Financial Glossary

The total market value of a company's outstanding shares. Calculated by multiplying the current stock price by the total number of shares outstanding. Market cap is the most common way to measure a company's size and is used to classify stocks as large-cap (over $10B), mid-cap ($2B-$10B), or small-cap (under $2B).

Formula: Market Cap = Share Price x Shares Outstanding

How to use it: A higher market cap generally indicates a larger, more established company. However, market cap alone doesn't tell you whether a stock is cheap or expensive — that requires valuation ratios like P/E.

The ratio of a company's stock price to its earnings per share (EPS). It tells you how much investors are willing to pay for each dollar of earnings. The trailing P/E uses the last 12 months of actual earnings, while the forward P/E uses analyst estimates of future earnings.

Formula: P/E = Stock Price / Earnings Per Share

How to use it: A lower P/E may suggest a stock is undervalued relative to its earnings, but could also reflect low growth expectations or declining business quality. Compare P/E ratios within the same industry for the most meaningful analysis. The S&P 500 historically averages a P/E of 15-20.

A variation of the P/E ratio that uses projected earnings for the next 12 months instead of trailing earnings. Forward P/E reflects market expectations about a company's future profitability.

Formula: Forward P/E = Stock Price / Estimated Future EPS

How to use it: If the forward P/E is lower than the trailing P/E, analysts expect earnings to grow. A significantly higher forward P/E than trailing P/E could signal expected earnings decline. Most useful when compared to the trailing P/E to gauge growth expectations.

Compares a company's stock price to its book value per share. Book value represents the net asset value of a company — total assets minus total liabilities. The P/B ratio is especially useful for evaluating asset-heavy industries like banking, insurance, and real estate.

Formula: P/B = Stock Price / Book Value Per Share

How to use it: A P/B below 1 means the stock trades below its net asset value, which could indicate undervaluation or serious problems with the business. Asset-light companies like tech firms typically have high P/B ratios because their value comes from intellectual property, not physical assets.

The ratio of a company's market capitalization to its total revenue. Unlike P/E, the P/S ratio can be used to value companies that are not yet profitable, making it popular for evaluating high-growth technology companies.

Formula: P/S = Market Cap / Total Revenue

How to use it: Lower P/S ratios generally suggest better value. A P/S below 1 means you're paying less than $1 for each dollar of revenue. Most useful for comparing companies within the same industry, since profit margins vary widely across sectors.

The PEG ratio adjusts the P/E ratio by the company's earnings growth rate. It was popularized by Peter Lynch as a way to find stocks that are reasonably priced relative to their growth.

Formula: PEG = P/E Ratio / Annual EPS Growth Rate

How to use it: A PEG of 1 suggests the stock is fairly valued relative to its growth. Below 1 may indicate undervaluation; above 1 may suggest overvaluation. The PEG ratio is most useful for growth companies and less meaningful for mature, slow-growth businesses.

Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation, and Amortization. This ratio is used to value companies independent of their capital structure (debt vs. equity) and tax situation, making it useful for comparing companies across different countries and industries.

Formula: EV/EBITDA = Enterprise Value / EBITDA

How to use it: Lower ratios generally indicate better value. The average varies significantly by industry — capital-intensive industries like utilities typically have lower EV/EBITDA than technology companies. It's often considered more reliable than P/E for companies with significant debt.

A measure of a company's total value that accounts for both equity and debt. Enterprise value represents the theoretical takeover price of a company — what you'd need to pay to acquire the entire business, including paying off its debts and receiving its cash.

Formula: EV = Market Cap + Total Debt - Cash and Cash Equivalents

How to use it: Enterprise value is more comprehensive than market cap because it includes debt obligations. Two companies with the same market cap can have very different enterprise values if one carries significantly more debt. EV is used as the numerator in ratios like EV/EBITDA and EV/Revenue.

The net asset value of a company as recorded on its balance sheet. Book value represents what shareholders would theoretically receive if the company liquidated all its assets and paid off all its debts. Book value per share divides this by the number of shares outstanding.

Formula: Book Value = Total Assets - Total Liabilities

How to use it: Book value is most meaningful for asset-heavy companies like banks, manufacturers, and real estate firms. For technology companies, book value often understates true value because intellectual property and brand value aren't fully captured on the balance sheet. Comparing stock price to book value gives you the P/B ratio.

