Vocabulary

Fundamental Analyst Language

Basic terms

• Stock Price or Share Price: the cost of buying one unit of ownership of the company in the market. It constantly varies due to supply and demand.

• Outstanding Shares: the total number of shares that have been issued by the company and are in the hands of investors (public and internal shareholders).

• Volume: the number of shares that have been traded during a specific period of time (for example, in a day). High volume can indicate greater interest in the stock.

• Shareholding or Ownership Structure: the distribution of share ownership among different investors (institutional, retail, executives, etc.). Knowing the shareholding can give clues about the stability and prospects of the company.

• Dividend: a portion of a company’s earnings that is distributed periodically to its shareholders.

• Stock Markets or Stock Exchanges: the stock exchanges (for example, NYSE, Nasdaq, Euronext) where company shares are bought and sold. A company can be listed on one or several markets.

Corporate operations

• Split: a company increases the number of its outstanding shares, which proportionally reduces the price of each share. The total market value of the company remains the same. It is usually done to make shares more accessible to small investors.

• Reverse Split: a company reduces the number of its outstanding shares, which proportionally increases the price of each share. It also maintains the total market value. It is usually done to increase the price per share when it has fallen too much, to meet the listing requirements of some exchanges.

Valuation metrics

• Earnings Per Share or EPS: this metric shows you how much profit the company earned for each of its shares that are in the hands of investors. A growing EPS is usually a positive signal.

• P/E Ratio – Price-to-Earnings Ratio: also commonly known as PER, indicates how much investors are willing to pay for each euro of profit that the company generates. A high P/E could suggest that the stock is overvalued (or that high future growth is expected), while a low P/E could indicate that it is undervalued (or that there are concerns about its growth).

• P/B – Price-to-Book Ratio: compares the market price of a stock with its book value per share (total assets minus total liabilities, divided by the number of outstanding shares). A low P/B could indicate an undervalued company (although sometimes it can signal underlying problems).

• Market Cap: represents the total value of a company’s outstanding shares in the market. It’s like calculating how much the public part of the company is “worth” according to the current price of its shares.

• Enterprise Value – EV: represents the total economic value of a company. Unlike market capitalization, Enterprise Value considers not only the value of shares (equity), but also the company’s debt and cash.

Public offerings

• IPO – Initial Public Offering: is the process by which a private company sells shares to the public for the first time, becoming a publicly traded company. This allows the company to obtain capital and investors to buy a part of it.

• Takeover Bid: is an offer made by a company (or an investor) to acquire a significant portion or all of the shares of another publicly traded company. Takeover bids can be friendly (agreed with the target company’s management) or hostile (without management’s agreement).

Accounting Language

GAAP vs NON-GAAP

We must distinguish between GAAP and NON-GAAP metrics. But what are they?

GAAP and IFRS are financial reporting regulatory frameworks, sets of principles, standards, and criteria that indicate how you should prepare and present a company’s accounting.

Metrics subject to that regulatory framework have the GAAP label (common in the United States) or IFRS (outside the United States, Europe, or Latin America).

We must be careful with metrics labeled as NON-GAAP or NON-IFRS, as they are metrics that a company can define in its own way.

Generally, we can calculate NON-GAAP metrics ourselves, with the accounting information provided by the company.

Profitability metrics

• (NON-GAAP) EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization: is a measure of a company’s gross operating profitability. It focuses on earnings generated by main operations, without taking into account financial expenses, taxes, the loss of value of fixed assets (depreciation), and the amortization of intangible assets.

  It allows comparing operating profitability between different companies, regardless of their capital structure (debt), tax regime, or asset accounting policy. It is useful for analyzing how efficiently a company manages its resources to generate profits from its main activity.

• (GAAP) EBIT - Earnings Before Interest and Taxes: also known as operating profit.

  Shows the profitability of a company’s operations after considering the wear and tear of its assets, but before taking into account financial costs (debt interest) and taxes. It is a good indicator of the profitability of the business itself.

• (NON-GAAP) ROIC - Return on Invested Capital: measures the efficiency with which a company uses the total invested capital (both from shareholders and debt) to generate profits.

  Indicates how much profit the company is generating for each euro of capital that has been invested in it. A high ROIC suggests that the company is effective in converting invested capital into profits.

• (NON-GAAP) ROE - Return on Equity: measures a company’s profitability in relation to the capital contributed by its shareholders (net equity).

  Indicates how much profit the company generates for each euro invested by shareholders. It is a key metric for equity investors.

Liquidity and financial structure metrics

• (GAAP) Cash Flow: shows the actual movement of money that enters and leaves a company during a period of time. Unlike accounting profit, which can include non-monetary items, cash flow reflects real cash.

  It is crucial for evaluating a company’s liquidity, its ability to pay debts, finance operations, and make investments. But we have to be careful, if we see “Adjusted Cash Flow”, it would be a NON-GAAP metric.

• (NON-GAAP) Debt-to-Equity Ratio: compares the amount of debt that a company uses to finance its assets with the amount of capital contributed by shareholders.

  Indicates the level of financial leverage of the company. A high ratio suggests that the company depends more on debt, which can increase financial risk.

Margin metrics

• (GAAP) Gross Margin: is the percentage of revenue that remains after deducting the cost of goods sold (the direct cost of producing goods or services).

  Shows the profitability of the company’s main sales before considering other operating expenses. A high gross margin indicates that the company has good control over its production costs.

• (GAAP) Operating Margin: is the percentage of revenue that remains after deducting the cost of goods sold and operating expenses (such as salaries, rent, marketing, etc.). It is directly related to EBIT.

  Shows the profitability of the company’s main operations, taking into account the direct and indirect costs associated with the activity.

• (GAAP) Net Margin: is the percentage of revenue that remains after deducting all expenses, including the cost of goods sold, operating expenses, interest, and taxes. It is directly related to net profit.

  Represents the final profitability of the company for each euro of revenue. It is what really remains for shareholders.