The whole library
315 articles · page 2 of 7
The Balance Sheet, Line by Line
A snapshot on one date of what a company owns, what it owes and what belongs to shareholders. It has to balance, which is a constraint that makes several things checkable.
The Cash Flow Statement
The statement that reconciles reported profit to cash that actually moved. It is the hardest of the three to dress up, which is why experienced readers start here.
From Revenue to Net Income
The walk down the income statement, and what each stage is capable of telling you about the business that the stage above it cannot.
EBITDA, and the Argument About It
Earnings before interest, taxes, depreciation and amortization is the most used and most criticized measure in finance. Both the use and the criticism are reasonable.
Free Cash Flow
The cash a business produces after the spending required to keep producing it. It is what funds dividends, buybacks, debt repayment and acquisitions.
GAAP and Non-GAAP
Filed statements follow standardized rules. The headline numbers a company puts in its press release frequently do not, and the reconciliation between the two is where the reading happens.
Earnings Per Share
Profit divided by shares. Both halves move, and the denominator moving is what makes the diluted figure the one that matters.
Working Capital and the Cash Conversion Cycle
The gap between paying for inputs and collecting for outputs has to be funded by somebody. Which side funds it says a lot about a company's position with its customers and suppliers.
Debt, Leverage and Coverage
Borrowing magnifies returns in both directions. The ratios that matter are how much is owed relative to earnings, and how comfortably the interest is covered.
Segment Reporting
Consolidated results average together businesses that may be moving in opposite directions. The segment note is where that averaging is undone.
Quality of Earnings
Two companies can report the same profit and one of the numbers is more likely to persist. Quality is about persistence and about how much of the profit is cash.
Revenue Recognition
When a sale becomes revenue is a judgment governed by a five-step framework. The judgment is where a substantial share of accounting problems have originated.
Leases
Lease obligations were once disclosed in a footnote and are now on the balance sheet. The change made a large existing liability visible without altering any economics.
Pension Obligations
A defined benefit plan is a long-dated liability whose measured size depends on a discount rate. Small changes in assumptions move it substantially.
Inventory Accounting
Which costs are assigned to goods sold is a policy choice. In a period of changing prices it changes reported profit, taxes and the balance sheet.
Accounting Red Flags
A checklist assembled from what has actually preceded accounting failures. None of the items is proof of anything, and several together are a pattern.
The Price-to-Earnings Ratio
The most quoted number in equities, and the most misread. It compares price to one year of profit and says nothing at all about the years after it.
The PEG Ratio
An attempt to price growth alongside profit by dividing the P/E by a growth rate. Useful as a rough sort, fragile as a valuation.
Price-to-Sales and Price-to-Book
Two multiples that work where earnings do not: one anchored to revenue, the other to the balance sheet. Each is useful in a narrow set of situations and misleading outside it.
Enterprise Value and EV/EBITDA
Market cap prices the equity; enterprise value prices the whole business. Comparing companies with different debt loads requires the second one.
Dividends: Yield, Payout and Safety
A dividend is a discretionary distribution. The yield is trivially calculated and the interesting question is always whether the company can keep paying it.
Return on Equity, Assets and Invested Capital
Profit means little without knowing how much capital was needed to produce it. These ratios answer that, and the differences between them are mostly about leverage.
Gross, Operating and Net Margin
Margins convert absolute profit into a rate, which is what makes companies of different sizes comparable. Each of the three answers a different question.
Discounted Cash Flow, in Plain English
The theory every multiple is a shortcut for: a business is worth the cash it will produce, discounted for the fact that future cash is worth less than cash today.
Valuing Against a Peer Set
A multiple only means something next to something else. Choosing what that something else is does most of the analytical work.
Sum of the Parts
Valuing each business within a company separately and adding them up. Useful where the parts deserve different multiples, and dependent on disclosure that may not exist.
EV to Sales
Enterprise value divided by revenue. The multiple used where there are no profits, and the one that requires the strongest assumption to interpret.
Free Cash Flow Yield
Free cash flow divided by market value, expressed as a percentage. Harder to manipulate than an earnings yield and noisier than one.
Residual Income
Valuing a company as its book value plus the present value of the profit it earns above its cost of capital. It puts the return-against-cost comparison at the center.
Scenario and Sensitivity Analysis
Varying the inputs to see how much the answer moves. It converts a point estimate into a range and identifies which assumption is actually carrying the conclusion.
What Technical Analysis Is, and What It Is Not
Technical analysis studies price and trading volume to describe the balance of supply and demand. It describes conditions; it does not forecast outcomes.
Moving Averages: Simple and Exponential
A moving average is the average of recent closes, redrawn each bar. A simple one weights every close equally; an exponential one weights recent closes more, so it turns sooner. Both turn a jagged series into a slope.
The Golden Cross and the Death Cross
A golden cross is the 50-day moving average crossing above the 200-day; a death cross is the reverse. Both are widely reported, heavily lagging, and describe a trend that has already turned.
RSI: The Relative Strength Index
RSI (Relative Strength Index) is a 0 to 100 oscillator comparing recent gains with recent losses. Above 70 is called overbought and below 30 oversold, and those thresholds are conventions rather than rules.
MACD
MACD (moving average convergence divergence) plots the gap between a 12-period and a 26-period exponential moving average, with a signal line. It is unbounded, which makes it a trend indicator in an oscillator's clothes.
Bollinger Bands
Bollinger Bands are a moving average with bands set a number of standard deviations above and below it. The bands widen and narrow with volatility, which is the whole point of them.
ATR: Average True Range
ATR (Average True Range) measures how far a security typically moves in a period, gaps included. It has no direction, which is what makes it useful for sizing positions and placing stops.
The Stochastic Oscillator
Where the close sits inside the recent high-low range, expressed 0 to 100. It asks a different question from RSI and reaches extremes far more readily.
VWAP
VWAP (volume-weighted average price) is the average price every share traded at during a session, weighted by volume. It is an execution benchmark for institutions first and a chart reference second.
Volume and On-Balance Volume
Trading volume is the number of shares that changed hands. It measures participation, and it is the one chart input that is not a transformation of price, which is what makes it worth reading on its own.
ADX and Trend Strength
ADX measures how strongly a market is trending without saying which way. Its real use is deciding which other indicators are appropriate right now.
Fibonacci Retracements
Fibonacci retracements are levels drawn at set fractions of a prior move, such as 38.2, 50 and 61.8 percent. Their mathematical case is weak; their relevance comes from how many people draw them.
Pivot Points
Reference levels computed mechanically from the prior period's high, low and close. Their appeal is that they are fixed in advance and identical for everyone.
Relative Strength Against the Market
Relative strength is how a stock performs against a benchmark rather than in isolation. A stock down 3 percent on a day the index fell 6 has outperformed. It is a different measure from RSI.
Beta and Volatility
Two different measures of movement. Historical volatility says how much a security moves; beta says how much of that movement is shared with the market.
Keltner and Donchian Channels
Two envelope constructions that answer different questions: one is built from average range, the other from the highest high and lowest low over a window.
Ichimoku Kinko Hyo
Five lines intended to be read as one picture. Every component is a midpoint of a range or a shifted copy, which is what makes the whole thing derived from the same series.
Parabolic SAR
A trailing stop that accelerates. It is always in the market, always on one side, and it flips when price reaches it.