of it is truly spare.Both sides of the numberA large cash pileCan be good: A safety cushion for hard times, and money ready for opportunities like buying another company.Can be bad: Cash sitting idle earns little. Investors may prefer it to be invested or returned to them.Little cashCan be good: A company with steady cash coming in may not need a big pile, and may already have put its cash to good use.Can be bad: If cash runs low and business slows, the company may need to borrow or issue new shares on bad terms.
Cash flow statementThe part of a company's report that shows the actual cash coming in and going out.
Why it matters: Profit can be shaped by accounting rules; cash is harder to disguise.
Why people check itIt shows the actual cash moving in and out. People usually use it to check that profits are real and to see where the money goes.What the number can suggestCash from the business that matches or beats profit suggests good-quality earnings.Devil's advocateCash flow can be lumpy from year to year, for example when a company pays for a big project or collects a large one-off payment.
Cash from operationsboth sidesThe cash that came in from customers minus the cash paid out to suppliers, staff, landlords, lenders (interest) and the tax office during the period. It differs from profit because of timing, such as customers paying later, and because some costs in profit, like wear and tear on equipment, aren't paid in cash.
Why it matters: Profit is an accounting figure; this is real cash. A company that earns profit but brings in little cash can run into trouble.
Why people check itProfit is an accounting figure; this is the cash the business actually brought in. People usually compare the two to check that profits turn into real money.What the number can suggestCash from operations close to or above profit suggests good-quality profits. Much lower cash than profit can mean customers are slow to pay or stock is piling up.Devil's advocateIt can be flattered for a while by paying suppliers later or collecting from customers faster, which can't continue for ever.Both sides of the numberHigh operating cash flow (compared with profit)Can be good: Profits are turning into real cash, often a sign of good-quality earnings and customers who pay on time.Can be bad: It can be boosted for a while by paying suppliers later or cutting stock, which can't go on for ever.Low operating cash flow (compared with profit)Can be good: A fast-growing company may be building up stock or waiting for customers to pay, which can turn into cash later.Can be bad: Profit that doesn't arrive as cash can be a warning that customers are slow to pay, stock is piling up, or the profit relies on estimates.
CompetitionOther companies trying to win the same customers.
Why it matters: Strong competition can force a company to cut prices or spend more, squeezing its profit.
Why people check itCompetitors limit how much a company can charge and how many customers it keeps. People usually look for what protects the company from rivals.What the number can suggestA company that keeps its margins while rivals compete suggests a lasting advantage.Devil's advocateAdvantages can disappear quickly with new technology or new entrants; past strength is no guarantee.
Consumer demandHow much people and businesses are willing and able to buy. It depends a lot on jobs, wages and confidence.
Why it matters: When people feel less secure they spend less, and companies selling things people can put off feel it first.
Why people check itDemand drives sales. People usually watch jobs and spending figures to judge whether customers will buy more or less.What the number can suggestLow unemployment and rising wages usually support spending; rising unemployment usually weakens it.Devil's advocateSome companies sell things people buy in good times and bad (food, medicines), so the economy matters much less for them.
Cost of salesThe direct cost of making or buying the products and services a company sold: materials, factory work and delivery.
Why it matters: The less a company spends to make what it sells, the more is left over for everything else.
Why people check itIt's the direct cost of what the company sold. People usually watch it against sales to see if it can keep its costs under control as prices change.What the number can suggestCost of sales growing slower than sales means each sale keeps more money (a rising gross margin).Devil's advocateChanges in what the company sells (more of a cheap or an expensive product) can move it, without any change in efficiency.
Costs and expensesEverything a company spends to make and sell its products and run the business, plus interest and tax.
Why it matters: Sales minus all of these is the profit. Two companies with the same sales can keep very different amounts.
Why people check itTotal costs set how much of each sale is left as profit. People usually split them into product costs and running costs to see where the money goes.What the number can suggestCosts rising faster than sales squeeze profit; costs rising slower widen it.Devil's advocateSome costs are one-offs (restructuring, legal settlements) that won't repeat, so a single year can look worse than normal.
Current ratioboth sidesCurrent assets (cash, money customers owe it, stock and anything else it expects to turn into cash within a year) divided by current liabilities (bills it must pay within a year). 1.5 means $1.50 coming in for every $1 due.
Why it matters: It shows whether the company can comfortably pay what's due soon. Below 1 isn't automatically a problem, but it leaves less room for surprises.
Why people check itIt compares what the company can turn into cash within a year with the bills due within a year. People usually use it as a quick check on short-term safety.What the number can suggestAbove about 1 suggests it has enough to cover bills due soon. Well below 1 can mean it relies on new money coming in to pay its bills.Devil's advocateStrong businesses like big retailers often run below 1 because customers pay them before they pay suppliers. A very high ratio can mean cash is sitting idle.Both sides of the numberA high current ratioCan be good: Plenty of cash and short-term assets to pay bills due within a year, so a short-term cash squeeze is unlikely.Can be bad: Too much money may be sitting idle in cash or unsold stock, instead of being invested or returned to owners. Piles of unsold stock can be a warning sign too.A low current ratioCan be good: Strong companies that get paid quickly by customers and pay suppliers later (like big retailers) often run below 1 safely.Can be bad: The company may struggle to pay bills due soon, especially if sales slow or lenders become less willing to lend.
