Flashcards in Glossary of Financial Terms Deck (114)
A concept used when determining whether a business
has Meaning (one of the Four Ms) to you as a
Rule #1 investor. The rule states that you should not
“Own a business for 10 seconds if you are not willing
to own it for 10 years.”
A forecasted earnings growth rate that is derived
from the forecasts of all the professional analysts
following a particular company
Resources controlled by a company from which
future economic benefits are expected to be generated.
In a business, an asset is something the
business owns that has a dollar value. (An asset in
general is anything of value that can be traded.) An
intangible asset is an asset that has a dollar value
but may not be worth anything unless the business
is successful. Typically this is an asset that was
acquired through buying another business. The
price paid in excess of that business’s net worth is
often called “goodwill” and is treated as an asset
for GAAP purposes
Big Audacious Goal -- Coined by author Jim Collins
in the book Good to Great, Rule #1 investors seek
businesses led by CEOs driven by BAGs. These goals
are bigger and more meaningful than mere mission
statements in that BAGs are about passion and
relentless drive to change the world in some small
or big way.
The financial statement that presents a company’s
current financial position by disclosing the assets,
liabilities and equity claims as of a particular point
Net earnings that are available to common shareholders.
This is calculated as net income minus preferred
dividends, divided by the weighted average
number of common shares outstanding.
An investor who acts on the belief that a security
or the market is falling or is expected to fall.
A standardized measure of risk.
Big Five Numbers
The five financial calculations help to confirm the
existence of a Moat (see definition) in a business,
which translates to the business being protected
from competition and thereby having a predictable
future. Rule #1 investors only invest in businesses
if all five of the Big Five numbers are equal to
or greater than 10 percent per year for the last
The Big Five numbers are:
1. Return on Investment Capital (ROIC)
2. Sales growth rate
3. Earnings per Share (EPS) growth rate
4. Equity, or Book Value per Share (BVPS),
5. Free Cash Flow (FCF or Cash) growth rate
A debt investment, as in your loaning money to the
U.S. government, which borrows from you for a
defined period of time at a specified interest rate.
The government issues you a certificate, or bond,
that states the interest rate (coupon rate) that will be
paid and when the loaned funds are to be returned
(maturity date). These are often called T-bonds or
T-bills, short for treasury bonds or bills.
The net asset value of a company, calculated by total
assets minus intangible assets (patents, goodwill)
and liabilities. It’s what the business is worth if you
shut it down.
Book Value Equity Per Share
The amount of book value of common equity per
share of common stock. This is calculated as book
value of shareholders’ equity divided by the number
of common shares outstanding.
An investor who thinks the market or a specific security
or industry will rise. A bull market is an extended
period in which the market consistently rises.
A contract that gives the holder the right to buy an
underlying asset from another party at a fixed price
over a specified period of time
Capital Gains Tax
A tax on the increase in the value of an asset; the
difference in what you paid to purchase that asset
and what you sell it for. (The gain is not realized until
the asset is sold.) A capital gain may be short-term
(one year or less) or long-term (more than one year).
Long-term capital gains are usually taxed at a lower
rate than regular income. So, if you sell stocks six
months after you purchased them and take profits,
you’ll be taxed at a higher rate than if you sell them
one year and one day after you originally bought
them (assuming you can still take profits).
A bulk good that’s traded on an exchange or in
the cash market. Examples include grain, oats,
coffee, fruit, gold, oil, beef, silver, and natural gas.
A “commodity business,” on the other hand, is what
we call any company that produces a product that
anyone else can similarly produce, thus eliminating
a Moat. If you own a strawberry patch, for example,
chances are a neighboring strawberry patch can
easily compete with you. A strawberry from your
patch is not going to be all that different from a
strawberry from your neighbor. It’s very difficult
and expensive to create a Moat and protect it with
a commodity business.
Compounded annual growth rate (CAGR)
The year-over-year growth rate of an investment
over a specified period of time. It’s an imaginary
number that describes the rate at which an investment
would have grown if it grew at a steady rate.
A measure of how constant a company’s growth has
been. Companies with high consistency scores are
ones that have expanded their operations and value
without demonstrating a significant amount
of variability in their growth rates.
An option strategy where the holder of an asset
sells a call option on a previously purchased stock.
The two potential scenarios at option expiration are
to create cash flow equal to the option premium
received or to effectively sell the stock at a price
equal to the stated strike price plus the premium
received. This is an alternative way to sell stocks
especially when the stock is not currently trading
in the red zone.
A limited risk option strategy that is implemented by
selling one naked option, which incurs an obligation
to perform and offsetting that obligation by buying
a second option at a different strike price that gives
you the right to make someone else perform.
Short-term obligations that are expected to be
settled in the near-term.
Liquidity ratio calculated as current assets divided by
Solvency ratio calculated as total debt divided by
total debt plus total shareholders’ equity.
The amount of years it would take a company to pay
off its debt using its current annual earnings.
Debt Score (0-100)
Companies with high scores are ones that have very
little debt or that can pay off their current debt load
using their earnings in a relatively short period of
time. Scores of 100 indicate no current debt load,
while lower scores indicate increasingly higher levels
of debt in relation to earnings.
The systematic allocation of costs of long-lived
assets to the period during which the assets are
expected to generate economic benefits.
The EPS (Earnings Per Share) that would
result if all dilutive securities were converted
into common shares
A distribution of cash, stock, or property by a
company, based on its earnings, to its shareholders.
Dividends are usually quoted per share. They are
typically the “thank-you” notes for owning stocks in
a stable company (which usually doesn’t have stock
prices that move rapidly)
Dividends per share
The dollar amount of cash dividends paid during
a period per share of common stock.