The annual dividend payment expressed as a percentage of the current stock price. Dividend yield shows how much cash income you receive for each dollar invested in a stock. It's one of the primary metrics for income-focused investors.

Formula: Dividend Yield = (Annual Dividend Per Share / Stock Price) x 100

How to use it: Yields between 2-6% are typically considered healthy for established companies. Extremely high yields (above 8-10%) often signal that the market expects a dividend cut or that the company is in financial trouble. Always compare yields within the same sector — REITs and utilities naturally have higher yields than tech stocks.

Developed by Nobel laureate William Sharpe, this is the most widely used measure of risk-adjusted return. It calculates how much excess return (above the risk-free rate) an investment generates per unit of total volatility. The Sharpe ratio treats all volatility — both upside and downside — as risk.

Formula: Sharpe = (Annualized Return - Risk-Free Rate) / Standard Deviation of Returns

How to use it: Higher is better. A Sharpe ratio above 1 is generally considered acceptable, above 2 is very good, and above 3 is excellent. Negative Sharpe ratios mean the investment returned less than the risk-free rate. The main limitation is that it penalizes upside volatility, which most investors actually welcome.

A modification of the Sharpe ratio that only penalizes downside volatility (negative returns) rather than all volatility. Developed by Frank Sortino, this ratio recognizes that investors are primarily concerned with losses, not gains. It replaces standard deviation with downside deviation in the denominator.

Formula: Sortino = (Annualized Return - Risk-Free Rate) / Downside Deviation

How to use it: Higher is better. Because it ignores upside volatility, the Sortino ratio is typically higher than the Sharpe ratio for the same stock. A Sortino above 2 is good, above 3 is excellent. It's particularly useful for stocks with asymmetric return distributions — for example, stocks that occasionally make large gains but rarely suffer large losses.

Measures annualized return relative to maximum drawdown — the worst peak-to-trough decline over the measurement period. Named after California Managed Accounts Reports, it answers the question: "How much return do I get for enduring the worst possible loss?"

Formula: Calmar = Annualized Return / Maximum Drawdown

How to use it: Higher is better. A Calmar ratio above 1 means the annualized return exceeds the worst drawdown — you're being compensated more than the maximum pain. Above 3 is excellent. The Calmar ratio is especially popular with hedge fund managers and investors who are sensitive to worst-case scenarios.

Compares the probability-weighted sum of gains above a threshold (typically 0%) to the probability-weighted sum of losses below it. Unlike the Sharpe and Sortino ratios which only use mean and variance, the Omega ratio captures the entire return distribution including skewness and tail risk.

Formula: Omega = Sum of Returns Above Threshold / Sum of Returns Below Threshold

How to use it: Higher is better. An Omega ratio above 1 means the stock has generated more total gains than losses. Above 2 indicates strong performance. The Omega ratio is particularly valuable because it doesn't assume returns follow a normal distribution — it works well for stocks with unusual return patterns.

Divides annualized return by the Ulcer Index, measuring how much return a stock generates per unit of sustained drawdown pain. Also known as the Ulcer Performance Index, it combines the Ulcer Index's comprehensive drawdown measurement with return analysis.

Formula: Martin Ratio = Annualized Return / Ulcer Index

How to use it: Higher is better. The Martin ratio rewards stocks that achieve high returns with minimal sustained drawdowns. It's particularly useful for risk-averse investors because the Ulcer Index (denominator) penalizes both the depth and duration of drawdowns, not just the worst single decline.

Measures the depth and duration of percentage drawdowns from previous highs. Created by Peter Martin in 1987, it's named for the stomach-churning anxiety investors feel during sustained declines. Unlike maximum drawdown which only captures the single worst decline, the Ulcer Index considers all drawdowns over the period.

Formula: Ulcer Index = sqrt(mean of squared percentage drawdowns from peak)

How to use it: Lower is better (unlike the other ratios on this list). An Ulcer Index below 5 indicates a very stable stock with minimal drawdowns. Between 5-10 is low risk. Between 10-20 is moderate. Above 20-30 indicates significant drawdown exposure. It's particularly useful for retirees or anyone who can't tolerate sustained losses.

