§ Reference
Glossary
Definitions, formulas, and worked examples for the valuation, profitability, balance-sheet, and risk metrics used across our research. Each entry links to recent reports where the metric is load-bearing in the conclusion.
Valuation models
- Diluted EPSEPS computed on a fully-diluted share count that assumes all in-the-money options, RSUs, and convertibles are…
- Discounted cash flowValuation method that projects future free cash flows and discounts them back to present value using a risk-ad…
- Earnings per shareNet income divided by weighted-average diluted shares outstanding. The headline accounting earnings figure on…
- Fair valueOur composite estimate of intrinsic per-share value, blended across DCF, exit-multiple, and reverse-DCF method…
- Free cash flow to equityCash flow available to equity holders after interest, principal repayments, and net new borrowing. Discounted…
- Free cash flow to firmCash flow available to all capital providers (debt and equity) before financing costs. Discounted at WACC to d…
- Intrinsic valueThe discounted present value of all cash a business will produce over its remaining life. The theoretical anch…
- Owner earningsBuffett-method cash earnings: net income plus D&A minus maintenance capex. A floor estimate of the cash a busi…
- Residual incomeNet income minus a charge for the cost of equity capital. Positive residual income means the business is earni…
- Reverse DCFInverts a standard DCF: instead of solving for fair value, we solve for the growth rate the current price alre…
- Terminal multipleThe exit P/E or EV/EBITDA we apply to the final year of an explicit forecast. Anchored to the business's long-…
- Terminal P/EThe exit P/E multiple applied to the final-year EPS in a forward-earnings model. Set conservatively based on a…
- Terminal valueValue attributed to all cash flows beyond the explicit forecast horizon. Computed via Gordon growth or exit-mu…
Multiples and ratios
- Dividend yieldTrailing or indicated annual dividend divided by share price. The cash income return on equity, before any cap…
- Earnings yieldInverse of P/E: trailing or forward EPS divided by share price, expressed as a percentage. The intuitive bond-…
- EV/EBITDAEnterprise value divided by EBITDA. A capital-structure-neutral multiple commonly used for cross-cohort compar…
- EV/SalesEnterprise value divided by trailing or forward revenue. Useful for early-stage or unprofitable companies wher…
- FCF yieldFree cash flow per share divided by current price. A direct cash-on-cash return ignoring growth — a useful san…
- Forward P/ECurrent share price divided by the consensus next-twelve-months EPS estimate. Less backward-looking than trail…
- P/E ratioPrice-to-earnings ratio: current share price divided by trailing twelve-month earnings per share. The most-cit…
- Payout ratioDividends per share divided by EPS. Measures how much of earnings the company distributes versus retains for r…
- PEG ratioForward P/E divided by growth rate as integer percent (e.g. 20 for 20% growth). A PEG of 1.0 is the convention…
- Price-to-book ratioShare price divided by book value per share. Most useful for financials and asset-heavy businesses where book…
Cost of capital
- BetaA statistical measure of a stock's price sensitivity relative to the market. We use an adjusted beta (raw, sec…
- CAPMCapital Asset Pricing Model. The standard framework for computing required equity returns: risk-free rate plus…
- Cost of debtThe marginal pre-tax interest rate the company would pay on new borrowing today. Used in WACC after applying t…
- Cost of equityThe required return on equity capital, derived via CAPM (risk-free rate + beta × equity-risk premium). Used to…
- Equity risk premiumThe additional return investors demand for holding the equity market over the risk-free rate. Currently approx…
- Risk-free rateThe return on a default-free, duration-matched government bond. We use the ten-year U.S. Treasury yield as the…
- WACCWeighted average cost of capital. The blended after-tax discount rate applied to free cash flows in a DCF, ref…
Returns on capital
- Economic profit(ROIC − WACC) × Average invested capital. The dollar amount of value the business creates over its capital cos…
- Return on assetsNet income divided by average total assets. Measures capital-efficiency before financial leverage; lower than…
- Return on capital employedEBIT divided by capital employed (debt + equity − cash). A pre-tax cousin of ROIC commonly used in European re…
- Return on equityNet income divided by average shareholder equity. The return generated for equity holders specifically; primar…
- Return on incremental invested capitalMarginal NOPAT growth divided by marginal invested-capital growth. Measures the return earned on capital reinv…
- ROICReturn on invested capital. Operating profit (after tax) divided by invested capital. The single best gauge of…
Margins and profitability
- EBITDA marginEBITDA divided by revenue. A capital-intensity-neutral profitability measure favored in M&A, credit analysis,…