Debt-to-equity ratioboth sidesLong-term borrowing divided by shareholders' equity (what the accounts say belongs to the owners). 0.5 means $0.50 borrowed for every $1 of owners' money; higher means it relies more on borrowed money.
Why it matters: Borrowing can help a company grow, but debt must be repaid with interest. The higher this is, the more a bad year can hurt.
Why people check itIt compares borrowed money with the owners' money in the business. People usually use it to judge how much the company relies on debt.What the number can suggestA low figure suggests it is mainly funded by its owners. A high figure means more borrowing, which can increase both returns and risk.Devil's advocateShare buybacks shrink the owners' share on paper, so a company that buys back a lot of shares can show a very high figure without being in trouble. Compare it with similar companies.Both sides of the numberHigh debt-to-equityCan be good: Borrowing can boost returns for owners when the business earns more on the money than the interest it pays. Steady businesses (utilities, for example) can safely carry more debt.Can be bad: More debt means more interest to pay and less room for error. In a downturn or when interest rates rise, heavy borrowing can become dangerous.Low debt-to-equityCan be good: Little borrowing makes the company sturdy in hard times and gives it room to borrow later if a good opportunity comes up.Can be bad: It may be too cautious, missing chances to grow. Note too that buybacks can shrink equity and make this ratio look worse than the company's real health.
Dividendboth sidesCash a company pays out to its shareholders, usually every quarter, from its profits.
Why it matters: Dividends are one way owners get paid back. Some companies pay them regularly; others keep the cash to grow.
Why people check itDividends are cash paid directly to owners. People usually check whether the company can afford them from its spare cash.What the number can suggestA steady or rising dividend paid comfortably from spare cash suggests a mature, reliable business.Devil's advocateA dividend bigger than spare cash may not last. Some excellent companies pay none because they reinvest everything to grow.Both sides of the numberLarge dividendsCan be good: A steady stream of cash to owners, and a sign management is confident about future cash flow.Can be bad: If the dividend is bigger than the company can afford, it may be cut later, and a cut usually hits the share price. Money paid out also can't be reinvested to grow.Small or no dividendCan be good: The company may be reinvesting its cash in growth, which can be worth more to owners over time.Can be bad: In a mature company it can mean cash is tight, or the dividend was recently cut because of trouble.
Dividend yieldboth sidesThe yearly dividend per share divided by the share price. A 3% yield means you get about $3 a year in dividends for every $100 of shares.
Why it matters: It shows how much cash income a share pays you compared with what it costs to buy.
Why people check itPeople usually compare yields across companies and with interest on savings or bonds, to see how much of a share's return comes as cash.What the number can suggestA higher yield means more cash income for the price. A low yield is common for companies that reinvest to grow.Devil's advocateYield goes up when the share price falls, so a very high yield can be a warning that investors expect the dividend to be cut.Both sides of the numberA high dividend yieldCan be good: A healthy business paying out a generous, well-covered dividend gives you strong cash income.Can be bad: The yield may be high only because the share price has fallen on bad news, and the dividend itself may be about to be cut.A low dividend yieldCan be good: The company may be reinvesting its cash in growth, which can reward owners through a rising share price instead.Can be bad: If you want income, there is little of it, and in a mature company it may mean cash is tight.
Earnings per share (EPS)both sidesNet income divided by the average number of shares during the period. "Diluted" EPS also counts shares that could still be created, for example from staff stock awards, so it's usually slightly lower.
Why it matters: It turns the company's profit into a per-share figure, so you can see what each share 'earns'. It's also half of the P/E ratio.
Why people check itEarnings per share splits the profit across every share. People usually track it because it's what share prices are most often compared with, in the P/E ratio.What the number can suggestSteady growth in earnings per share suggests owners are getting more profit for each share they hold.Devil's advocateIt can rise just because the company bought back shares, even if total profit didn't grow. One-off items affect it in the same way they affect profit.Both sides of the numberRising EPSCan be good: The company is earning more for each share, which over time tends to support a higher share price.Can be bad: It can rise because the company bought back shares, not because the business grew, or because of a one-off gain. Check whether total profit and sales also grew.Falling EPSCan be good: It can be a planned dip: heavy spending now on new products, factories or marketing that may pay off later.Can be bad: Profit per share is shrinking, from weaker sales, higher costs or new shares diluting existing owners. If it keeps falling, the share price usually follows.
EBITDAboth sidesEarnings before interest, tax, depreciation and amortisation: profit from the main business before paying interest and tax, and before the yearly wear-and-tear charge on buildings and equipment.
Why it matters: It shows how much the core business earns before decisions about borrowing and tax, so companies with different debts can be compared.
Why people check itPeople usually use it as a rough measure of the cash-like earnings of the main business, and it's the bottom half of the EV/EBITDA ratio.What the number can suggestGrowing EBITDA suggests the core business is earning more each year.Devil's advocateIt ignores the real cost of replacing worn-out equipment and the interest the company must pay, so a business can show strong EBITDA and still be short of cash.Both sides of the numberHigh EBITDA (compared with sales)Can be good: The main business earns a lot before interest and tax, which gives room to pay debts and invest.Can be bad: It can flatter companies that must keep spending heavily on equipment, because that spending isn't subtracted.Low EBITDA (compared with sales)Can be good: Some businesses, like retailers, run on thin earnings but sell very large volumes and turn their stock over quickly.Can be bad: Little is left to cover interest, tax and new equipment, so a small fall in sales can wipe it out.
