Financial terms explained
What the numbers on a company page actually mean — including what each one does not tell you.
Market capitalisation
Market capitalisation is the total dollar value of a company's outstanding shares, calculated as share price multiplied by the number of shares outstanding. It represents what the stock market believes the entire equity of the company is worth at a given moment.
The formula is: Market capitalisation = Share price × Shares outstanding. This is often abbreviated as market cap and is used to classify companies into size categories like large-cap, mid-cap, or small-cap.
Market cap tells you the market's valuation of a company's equity, but it does not tell you the cost to buy the whole business. Ignoring debt and cash, a company with a £10 billion market cap and £4 billion in debt would actually cost £14 billion to acquire. Enterprise value (market cap plus debt minus cash) gives that fuller picture.
A concrete trap: Two companies with the same market cap can have vastly different financial risk if one carries heavy debt. Market cap alone can mislead you about a company's true size and financial health, especially when comparing firms across different industries or capital structures.
Revenue
Revenue is the total money a company receives from selling its goods or services before any costs or expenses are deducted. It is called the top line because it sits at the top of the income statement.
There is no single formula for revenue; it is the sum of all sales during a period. However, revenue is not simply cash received — it is recognised when it is earned, according to accounting rules. For example, a software company might book a full year's subscription revenue upfront but collect the cash over 12 months, or a construction firm might recognise revenue as a project progresses even before receiving payment.
Revenue tells you how much a company is selling and growing its business. It does not tell you whether the company is profitable. A company can report rising revenue for years while still losing money if its costs, such as marketing or R&D, grow even faster.
A concrete trap: Watch for aggressive revenue recognition, where a company books revenue on products shipped but not yet accepted by the customer, or on long-term contracts using optimistic estimates. This can inflate revenue temporarily and mislead about underlying business momentum.
TTM (trailing twelve months)
TTM stands for trailing twelve months; it is the sum of a company's financial data from the most recent four reported quarters. This rolling annual figure updates every quarter, giving a more current view than the last full fiscal year.
For example, if a company's fiscal year ends in December and it has reported results through June, the TTM revenue would be the sum of July–September last year, October–December last year, January–March this year, and April–June this year. It is calculated by adding the most recent four quarters of income statement data.
TTM is used to keep valuation ratios like P/E or growth rates current between annual reports. It also smooths out seasonal fluctuations by covering a full year. However, TTM does not tell you what the future holds — it is purely historical.
A concrete trap: TTM can straddle two different fiscal years, mixing periods that may have included non-recurring events (e.g., a large legal settlement or a major acquisition). This can distort the picture of ongoing business performance. Also, if a company recently changed its fiscal year, TTM might not be directly comparable with prior periods.
Net income
Net income is the profit after all expenses — including operating costs, interest, taxes, and non-cash charges like depreciation — are subtracted from revenue. It is commonly called the bottom line because it appears at the bottom of the income statement.
The basic formula is: Net income = Total revenue – Total expenses. This includes both cash and non-cash items. For instance, depreciation reduces net income but does not involve any cash outflow.
Net income tells you how profitable a company is according to accounting rules. It is a key input for earnings per share and many valuation ratios. But it does not tell you how much cash the company actually generated from its operations, because non-cash charges and one-time gains or losses can cause net income to differ sharply from cash flow.
A concrete trap: A company can report positive net income yet be burning cash if it relies on aggressive revenue recognition, slow customer payments, or if its profits come mostly from non-operating items (like selling assets or revaluing investments). Always compare net income with cash from operations to gauge real cash generation.
Earnings per share (EPS)
Earnings per share (EPS) is net income divided by the number of outstanding shares, showing how much profit is attributed to each share of stock. It is a widely used measure of profitability per unit of ownership.
The basic formula is: EPS = Net income ÷ Weighted average shares outstanding. But two versions exist: basic EPS uses the actual shares outstanding, while diluted EPS also includes shares that could be created from options, warrants, or convertible bonds. Diluted EPS is always lower (or equal) and is considered more conservative — it is the figure most analysts use.
EPS tells you the earnings per share, which helps compare profitability across companies that may have different share counts. It is a key component in the P/E ratio. However, EPS does not tell you whether net income is sustainable or how much cash the company generates.
A concrete trap: A company can increase EPS without improving its business simply by buying back its own shares. When shares are repurchased, the share count falls, so net income is divided by fewer shares — boosting EPS even if total earnings remain flat or decline. This can mask underlying deterioration in operations.
Price-to-earnings ratio (P/E)
The price-to-earnings ratio (P/E) is the current share price divided by earnings per share, or equivalently the market capitalisation divided by net income. It measures how many years of current earnings it would take to cover the share price, assuming earnings stay constant.
