Essential Basic Terms (Understand Them All in One Read)

The investing world is full of jargon, and beginners are often scared off by a pile of English acronyms. In reality, only about a dozen come up most often. Below, each is explained as briefly as possible—worth bookmarking as a mini-dictionary.

On How Much It Is Worth

• Market Cap: a company's total value = share price × shares outstanding. To gauge a company's size, look at market cap, not the level of the share price.
• EPS (Earnings Per Share): net income ÷ share count, i.e. how much each share earned for you.
• P/E (Price-to-Earnings): share price ÷ EPS, roughly how many years it takes to earn back your investment at current earnings. A higher figure signals more optimistic market expectations (and possibly a more expensive stock).
• P/B (Price-to-Book): share price ÷ net assets per share, commonly used for asset-heavy or financial companies.

On Earning Power

• Gross margin: (revenue − direct costs) ÷ revenue, reflecting whether the product itself is profitable.
• Net margin: net income ÷ revenue, reflecting the ultimate efficiency of turning sales into profit after all expenses.
• ROE (Return on Equity): net income ÷ shareholders' equity, one of Buffett's favorite metrics, measuring how efficiently the company earns money with shareholders' capital.
• ROIC (Return on Invested Capital): measures how efficiently the entire business generates profit from its capital; see the advanced piece for more.

On Return and Risk

• Dividend Yield: annual dividends ÷ share price, essentially the cash return on holding this stock.
• Free Cash Flow (FCF): the cash a company truly has left over and can freely deploy after sustaining its operations.
• Debt ratio: liabilities ÷ assets; too high means greater risk and weaker resilience to shocks.
• Volatility / Beta: measures how much a stock swings relative to the broad market; the higher it is, the wilder the ride.

Do Not Let the Jargon Intimidate You

Terms are just tools, not a barrier to entry. You do not need to memorize them all at once—just come back and look one up whenever you get stuck. What really matters is not reciting definitions but grasping the plain meaning behind them: is this company profitable, is it expensive, is it stable?

How This Applies Here

This site's reports use terms such as P/E, IRR, and Required Return. When something is unclear, refer back to this piece or read "How to Read a Valuation Report." We are also continually making the reports more plain-spoken.