EV/EBITDAboth sidesThe value of the whole company, including its debt minus its cash (enterprise value), divided by its profit before interest, tax, depreciation and amortisation (EBITDA).
Why it matters: Unlike the P/E, it counts debt, so it lets you compare companies that borrow very different amounts.
Why people check itInvestors and buyers of whole companies use it to compare valuations across companies with different debt and tax situations.What the number can suggestA higher figure means the market pays more for each dollar of operating earnings; a lower one, less.Devil's advocateEBITDA ignores the cost of replacing equipment and the interest the company must pay, so it can flatter companies that spend heavily on equipment or carry lots of debt.Both sides of the numberA high EV/EBITDACan be good: Investors expect strong growth or see the business as especially safe and high quality.Can be bad: The whole company, debt included, is expensive, and there is little margin for disappointment.A low EV/EBITDACan be good: The company may be cheap even after counting its debt, a possible target for a takeover.Can be bad: Earnings may be expected to fall, or heavy spending on equipment may eat most of that EBITDA before any cash reaches owners.
External factorsForces outside a company's control: competitors, laws and governments, new technology, suppliers, world events and nature.
Why it matters: These can change a company's prospects suddenly, whatever its management does.
Why people check itPeople usually read the risks a company lists in its annual report to see which outside forces it is most exposed to.What the number can suggestA company exposed to many serious outside risks deserves a closer look at how it protects itself.Devil's advocateCompanies list nearly every possible risk for legal reasons, so the list alone doesn't show which ones are likely.
Fiscal yearThe 12-month period a company uses for its accounts. It doesn't have to match the calendar year; Apple's ends in late September, for example.
Free cash flowboth sidesOperating cash flow minus capital expenditure: the cash left after the business pays for the buildings and equipment it needs. It's what the company can use to pay dividends, buy back shares, repay debt or save.
Why it matters: It's the money a company can actually choose what to do with: pay shareholders, pay off debt or grow. Many investors watch it more closely than profit.
Why people check itSpare cash is what's left after the company has paid to keep and grow its buildings and equipment. People usually see it as the money truly available for owners, debt repayment or growth.What the number can suggestStrong, steady spare cash suggests the company can fund dividends, buybacks or growth without borrowing. Negative spare cash means it needed other money to cover its spending.Devil's advocateA company can boost spare cash by cutting investment, which may hurt it later. Young, fast-growing companies often have negative spare cash on purpose because they are investing heavily.Both sides of the numberStrong free cash flowCan be good: Real spare cash the company can use to pay dividends, buy back shares, pay off debt or grow, without borrowing.Can be bad: It can be flattered by cutting needed investment, delaying payments to suppliers or one-off items. Check whether it holds up across several years.Weak or negative free cash flowCan be good: A growing company may spend heavily on new factories or stores today that will produce cash later.Can be bad: The business may not be producing enough cash to fund itself, which can lead to more borrowing or new shares that dilute owners.
FundamentalsThe company's own business and finances: its sales, profit, cash, debt and how well it is run.
Why it matters: Over long periods, a company's share price tends to follow how its business performs, so fundamentals are where people start.
Why people check itPeople usually study fundamentals to judge what a business is worth on its own merits, separate from the day-to-day mood of the market.What the number can suggestGrowing sales, healthy margins, strong cash flow and manageable debt suggest a solid business.Devil's advocateStrong fundamentals don't stop a share price falling if investors already expected them, or if the whole market drops.
Gross marginboth sidesGross profit (sales minus the direct cost of making or buying what was sold) as a share of sales. A 40% gross margin means $40 of every $100 of sales is left to pay for everything else.
Why it matters: It shows how much room a company has to pay for everything else. A high gross margin often means a strong brand or something hard to copy.
Why people check itIt shows how much is left from each sale after the direct cost of making or buying the product. People usually use it to judge pricing power and how costly the product is to make.What the number can suggestA high gross margin (software often has 70% or more) suggests the company can charge well above its costs. A low one (shops, airlines) means it must sell a lot to cover its other costs.Devil's advocateDifferent industries have very different normal levels, so compare with similar companies, not across industries. A rising margin can also come from a change in what it sells rather than better pricing.Both sides of the numberA high gross marginCan be good: The company can charge well above what its products cost to make, often a sign of a strong brand, patents or software that is cheap to copy.Can be bad: A high margin attracts competitors, who may cut prices. It also says nothing about the other costs (staff, marketing, research) that can still eat up the profit.A low gross marginCan be good: Some excellent businesses run on thin margins by selling huge volumes cheaply, like warehouse clubs and supermarkets.Can be bad: There is little room for mistakes: a small rise in costs or a price war can wipe out profit. It can also mean the product has no real edge.
Income statementThe part of a company's report that shows what it sold and what it kept as profit over a period.
Why it matters: It answers the most basic question about a business: is it making money?