The formula is: P/E = Share price ÷ EPS (diluted). If a stock trades at £50 and its EPS is £5, the P/E is 10 — meaning investors pay £10 for every £1 of annual earnings.
A high P/E typically indicates that investors expect future earnings growth to be strong, not necessarily that the stock is overpriced. Conversely, a low P/E may signal undervaluation or expected problems. The ratio tells you the market's sentiment about future profitability, but it does not tell you the company's debt level, cash flow, or growth prospects directly.
A concrete trap: P/E is meaningless when earnings are negative (a net loss). In that case, the ratio becomes negative or undefined, so comparison with other stocks is not possible. Also, comparing P/E ratios across different industries can be misleading because growth rates, capital intensity, and risk profiles vary widely — a high P/E in a fast-growing tech sector may be normal, while the same ratio in a mature utility could indicate speculation.
Price-to-sales (P/S)
Price-to-sales (P/S) is a valuation ratio that compares a company's market capitalization to its total revenue over a trailing twelve-month period. The formula is P/S = Market Cap ÷ Revenue (or Share Price ÷ Revenue Per Share). It tells you how much investors are willing to pay for each dollar of a company's sales.
This ratio is especially useful when a company has no earnings (negative net income) because it still has positive sales, so you can still put a multiple on the business. However, P/S says absolutely nothing about whether those sales are profitable or whether the company is generating cash. A company could have high revenue but huge losses, and the P/S would still look low.
A concrete trap: a low P/S can be a value trap. For example, a retailer with razor-thin margins and declining same-store sales may sport a very low P/S, but that doesn't mean it's a bargain — the low multiple may simply reflect the market's correct expectation that profits will never arrive. Also, P/S can be misleading for cyclical companies because revenue peaks near the top of the cycle, making the ratio appear deceptively low.
Price-to-book (P/B)
Price-to-book (P/B) compares a company's market capitalization to its book value (shareholder equity) as reported on the balance sheet. The formula is P/B = Market Cap ÷ Book Value (or Share Price ÷ Book Value Per Share). It tells you whether the market values a company above or below the net value of its tangible assets after liabilities.
P/B is most informative for companies whose assets are hard and measurable, such as banks (financial assets like loans) and industrial firms (factories, equipment). For these businesses, book value is a reasonable proxy for liquidation value or replacement cost. Conversely, P/B is close to useless for software, brands, or service companies, where the true value lies in intellectual property, customer relationships, or human capital — none of which appear on the balance sheet.
A major trap: software or luxury goods companies often have very little book value because their key assets are intangible and not recognized under accounting rules. As a result, these companies will show a very high P/B (say, 10x or more) even if they are perfectly healthy. Conversely, a bank with a P/B below 1.0 might look cheap, but that could signal hidden loan losses that will eventually wipe out equity.
Dividend yield
Dividend yield is the annual dividend per share divided by the current share price, expressed as a percentage. The formula is: Dividend Yield = (Annual Dividends Per Share ÷ Share Price) × 100. It tells you the income return you would get from dividends alone at the current price, without considering any price appreciation.
A crucial insight: yield rises when the stock price falls, and falls when the price rises. So an unusually high dividend yield often signals that the stock price has dropped sharply — which may be due to trouble in the business, not generosity. Always check the payout ratio (dividends divided by earnings or free cash flow) to see if the dividend is sustainable. A payout ratio above 100% is a red flag; the company is borrowing or selling assets to pay dividends.
Trap: a dividend yield that looks too good to be true usually is. For example, a company in a declining industry might cut its dividend soon after the yield spikes, catching income investors unaware. The yield is backward-looking and does not predict future dividend payments. Also, high-yield stocks can underperform total return if the price continues to fall.
Free cash flow
Free cash flow (FCF) is the cash a company generates from its operations minus the capital expenditures required to maintain or grow its asset base. The formula is: Free Cash Flow = Operating Cash Flow − Capital Expenditures. It represents the cash left over after keeping the business running — cash that can be used for dividends, stock buybacks, debt repayment, or acquisitions.
Many investors trust FCF more than net income because it is harder to manipulate with accounting choices. Net income includes non-cash expenses like depreciation and can be inflated by aggressive revenue recognition. FCF, on the other hand, shows actual cash that came in and went out. A company that consistently reports positive net income but negative FCF may be using accounting tricks or experiencing a working capital drain.
A trap: negative FCF is not automatically bad. Fast-growing companies often invest heavily in new property and equipment (capex), pushing FCF negative for years while building future value. Similarly, companies that are growing receivables or inventory to support sales may temporarily show weak FCF. The trap is judging FCF in isolation without considering the company's growth stage. Also, one-time items like large asset sales can flatter FCF, so look for trends over several years.
