Answered this question on Quora Subtract Cash from the market value before dividing by earnings. There is a very good reason why this is done. Let’s say you are looking at a company A that is trading at $15/share with earnings of $1/share in the last 12 months. The P/E ratio is 15 Also consider… [Read More]
Definitions of Investment and Stock Market Terms
Please refer to the basic stock market terms here.
The definitions here expand and augment the list referenced above. These definitions are of interest to intermediate and advanced readers, specially for practicing investors in the stock market. We go into sufficient detail necessary to make the concept clear, and give examples where necessary.
What is EBIT? How to Calculate EBIT? Earnings before interest and tax (EBIT) is the net income of a company before the tax expense and interest expense are taken off. EBIT is equivalent to Operating Income for companies that do not have non-operating income. In such cases, EBIT = Revenue – Operating Expense (OPEX) EBIT… [Read More]
Enterprise value can be thought of as a private market valuation for the company. When a buyer purchases a company in the private market, he has to pay for the company equity (including common stock, preferred shares, minority interest, etc), he has to pay off all the debt, but in return the buyer gets the… [Read More]
Quick ratio measures the liquidity of the company. It is similar to current ratio but a bit more restrictive in what it considers to be liquid. Inventory is part of the current asset used for current ratio. However, it is explicitly excluded from the calculation of quick ratio. Quick Ratio, also called Acid Test Ratio… [Read More]
What is Inventory Turnover? Inventory turnover is used to indicate how many times a company sells its complete inventory in any given period of time. This measures the briskness of the business. Inventory Turnover Formula Inventory turnover = Cost of Goods Sold / Average Inventory Where, Average Inventory = (Beginning Inventory + Ending Inventory) /… [Read More]
Enterprise Value/EBIT or EV/EBIT is a similar measure as P/E ratio. Instead of the Market Value, we use the Enterprise Value and instead of the Earnings in the denominator, we use EBIT. EV/EBIT = Enterprise Value (EV) / Earnings Before Interest and Tax (EBIT) (obviously) You may want to use EV/EBIT if you wish a… [Read More]
The investment world is filled with trading opportunities outside of your traditional stocks and bonds. You may not have heard about them as much, but each one offers their own set of benefits and risks. Take, for example, a master limited partnership. A master limited partnership (MLP) is a publicly traded partnership that shares elements… [Read More]
There are a lot of different methods for valuing stocks and determining a fair price for their shares. One of the oldest methods is the dividend discount model, commonly abbreviated to DDM. It’s a more theoretical model in a lot of ways, but can be helpful once you learn how to use it. Let’s dive… [Read More]
With a constantly changing market, assessing the potential risks and rewards of and investment can be tricky. As you build your portfolio, you may be in search of the ideal investment that helps bring in a maximized return while minimizing risks. This type of investment is almost impossible find, but that hasn’t stopped people from… [Read More]
What is CAPM & Why it Matters CAPM stands for Capital Asset Pricing Model. It is used to calculate the predicted rate of return of any risky asset. It compares the relationship between systematic risk and expected return. Typically, it’s used on stocks. However, CAPM can also be used throughout financial decision making to price… [Read More]