Why people check itIt's the first of the three main financial statements and shows sales, costs and profit over a period. People usually start here to see whether the business makes money and is growing.What the number can suggestGrowing sales and stable or rising margins suggest a healthy, growing business.Devil's advocateProfit on the income statement includes estimates and one-off items; it should always be checked against the cash flow statement.
InflationPrices rising across the economy, usually measured as how much more a typical basket of goods costs than a year earlier.
Why it matters: It pushes up a company's costs. Companies that can raise their own prices without losing customers cope best.
Why people check itRising prices affect both a company's costs and what it can charge. People usually look at whether it can pass higher costs on to customers.What the number can suggestCompanies with strong brands or essential products often keep their margins when prices rise; others see them squeezed.Devil's advocateInflation can make sales grow on paper while the amount actually sold stays flat.
Interest coverage ratioboth sidesOperating profit divided by the interest the company pays on its debt. A ratio of 5 means profit covers interest five times over.
Why it matters: It shows how comfortably a company can pay the interest on what it has borrowed.
Why people check itLenders and people use it to judge how risky a company's borrowing is.What the number can suggestA high ratio means interest is easy to pay. A ratio near or below 1 means profit barely covers, or doesn't cover, the interest.Devil's advocateOne good or bad year can swing it a lot, and it ignores when the loans themselves must be repaid.Both sides of the numberHigh interest coverageCan be good: Interest payments are easy to meet, so the company is unlikely to get into trouble with lenders.Can be bad: It may be so cautious that it passes up cheap borrowing that could fund growth.Low interest coverageCan be good: It can be temporary, after a big borrowing to buy a business that will soon add profit.Can be bad: A small dip in profit or a rise in rates could leave the company struggling to pay its interest.
Interest ratesThe cost of borrowing money. In the US they are steered by the Federal Reserve and set day to day in markets.
Why it matters: Higher rates make borrowing more expensive for companies and their customers, and tend to pull share prices down.
Why people check itRates set the cost of borrowing for the company and its customers, and affect how investors value future profits. People usually watch them closely.What the number can suggestHigher rates usually hurt companies with lots of debt and those whose profits are far in the future.Devil's advocateBanks and insurers can earn more when rates rise, and companies with lots of cash earn more interest on it.
Long-term debtboth sidesMoney the company has borrowed and must pay back over more than a year, such as bonds and bank loans.
Why it matters: Debt isn't bad on its own, but it has to be repaid with interest whatever happens to sales.
Why people check itDebt has to be repaid with interest whatever happens to the business. People usually check how big it is compared with profit, cash and what the owners have put in.What the number can suggestModest debt that the company can easily cover with its profit is normal and can boost returns. Debt growing faster than profit increases the risk in a downturn.Devil's advocateSome steady businesses (utilities, drink makers) safely carry a lot of debt because their income is reliable. What matters is when it must be repaid and at what interest rate.Both sides of the numberA lot of long-term debtCan be good: Borrowing can fund growth and boost returns to owners when the business earns more than the interest it pays.Can be bad: Interest must be paid in good years and bad, and the loans must eventually be repaid or refinanced, possibly at higher rates.Little long-term debtCan be good: The company is less exposed to rising interest rates and has room to borrow if it needs to.Can be bad: It may be missing out on cheap funding that could have helped it grow faster.
Macroeconomic factorsConditions in the whole economy that affect almost every company: interest rates, inflation, jobs and economic growth.
Why it matters: A good company can still struggle in a recession or when borrowing becomes expensive.
Why people check itPeople usually check how sensitive a company is to the economy, for example whether people keep buying its products in a downturn.What the number can suggestCompanies selling essentials are usually less affected; companies selling things people can put off, or with lots of debt, are usually more affected.Devil's advocateEconomic forecasts are often wrong, and markets tend to move before the economic data does.
Market sentimentThe overall mood of investors: how optimistic or worried they feel about a company or the market.
Why it matters: Mood can move a share price a lot in the short run, even when the business itself hasn't changed.
Why people check itSentiment is how investors feel about a company or the market. People usually watch it because it can move share prices far from what the business is doing.What the number can suggestVery optimistic sentiment can push prices and P/E ratios up; very negative sentiment can push them down.Devil's advocateSentiment can change quickly and often reverses; a share falling on bad mood doesn't mean the business got worse.
Market value (market cap)both sidesThe share price multiplied by the number of shares: what the whole company is worth on the stock market at that moment.
Why it matters: It's how much the whole company is worth according to the stock market, so you can compare its size with other companies.
Why people check itMarket value is the price of the whole company at today's share price. People usually use it to compare company sizes and in valuation ratios.What the number can suggestA larger figure means a bigger company in the market's eyes. Big changes usually reflect the share price moving.Devil's advocateIt reflects what investors are willing to pay today, which can swing with mood and news, not just with how the business is doing. It ignores the company's debts.Both sides of the numberA large market capCan be good: Big companies are often more established and stable, with more resources to survive hard times.Can be bad: Growing a very large company quickly is hard, so big share price gains may be harder to come by.A small market capCan be good: Smaller companies have more room to grow, so their shares can rise faster when things go well.Can be bad: They are often riskier: less established, more affected by a single setback, and their share prices can swing more.
Net debtboth sidesLong-term borrowing minus the cash the company holds. A negative figure means it holds more cash than it owes long-term (net cash).