- Free cash flow marginFree cash flow divided by revenue. Captures the cash-generation efficiency of the business — what survives all…
- Gross marginRevenue minus cost of goods sold, divided by revenue. The first-line indicator of pricing power and unit econo…
- Net marginNet income divided by revenue. Captures the percentage of each revenue dollar that survives all costs, taxes,…
- Operating marginOperating income (EBIT) divided by revenue. Captures profitability after both direct costs and operating expen…
Cash flow
- Capital expendituresCash spent on acquiring or upgrading property, plant, and equipment. Splits into maintenance capex (sustaining…
- DilutionThe increase in share count over time, typically driven by SBC vesting, equity issuance, or M&A in stock. Redu…
- Free cash flowOperating cash flow minus capital expenditures. The cash a business generates after maintaining and growing it…
- Maintenance capexCapex required to sustain current revenue and capacity. Approximately equal to depreciation in steady-state. S…
- Operating cash flowCash generated from the company's core operations after working-capital changes but before capital expenditure…
- Share buybackCompany purchases of its own shares, retired or held as treasury stock. Returns capital to remaining sharehold…
- Shares outstandingThe total number of common shares currently held by all shareholders, including insiders. Reported as basic (i…
- Stock-based compensationThe fair-value cost of equity awards (options, RSUs, performance shares) granted to employees. A real economic…
Balance sheet
- Current ratioCurrent assets divided by current liabilities. A near-term liquidity measure: above 1.0 means the company can…
- Interest coverageEBIT (or EBITDA) divided by interest expense. Measures how comfortably operating profit covers debt-service ob…
- LeverageThe proportion of debt in the company's capital structure. Commonly measured as Debt/EBITDA, Debt/Equity, or N…
- Net debtTotal debt minus cash and short-term investments. The amount of debt a company would still owe if it used all…
- Quick ratioCurrent assets excluding inventory, divided by current liabilities. A stricter near-term liquidity measure for…
- Tangible book valueShareholder equity minus goodwill and intangible assets. A more conservative book-value measure that strips ou…
- Working capitalCurrent assets minus current liabilities. The capital tied up in the operating cycle (receivables and inventor…
Growth and forecasting
- Deceleration curveThe rate at which revenue or earnings growth slows over the explicit forecast period. We use visibility-adjust…
- EPS growthYear-over-year change in diluted earnings per share. The bottom-line growth rate that drives shareholder retur…
- Revenue growthYear-over-year change in revenue, expressed as a percentage. The starting point for any forward-earnings model…
- Terminal growthThe perpetual growth rate assumed in the Gordon-growth terminal-value calculation. Capped below long-run nomin…
Quality and accounting
- Accruals ratioNet accruals (net income minus operating cash flow) divided by total assets. Persistent positive accruals sign…
- Altman Z-ScoreA composite bankruptcy-risk model. Above 3.0 is the safe zone; below 1.8 is the distress zone. Mostly relevant…
- Beneish M-ScoreAn eight-variable model designed to flag earnings manipulation. Above −1.78 indicates elevated manipulation pr…
- Earnings qualityA composite assessment of how reliable reported earnings are as a predictor of future cash flow. Combines OCF/…
- OCF/NI ratioOperating cash flow divided by net income. Measures earnings-to-cash conversion. Below 0.8 triggers a soft-pas…
- Piotroski F-ScoreA 0–9 integer score measuring fundamental strength across profitability, leverage, and operating-efficiency di…
Risk and sensitivity
- Bear caseThe worst-realistic outcome — what happens if our top three risks materialize together. Used to set the floor…
- Kill scenarioA specific, quantified mechanism by which the investment thesis fails. Distinct from a bear case (a probabilit…
- Sensitivity analysisA 5×5 grid showing how fair value moves under different combinations of two key drivers (typically Ke and term…
Methodology terms
- ArchetypeOur coverage taxonomy. Each ticker is assigned to one of seven business archetypes (mature-quality, hyper-grow…
- Composite fair valueThe weighted blend of all valuation methods used for a ticker. Weights vary by archetype — financials lean on…
- Confidence scoreA 0–100 score reflecting how tight our fair-value range is and how reliable the inputs are. Below 60: wide mod…
- Margin of safetyThe discount required between fair value and current price before we recommend buying. Typically 15% for wide-…
- MoatA durable structural advantage that protects long-term returns on capital from competition. Sources include ne…
- ScorecardA 9-category weighted business-quality framework (0-100) covering growth, profitability, balance sheet, capita…
- Soft passA report flag indicating the company passed our quality gate but with a yellow card on a specific quality metr…