Operating cash flow
Operating cash flow (OCF) is the cash generated from a company's core business operations. It starts with net income and then adds back non-cash expenses (like depreciation and amortization) and adjusts for changes in working capital (receivables, payables, inventory). The formula is: OCF = Net Income + Non-Cash Charges ± Changes in Working Capital. It tells you how much actual cash the business produced from its day-to-day activities.
OCF usually exceeds net income for capital-intensive companies because they have large depreciation charges that reduce net income but do not require a cash outlay. For example, a manufacturer might report net income of $10 million but OCF of $30 million thanks to $20 million in depreciation. This makes OCF a better measure of the company's ability to generate cash internally than net income alone.
A trap: OCF can be distorted by working capital changes. If a company aggressively collects receivables and delays paying suppliers, OCF may temporarily look great — but those moves are not sustainable. Conversely, strong sales growth often leads to a buildup of receivables and inventory, which drains OCF even though the business is healthy. Always examine the components of working capital in the cash flow statement to see whether OCF is being boosted by one-time or unsustainable factors.
Gross profit and gross margin
Gross profit is revenue minus the direct costs of producing the goods or services sold (cost of goods sold, or COGS). Gross margin is gross profit divided by revenue, expressed as a percentage. The formulas are: Gross Profit = Revenue − COGS; Gross Margin = (Gross Profit ÷ Revenue) × 100. Gross profit tells you how much money is left to cover operating expenses, interest, and taxes, while gross margin indicates pricing power and production efficiency.
A high gross margin usually implies that a company has strong pricing power, a differentiated product, or a low-variable-cost business model (e.g., software). A low gross margin suggests a commodity-like product with thin markups, typical of retailers or low-cost manufacturers. However, what counts as a direct cost varies by industry. Some companies include depreciation and amortization in COGS; others exclude them. This makes cross-industry gross margin comparisons unreliable.
A concrete trap: a company can boost gross margin by shifting costs out of COGS and into operating expenses (e.g., reclassifying shipping costs or R&D). Always check the footnotes to understand what is included in COGS. Also, a high gross margin does not guarantee a high net profit — the company may have enormous selling, general, and administrative expenses that eat up all the gross profit. Conversely, a low gross margin retailer like Costco can still be very profitable due to high sales volume and tight expense control.
Profit margin
Profit margin is the percentage of revenue that turns into net income — in other words, how many cents of profit the company keeps from each dollar of sales. The basic formula is Net Income ÷ Revenue, or (Net Income / Revenue) × 100%.
This number tells you how efficiently a company controls costs relative to its sales. But it does NOT tell you how much absolute profit the company makes, nor does it reflect the amount of capital required to generate those sales. A tiny margin on enormous revenue can still produce a huge dollar profit.
A critical distinction: gross margin (revenue minus cost of goods sold, divided by revenue) looks only at direct production costs, while profit margin includes all operating expenses, interest, and taxes. A company can have a high gross margin but a low profit margin if it spends heavily on sales, marketing, or R&D.
Trap: Profit margins vary enormously by industry — a grocery chain might be thrilled with 2% while a software company expects 20%+. Comparing margins across different sectors is meaningless. Also, a rising profit margin could simply mean the company cut essential spending, not that it is healthier.
Retained earnings
Retained earnings are the cumulative total of every dollar of profit the company has ever earned, minus every dollar it has paid out as dividends or used to buy back stock. It is calculated by starting with the company's first retained earnings balance (usually zero at founding), then adding each year's net income and subtracting each year's dividends and buybacks.
This number tells you how much profit the company has reinvested in its business since its founding. Retained earnings are the main reason shareholder equity grows over time for profitable companies that pay few dividends. But critically, retained earnings are NOT a cash balance — they represent profit that was reinvested into assets like factories, inventory, or acquisitions. The cash from those profits is long gone.
A company can have billions in retained earnings yet be short on cash, because the money was spent on things like new equipment or paying down debt. Conversely, a company with high retained earnings and low cash is not necessarily a problem — it simply means profits were productively deployed.
Trap: Retained earnings can be negative if a company has accumulated losses over time (called an accumulated deficit). This is a red flag for financial health, though young growth companies often start with negative retained earnings. Also, a company that aggressively buys back stock may reduce retained earnings, but that's not a sign of trouble; it's a capital return decision.
Total assets and liabilities
Total assets is the sum of everything a company owns that has economic value: cash, inventory, property, equipment, investments, and intangible items like patents or goodwill. Total liabilities is the sum of everything it owes: loans, accounts payable, salaries payable, taxes, and other debts. The identity is Assets = Liabilities + Shareholder Equity.