Why it matters: Cash in the bank could be used to pay back debt, so net debt shows the borrowing that cash wouldn't cover.
Why people check itPeople usually compare net debt with profit and cash flow to see how many years it would take to pay off what the company owes.What the number can suggestLow or negative net debt suggests a strong cushion; high net debt means the company depends more on lenders.Devil's advocatecandor uses long-term debt only, so short-term borrowing and leases are left out; and not all cash is free to use (some may be needed day to day or held abroad).Both sides of the numberHigh net debtCan be good: Stable businesses with reliable income can borrow cheaply to grow or pay owners, which can lift returns.Can be bad: Interest must be paid in good years and bad, and refinancing can get expensive when interest rates rise.Low or negative net debtCan be good: Plenty of cash and little borrowing gives safety in a downturn and freedom to invest.Can be bad: Large idle cash can mean management has no good use for it, and it earns little.
Net incomeThe profit left over a period (such as a year or a quarter) after paying every cost, including wages, interest and taxes. Often called the bottom line.
Why it matters: It's the money that's actually left for the owners after every bill is paid. A company can sell a lot and still make little or none.
Why people check itProfit is what is left for the owners after every cost, so it's the basis for the earnings per share and P/E ratio that investors quote.What the number can suggestRising profit suggests the business is growing, getting more efficient, or both. A loss means costs were bigger than sales over the period.Devil's advocateProfit includes one-off items (a sale of a building, a write-down, a tax change), so one year can look much better or worse than the business really is. Compare it with the cash the business actually brought in.
Net lossWhen a company's costs, including interest and taxes, add up to more than it earned during the period.
Why it matters: A loss isn't always bad (young companies often lose money while growing), but a company can't lose money forever.
Why people check itA loss shows the company spent more than it earned. People usually ask whether that is temporary, planned (a young company investing to grow) or a sign of trouble.What the number can suggestA shrinking loss can mean the company is moving towards profit. A growing loss for a mature company is usually a warning sign.Devil's advocateSome strong companies lose money for years on purpose while they grow. Others report a loss only because of a one-off accounting charge, while their cash flow is healthy.
Operating expensesThe cost of running the business beyond making the products: staff, research, marketing, offices.
Why it matters: Keeping these under control lets more of each sale turn into profit.
Why people check itThese are the costs of running the business: staff, research, marketing and offices. People usually check whether they grow slower or faster than sales.What the number can suggestExpenses growing slower than sales suggest the business gets more efficient as it grows.Devil's advocateCutting research or marketing lowers expenses now but may hurt future sales.
Operating incomeSales minus the cost of what was sold and the cost of running the business (staff, rent, marketing, research). It's the profit from the main business, before interest and tax.
Why it matters: It shows whether the core business makes money, separate from one-off gains or interest.
Why people check itOperating profit shows what the main business earns before interest and tax. People usually use it to compare companies that borrow different amounts or pay different tax rates.What the number can suggestGrowing operating profit suggests the core business is doing better, not just the financing or tax side.Devil's advocateCompanies sometimes leave costs out of 'adjusted' operating profit figures in their announcements. The SEC numbers used here follow the standard rules, which can differ from the headline figures in press releases.
Operating marginboth sidesOperating income as a share of sales: of each $100 of sales, what's left after paying for what was sold and for running the business, before interest and tax.
Why it matters: It shows how profitable the main business is on its own, before borrowing costs and taxes.
Why people check itIt shows how much of each sale is left after running the business, before interest and tax. People usually treat it as a measure of how well the business itself is run.What the number can suggestA steady or rising operating margin suggests costs are under control as the company grows. A falling one can mean costs are growing faster than sales.Devil's advocateHeavy spending on research or marketing lowers the margin today but may build the business for later. A cut in such spending can lift the margin while weakening the future.Both sides of the numberA high operating marginCan be good: The core business earns well from each sale, before interest and tax, a sign of an efficient operation or pricing power.Can be bad: It may be high because the company is cutting spending on research or upkeep that it will need later.A low operating marginCan be good: It can be low because the company is spending now to grow, which may pay off in later years.Can be bad: The everyday business barely covers its own costs, leaving little cushion if sales fall.
P/E ratio (price-to-earnings)both sidesThe share price divided by earnings per share. It shows how many dollars investors are paying for each dollar of yearly profit. It describes the price; it doesn't say whether the price is right.
Why it matters: It helps you judge whether a share looks expensive or cheap compared with the profit behind it. A high P/E usually means people expect profits to grow.
Why people check itIt shows how many dollars investors are paying for each dollar of yearly profit. People usually use it to compare how highly the market values different companies.What the number can suggestA high P/E suggests investors expect strong growth. A low P/E suggests lower expectations, or doubts about the company.Devil's advocateA low P/E can be a 'value trap' if profits are about to fall, and a high P/E can be justified if profits really do grow fast. It's meaningless when profit is very small or negative, and it says nothing on its own about whether a share is a good buy.Both sides of the numberA high P/ECan be good: Investors expect profit to grow fast, often for good reason: a strong brand, a growing market or a business that is hard to copy. If that growth arrives, today's high price can turn out to be fair.Can be bad: The share is priced for perfection. If growth slows even a little, the P/E can fall sharply and the share price with it. It can also be high simply because profit dipped this year.A low P/ECan be good: The share may be cheap for what it earns, a possible bargain the market has overlooked, especially if profit is steady.Can be bad: It may be cheap for a reason: profit could be about to fall, the industry could be shrinking, or the company could have problems (a 'value trap'). It can also look low because of a one-off boost to this year's profit.