A 0-9 scoring system developed by accounting professor Joseph Piotroski that assesses a company's financial strength using 9 binary (pass/fail) criteria. The criteria are grouped into three categories: profitability (ROA, cash flow, ROA trend, accruals), leverage and liquidity (debt trend, current ratio, share dilution), and operating efficiency (gross margin trend, asset turnover trend).

Formula: F-Score = Sum of 9 binary criteria (each 0 or 1)

How to use it: Scores of 7-9 indicate strong financial health. Scores of 4-6 are moderate. Scores of 0-3 suggest weak fundamentals. Piotroski's original research showed that buying high F-Score stocks while shorting low F-Score stocks among value stocks generated significant excess returns. The F-Score is most powerful when combined with value metrics like low P/E or P/B.

An investment strategy developed by Joel Greenblatt in "The Little Book That Beats the Market." It ranks companies on two factors: earnings yield (how cheap the stock is) and return on capital (how good the business is). Companies are ranked separately on each metric, and the two ranks are combined — the lowest combined rank represents the best combination of value and quality.

Formula: Earnings Yield = Operating Income / Enterprise Value; Return on Capital = Operating Income / (Total Assets - Current Liabilities)

How to use it: Lower combined rank is better. The strategy excludes financial companies and utilities because their regulated capital structures make comparisons misleading. Greenblatt recommends holding a diversified portfolio of 20-30 top-ranked stocks for at least one year. The formula has historically outperformed market indices over long periods.

The portion of a company's profit allocated to each outstanding share of common stock. EPS is one of the most widely used metrics for evaluating a company's profitability. Diluted EPS accounts for all potential shares from stock options, convertible bonds, and other dilutive securities.

Formula: EPS = Net Income / Weighted Average Shares Outstanding

How to use it: Higher EPS indicates greater profitability. Growing EPS over time is a positive sign. Compare EPS growth rate to the stock's P/E ratio using the PEG ratio to assess whether the growth is priced in. Negative EPS means the company is unprofitable.

The percentage of revenue that remains as profit after all expenses are paid. Gross margin measures profit after cost of goods sold. Operating margin measures profit after operating expenses. Net profit margin measures final profit after all expenses including taxes and interest.

Formula: Net Profit Margin = Net Income / Revenue x 100

How to use it: Higher margins indicate more efficient businesses. Margins vary dramatically by industry — software companies often have 20-40% net margins, while grocery stores may operate on 1-3%. Compare margins within the same industry and track trends over time.

Measures how effectively a company uses shareholders' equity to generate profit. ROE tells you how much profit a company generates for each dollar of shareholder investment. It's one of the most important metrics for evaluating management effectiveness.

Formula: ROE = Net Income / Shareholders' Equity x 100

How to use it: An ROE above 15% is generally considered good. Very high ROE (above 30%) can indicate excellent management but may also reflect high leverage (debt). Companies with consistently high ROE often have durable competitive advantages. Compare ROE within the same industry.

Measures a stock's volatility relative to the overall market. A beta of 1 means the stock moves in line with the market. Beta greater than 1 indicates higher volatility than the market, while beta less than 1 indicates lower volatility.

Formula: Beta = Covariance(Stock Returns, Market Returns) / Variance(Market Returns)

How to use it: A beta of 1.5 means the stock tends to move 50% more than the market — up 15% when the market rises 10%, and down 15% when it falls 10%. Defensive stocks like utilities typically have betas below 1. High-growth tech stocks often have betas above 1.5. Beta measures systematic (market) risk, not total risk.

The largest peak-to-trough decline in a stock's price over a given period. It measures the worst-case scenario for an investor who bought at the peak and sold at the trough. Maximum drawdown is a critical risk metric because it shows the actual magnitude of potential losses.

Formula: Max Drawdown = (Peak Price - Trough Price) / Peak Price x 100

How to use it: Lower (less negative) is better. A maximum drawdown of -50% means the stock lost half its value from peak to trough. Even if the stock eventually recovered, an investor who panicked and sold at the bottom would have realized that loss. The Calmar ratio uses maximum drawdown to put returns in context.