The asset side tells you what resources the company has to generate revenue, while liabilities show how those resources were financed — through debt or through equity. But there is a huge catch: most assets are recorded at their historical cost minus depreciation, not at what they could be sold for today. A factory bought twenty years ago may be worth far more on the open market than its balance sheet value, or far less.
One common asset called 'goodwill' deserves special attention. Goodwill arises when one company buys another for more than the fair value of its net assets; the excess is recorded as an asset. It has no physical existence and cannot be sold separately, but it sits on the balance sheet until its value is impaired (written down). High goodwill can make a company's total assets look bloated relative to tangible assets.
Trap: A company with huge total assets may not be financially strong if those assets are hard to sell (like specialized factories) or if they are mostly goodwill. Conversely, a company with few assets on the books may be perfectly healthy if its real value is in brands or technology that accounting rules ignore. Always look beyond the headline number.
Cash and long-term debt
Cash and cash equivalents is exactly what it sounds like: money in the bank plus short-term investments that can be converted to cash within 90 days. Long-term debt is borrowings that mature in more than one year, such as bonds and bank loans. These two items are usually reported separately on the balance sheet.
The figure that matters most is net debt: total debt minus cash. If a company has $10 billion in debt and $2 billion in cash, its net debt is $8 billion. Net debt tells you the true debt burden after using available cash to pay down borrowings. A company with more cash than debt has negative net debt — that is, it is in a net cash position.
What this tells you: A high net debt level means the company relies heavily on borrowing, which increases risk during economic downturns or rising interest rates. But it does NOT tell you whether the company can afford that debt — you need to look at earnings and cash flow to gauge repayment ability. Also, long-term debt is often used deliberately to fund growth or returns to shareholders, so it is not automatically bad.
Trap: A profitable company with steady cash flow may carry large long-term debt on purpose, because interest is tax-deductible and using debt can boost returns to shareholders. Meanwhile, a company with lots of cash might have that cash trapped in foreign subsidiaries, unable to be used freely without incurring taxes. So net debt can mislead if the cash is not accessible. Also, short-term debt (due within a year) is excluded from 'long-term debt' but adds to total debt burden.
R&D expense
R&D expense is the money a company spends on research and development to create new products or improve existing ones.
Under US accounting rules, almost all R&D spending must be 'expensed' immediately as a cost on the income statement, rather than being treated as an asset (capitalized) and spread over time. This means a company that spends heavily on R&D will show lower reported profit than one that does not, even if that spending creates valuable future products.
R&D expense tells you how much a company is investing in innovation, which can drive future growth. But it does not tell you whether those investments will succeed, nor does it capture the value of the intangible assets (like patents or know-how) that may result from the spending. Those assets stay off the balance sheet.
A concrete trap: a young biotech company with no revenue may have enormous R&D expense, causing large accounting losses. That is normal and expected—the losses do not mean the company is failing. Conversely, a mature company that cuts R&D to boost reported profit may be sacrificing its future.
52-week range
The 52-week range shows the highest and lowest price at which the stock has traded over the past year, typically displayed as two numbers (e.g., $50–$75).
Where the current price falls within that range (e.g., near the high, near the low, or in the middle) is sometimes used as a quick gauge of momentum or sentiment. A price near the 52-week high can suggest recent strength, while one near the low may signal weakness. But that is all it is—a historical observation, not a prediction.
The range does not tell you anything about the stock's fair value, nor does it suggest that the price will revert to the middle or bounce off the ends. A stock can trade above its 52-week high (breakout) or below its 52-week low (breakdown), making the old range irrelevant.
A trap: for stocks that have been listed less than a year, the '52-week range' covers only the time since listing, so the high and low may not represent a full cycle. Also, a stock that has fallen a lot might have a wide range that makes a low current price look 'cheap' by that metric alone, while the company's fundamentals could be deteriorating further.
Trading volume
Trading volume is the total number of shares of a stock that changed hands during a single trading session, often reported as the number of shares or total dollar value.
Unusually high or low volume compared to the stock's own recent average signals that something has changed—perhaps news, earnings, or a shift in sentiment. But volume alone does not tell you what happened or whether the price move is meaningful; it just confirms that more or fewer people are trading.
The best way to read volume is relative to the stock's own typical range. A stock that normally trades 1 million shares a day doing 5 million is notable; the same absolute number for a high-volume stock like Apple might be normal.
A trap: a one-day volume spike can be noise from options expiration, index rebalancing, or a single large block trade that doesn't reflect broad sentiment. Conversely, a stock with chronically low volume can have dramatic price swings on a small number of trades, making those moves less reliable. Also, volume data is often delayed or revised in some markets.
Reference material, written with AI assistance. Informational only, not investment advice.