Payout ratioboth sidesThe share of a company's profit that it pays out as dividends. A 40% payout ratio means $40 of every $100 of profit goes to owners as dividends.
Why it matters: It shows whether a dividend is comfortably affordable or stretched.
Why people check itPeople usually use it to judge how safe a dividend is and how much profit is kept to grow the business.What the number can suggestA moderate payout leaves room to keep paying in a bad year. A payout above 100% means the company is paying out more than it earns.Devil's advocateProfit can be distorted by one-off items, so people also compare dividends with free cash flow.Both sides of the numberA high payout ratioCan be good: Mature, steady companies with few growth projects can afford to hand most of their profit to owners.Can be bad: There is little cushion: if profit falls, the dividend may have to be cut. Above 100% is usually not sustainable.A low payout ratioCan be good: The dividend is well covered and has room to grow, and profit kept back can fund growth.Can be bad: Owners get little cash now, and the kept profit only helps if management invests it well.
PEG ratioboth sidesThe P/E ratio divided by the expected yearly growth in profit. It adjusts the P/E for how fast profit is expected to grow.
Why it matters: A high P/E can be fair for a fast grower. The PEG puts price and growth side by side.
Why people check itPeople usually use it to compare companies growing at different speeds on a fairer footing.What the number can suggestAround 1 is often treated as fair, below 1 as cheap for the growth, and well above 1 as expensive.Devil's advocateIt depends on growth forecasts, which are often wrong, and it is meaningless when profit is falling or negative.Both sides of the numberA high PEGCan be good: Investors may be paying up for quality and reliability that the growth figure alone doesn't capture.Can be bad: You are paying a lot for each bit of expected growth, and if growth disappoints, the share has far to fall.A low PEGCan be good: You may be getting strong growth at a fair price.Can be bad: The growth forecast may be too optimistic, so the share is only cheap if the forecast comes true.
Price-to-book ratio (P/B)both sidesThe share price compared with shareholders' equity per share (the company's 'book value'). It shows how much investors pay for each dollar the accounts say owners own.
Why it matters: It helps judge price against what the company owns, especially for banks and companies with lots of physical assets.
Why people check itPeople usually use it most for banks, insurers and asset-heavy companies, where book value is a fair guide to what the business is worth.What the number can suggestAbove 1 means investors pay more than book value, expecting good returns. Below 1 means the market values the company below its accounts.Devil's advocateBook value leaves out brands, patents and know-how, so it misleads for software and consumer brands. Buybacks also shrink book value and push P/B up.Both sides of the numberA high P/BCan be good: The company earns strong returns on what it owns, often thanks to brands or ideas the accounts don't count.Can be bad: Investors may be paying far more than the assets are worth, leaving the share exposed if returns slip.A low P/BCan be good: You may be buying assets for less than their stated value, a classic bargain sign.Can be bad: The assets may be worth less than the accounts say (old stock, bad loans), or the business may earn poor returns on them.
Price-to-sales ratio (P/S)both sidesThe company's market value divided by its yearly sales. It shows how many dollars investors pay for each dollar of sales.
Why it matters: It works even when a company makes no profit, so it is often used for young, fast-growing companies.
Why people check itPeople usually use it to value companies with little or no profit and to compare companies in the same industry.What the number can suggestA higher P/S means investors pay more for each dollar of sales, usually expecting strong growth or high margins.Devil's advocateSales aren't profit: a company with a low P/S may still never make money, and margins differ hugely between industries.Both sides of the numberA high P/SCan be good: Investors expect sales to grow fast and to turn into high profit margins later.Can be bad: If growth slows or profit never comes, the share price has a lot of expectation to lose.A low P/SCan be good: The company may be cheap for the business it does, especially if margins could improve.Can be bad: Low-margin businesses always trade on low P/S ratios, so it may not be cheap at all.
Profit marginboth sidesNet income as a share of sales: what's left after every cost, including interest and tax. A 10% net profit margin means $10 of final profit for every $100 of sales.
Why it matters: It lets you compare companies of any size: $27 of profit per $100 of sales means the same thing for a small company and a giant.
Why people check itIt shows how much of each sale ends up as profit after all costs. People usually compare it over time and against competitors to see how efficient the company is.What the number can suggestA higher margin than rivals can point to a stronger brand, better pricing or lower costs. A falling margin can mean rising costs it can't pass on, or price cuts to keep customers.Devil's advocateOne-off gains or charges can push the margin up or down for a single year. A low margin isn't always bad: some businesses deliberately keep prices low to win volume.Both sides of the numberA high profit marginCan be good: The company keeps a lot of each sale as profit, which suggests pricing power and good cost control.Can be bad: It can be boosted by one-off gains or a low tax rate that may not last, and high margins invite competitors.A low profit marginCan be good: Thin margins are normal in some industries, and a company that is investing heavily for growth may have low margins on purpose.Can be bad: Little is left after costs, so a small rise in costs or fall in prices can push the company into a loss.
