Seven terms every investor should know
Earning season for the first quarter of the year is coming to an end and you are going to see a lot of publications about how different companies have done over the last three months. For some, you will also get to see their six- or nine-month performance. We are going to be covering most of the companies on the Jamaica Stock Exchange. In this article we want to cover 7 of the most common terms you are going to see in those upcoming articles. These are the seven terms related to company earnings that all investors need to know.
Revenues are all the funds taken in by a business for the products and services that it sells. Revenues are sometimes called by different names such as sales or turnover. What does it tell us? The revenues represent the total sum of money recognized by the company for the products and/or services it sold during the period.
The gross profit is the money the company has left after it has taken care of the expenses associated with its operation. Expenses vary for different types of companies. A company that buys and sells goods will record its expenses as a line item called cost of goods sold or COGS. On the other hand, a company that deals in securities will have expenses related to the buying and selling of those securities. Please note that the gross profit does not account for the taxes that the company will need to pay. For that we turn to the net profit.
What does it tell us? The gross profit tells us how much money the company collected after paying for its expenses.
Net Profit is the sum remaining after the company has paid taxes, interest and finance costs. Net profit will also take into consideration other gains or losses made by the company from activities outside of its normal operations. What does it tell us? The net profit is really telling us how much money the company has made over a particular period.
Earnings (Earnings per share)
When we speak of the earnings of a company, we normally mean its earnings per share. The earnings per share or EPS is a calculated value. It is calculated by taking the net profits and dividing it by the weighted average number of shares in issue during the period for which we are calculating the EPS. Usually, there is a note in the company report that details exactly how the earnings being reported are calculated. What does it tell us? The EPS tells us the amount of money that the company earns on a per stock basis.
The market capitalisation (or market cap) of a company is the going market value of the company. It is calculated by multiplying the current stock price by the total amount of shares outstanding for the company. What does it tell us? The market cap basically tells us how much someone would have to pay to own (all the shares in) a particular company.
The book value of a company is also a calculated number. If you take the total value of all the company’s assets and subtract the value of intangibles such as goodwill and patents and the total liabilities you will end up with the book value of the company. To find the book value per share, we divide the book value by the total number of shares in issue. What does it tell us? The Book value tells us the value of all the tangible assets on the books. The books here refers to the company’s balance sheet.
The PE ratio is one of the ratios used in assessing the value of a company. The PE ratio is calculated by dividing the current stock price by the earnings (specifically the earnings per share) of the company for the period. What does it tell us? In a way, the PE tells us how long it will take for the company to make back the money we have paid to buy the stock, but it also tells us how many times over we are paying for the earnings that the company makes.
Expand your knowledge
Check out the other articles on Caribbean Value Investor’s investor education page for more definitions of terms and concepts that will make you a better investor.
Caribbean Value Investor is an investment media company focused on promoting and enabling value investing in the Caribbean region.