QuarterA three-month period. US public companies report their results every quarter.
Quick ratioboth sidesLike the current ratio, but counting only cash, investments and money owed by customers, leaving out stock waiting to be sold. It compares these with bills due within a year.
Why it matters: It is a stricter test of whether a company could pay its near-term bills without relying on selling its stock.
Why people check itPeople usually use it when stock might be hard to sell quickly, to check short-term safety.What the number can suggestAbove 1 means quick assets cover bills due within a year. Below 1 means the company relies on selling stock or new cash coming in.Devil's advocateMany healthy retailers run below 1 because they sell stock fast and pay suppliers later.Both sides of the numberA high quick ratioCan be good: The company could pay its near-term bills quickly, even if sales stalled.Can be bad: Too much money may be sitting idle rather than being used to grow the business or rewarded to owners.A low quick ratioCan be good: Businesses that turn stock into cash quickly can run safely with a low ratio.Can be bad: If sales slow, the company may struggle to pay what it owes in the coming months.
RegulationLaws and rules set by governments, including taxes, tariffs and safety or competition rules.
Why it matters: New rules can add costs or limit what a company may sell.
Why people check itLaws, taxes and court cases can change what a company is allowed to do and what it costs. People usually look at what is pending and how much it could cost.What the number can suggestHeavy or growing regulation can raise costs or limit growth.Devil's advocateRules can also protect established companies by making it harder for newcomers to compete.
Restatement noticeA filing where a company says financial statements it published earlier contained errors and should no longer be relied on.
Why it matters: It means earlier numbers were wrong. It's one of the more serious warning signs a company can report.
Why people check itPeople usually check for restatements and auditor changes because the whole analysis rests on the accounts being reliable.What the number can suggestNo restatements and a steady auditor suggest the published figures can be relied on. A restatement means earlier figures were wrong.Devil's advocateSome restatements are small technical corrections; others reveal serious problems. Read what was corrected before drawing conclusions.
Return on assets (ROA)both sidesProfit divided by everything the company owns (its total assets). It shows how much profit each dollar of assets produces.
Why it matters: It shows how well a company uses what it owns, whether that was paid for by owners or by lenders.
Why people check itPeople usually use it alongside ROE: because it isn't boosted by borrowing, it is a cleaner view of how efficient the business is.What the number can suggestA higher ROA means the company squeezes more profit from its assets. Asset-heavy industries naturally have lower ROAs.Devil's advocateCompare ROA only within the same industry: a bank and a software company will never look alike.Both sides of the numberA high ROACan be good: The company gets a lot out of what it owns, a sign of an efficient or asset-light business.Can be bad: It may be high because assets are old and fully written down, not because the business is great, and may fall once they are replaced.A low ROACan be good: It is normal in asset-heavy industries like banks, utilities and railways.Can be bad: The company may own a lot that isn't earning much, such as idle factories or unsold stock.
Return on equity (ROE)both sidesNet income for a year divided by the average shareholders' equity over that year. A 20% ROE means $20 of profit for every $100 of owners' money in the business.
Why it matters: It shows how well a company turns its owners' money into profit. Higher is generally better, though heavy borrowing can push it up too.
Why people check itIt shows how much profit the company makes for each dollar the owners have in the business. People usually use it to judge how well management uses that money.What the number can suggestA consistently high figure (often above 15%) can point to a strong business. A low one suggests the owners' money isn't earning much.Devil's advocateLots of debt or large buybacks can make it look high because they shrink the owners' share. Check it together with how much the company has borrowed.Both sides of the numberA high ROECan be good: The company turns the owners' money into a lot of profit, often a sign of a high-quality business.Can be bad: ROE can be pushed up by heavy borrowing or by buybacks that shrink equity, not by a better business. Check debt-to-equity alongside it.A low ROECan be good: It may be temporary, during a period of heavy investment, or normal for a capital-heavy industry like banks or utilities.Can be bad: The business may not be earning enough on the money owners have put in, and that money might do better elsewhere.
Revenueboth sidesAll the money a company takes in from selling its products and services, before paying any costs. Also called sales.
Why it matters: It's the starting point for everything else: a company can't make a profit without selling something first. Growing sales usually means more customers or higher prices.
Why people check itSales are the top line that every other figure depends on. People usually look at how fast they grow, how steady they are from year to year, and where they come from.What the number can suggestSteady growth suggests customers want more of what it sells, or that it can raise prices. Falling sales can mean lost customers, weaker demand or tougher competition.Devil's advocateSales can grow while profit shrinks, if the company is buying growth with discounts or heavy spending. Growth from buying other companies is not the same as customers buying more.Both sides of the numberFast-growing salesCan be good: Customers want more of what it sells, or it can raise prices. Growing sales give a company room to grow profit too.Can be bad: Growth can be bought with discounts, heavy marketing or buying other companies, and may not be profitable. Very fast growth is also hard to keep up.Slow or falling salesCan be good: A mature, steady business may grow slowly but still make reliable profit and pay dividends. A dip can also be temporary, from a weak economy.Can be bad: It can mean lost customers, a shrinking market or stronger competitors. Costs rarely fall as fast as sales, so profit often drops more.
Revenue growthboth sidesHow much sales rose or fell compared with the year before, as a percentage.
Why it matters: It shows whether more customers are buying, or paying more, over time.
Why people check itPeople usually look at the growth rate and how steady it is, and whether it comes from the existing business or from buying other companies.What the number can suggestSteady growth suggests strong demand; shrinking sales can mean lost customers or a weaker market.Devil's advocateGrowth can come from price rises during inflation, from buying other businesses, or from currency moves, rather than from selling more.Both sides of the numberFast revenue growthCan be good: Customers want more of what it sells, and growth can lead to bigger profits as the business scales up.Can be bad: Very fast growth can be bought with discounts or heavy spending, and is hard to keep up for long.Slow or negative revenue growthCan be good: Mature companies can still earn steady profits and pay generous dividends without growing much.Can be bad: Shrinking sales can mean customers are leaving or the market is getting smaller.
Risk factorsThe section of a report where the company lists the things that could hurt its business or its share price.
Why it matters: Companies must list what could go wrong. Reading them helps you understand what could hurt the business.
Why people check itEvery business faces risks from its market, competitors and the wider world. People usually read the risk section of the annual report to see what management itself says could go wrong.What the number can suggestNew or growing risks deserve closer attention.Devil's advocateCompanies list almost every possible risk for legal reasons, so a long list doesn't mean trouble. Look for what's new or specific to this company.
Risks and outlookWhat the company says could go wrong, and what it says lies ahead.
Why it matters: Every company faces risks; knowing the main ones helps you understand what could change the picture.
Why people check itEvery business faces risks from its market, competitors and the wider world. People usually read the risk section of the annual report to see what management itself says could go wrong.What the number can suggestNew or growing risks deserve closer attention.Devil's advocateCompanies list almost every possible risk for legal reasons, so a long list doesn't mean trouble. Look for what's new or specific to this company.
SECThe US Securities and Exchange Commission, the government agency that oversees stock markets and collects company filings.
Share buybackboth sidesWhen a company buys its own shares from the market. It leaves fewer shares, so each remaining share owns a bigger slice of the company.
Why it matters: Buybacks are another way to reward owners: with fewer shares left, each one owns more of the company.
Why people check itBuying back shares is one way a company returns money to its owners. People usually look at how much it spends and at what prices.What the number can suggestRegular buybacks funded by spare cash suggest management thinks it has more cash than it needs. Each remaining share then owns a slightly bigger part of the company.Devil's advocateBuybacks at high prices can waste money, and buybacks funded by borrowing add risk. They can also make earnings per share grow even when profit doesn't.Both sides of the numberLarge buybacksCan be good: Each remaining share owns a bigger slice of the company, and buybacks suggest management thinks the shares are good value.Can be bad: Buying back shares when they are expensive wastes money, and buybacks funded by borrowing add risk. They can also mainly offset shares handed to staff.Few or no buybacksCan be good: The company may have better uses for its cash, such as growth, paying down debt or keeping a safety cushion.Can be bad: If shares keep being issued to staff without buybacks, existing owners' slices slowly shrink.
Share priceWhat one share of the company costs on the stock market. It moves every trading day as people buy and sell.
Why it matters: On its own the price says little: $10 isn't 'cheaper' than $500. It only means something next to the company's profit or size, which is why ratios like P/E exist.
Why people check itThe price is what the market will pay for one share today. People usually compare it with profit, sales and cash to judge whether expectations look high or low.What the number can suggestA rising price shows investors becoming more optimistic; a falling one, less so.Devil's advocatePrices can move a lot for reasons that have little to do with the business, such as interest rates or general mood. A price on its own doesn't say whether a share is cheap or expensive.
Shareholders' equityTotal assets minus total liabilities, as valued in the company's accounts (also called book value): what the accounts say belongs to the shareholders. It isn't the same as what the stock market says the company is worth.
Why it matters: It's the owners' share on paper. Many other measures, like return on equity, are worked out from it.
Why people check itIt's the value that would belong to the owners if all debts were paid from what the company owns, according to its accounts. People usually use it in ratios like return on equity.What the number can suggestEquity growing over time usually means the company is keeping profits in the business.Devil's advocateIt's based on accounting values, not what the business is worth on the market. Buybacks and dividends reduce it, and some valuable things like brands may not be counted at all.
Total liabilitiesEverything the company owes: loans, bonds, bills to suppliers, taxes due, and other obligations.
Why it matters: Comparing what a company owes with what it owns shows how stretched it is.
Why people check itLiabilities are everything the company owes: debts, bills, and promises like pensions. People usually compare them with assets and cash.What the number can suggestLiabilities growing faster than assets can mean the company is becoming more stretched.Devil's advocateNot all liabilities are equally risky: money customers paid in advance is a liability, but often a sign of a healthy business.
ValuationWorking out what a company is worth and comparing it with its share price.
Why it matters: A great company can still be a poor investment if its shares already cost too much. candor shows the measures but never says what to do.
Why people check itValuation compares the price of the shares with what the business earns or owns. People usually use it to judge what the market already expects.What the number can suggestA high valuation means the market expects a lot; a low one means it expects little.Devil's advocateValuation measures say what the market expects, not what will happen. candor doesn't say whether a price is right.