Glossary (Starter Terms)

Foundational investing terms (plain-language). This glossary will expand over time—PRs welcome.

Core Financial Metrics

Revenue: Total money a company brings in from selling goods or services.
Gross Margin: (Revenue − Cost of Goods Sold) ÷ Revenue. Indicates basic product/service profitability.
Operating Margin: Operating Income ÷ Revenue. Efficiency after operating expenses (ex R&D classification nuances).
Free Cash Flow (FCF): Cash generated after capital expenditures; available for reinvestment, buybacks, debt reduction, or dividends.
Net Income: Profit after all expenses, including taxes and interest. Can be influenced by non-cash or one-time items.
EBITDA: Earnings before interest, taxes, depreciation, amortization. Proxy for core operating performance (imperfect—can hide capex needs).
Return on Invested Capital (ROIC): After‑tax operating profit ÷ invested capital. Measures efficiency of capital deployment.
Return on Equity (ROE): Net income ÷ shareholder equity. Can be boosted by leverage.

Market Capitalization: Share price × shares outstanding.
Enterprise Value (EV): Market cap + debt − cash. Represents theoretical takeover price.
Multiple: Valuation ratio (e.g., P/E, EV/EBITDA, P/S) used to contextualize price relative to fundamentals.
Price-to-Earnings (P/E): Share price ÷ earnings per share. Simpler profit-based multiple.
EV/EBITDA: Compares enterprise value to operating cash proxy; common for capital-light firms.
Free Cash Flow Yield: FCF ÷ market cap (or EV). Higher yield can imply undervaluation (context required).
Price-to-Sales (P/S): Market cap ÷ revenue. Used for early-stage or low-profit companies; needs margin trajectory context.
Implied Growth: Growth rate the current valuation suggests the market is pricing in.

Dilution: Ownership percentage reduction due to new shares (options, equity raises, acquisitions).
Buyback (Repurchase): Company purchases its own shares, potentially increasing per-share metrics.
Leverage: Use of debt to finance operations or growth; increases both potential returns and risk.
Net Cash / Net Debt: Cash & equivalents minus total debt.

Operating Cash Flow (OCF): Cash generated from core operations before capex.
Capital Expenditures (Capex): Spending on long-term assets (equipment, infrastructure, software capitalization).
Working Capital: Current assets − current liabilities. Tight working capital can strain liquidity.
Accruals: Non-cash accounting adjustments; high persistent accruals may flag earnings quality issues.

Organic Growth: Growth excluding acquisitions or currency impacts.
Secular Tailwind: Long-term structural demand driver (e.g., cloud adoption, aging demographics).
Total Addressable Market (TAM): Revenue opportunity if a company captured 100% of its target market.
Unit Economics: Per-customer or per-transaction profitability model.

Moat: Durable advantage protecting returns (brand, scale, switching costs, network effects, data, regulation).
Switching Costs: Friction (time, money, risk) that discourages customer migration.
Network Effects: Product/service value increases as more participants join.
Pricing Power: Ability to raise prices without losing meaningful demand.

Volatility: Magnitude of price fluctuations; says nothing about business quality.
Drawdown: Peak-to-trough percentage decline over a period.
Beta: Sensitivity of a stock's movement relative to the broader market (statistical, backward-looking).
Margin of Safety: Buffer between intrinsic value estimate and purchase price.
Catalyst: Event that may materially change valuation perception (earnings, product launch, regulatory shift).

Diversification: Spreading capital across assets/sectors to reduce idiosyncratic risk.
Position Sizing: Allocation percentage assigned to a holding based on conviction and risk profile.
Rebalancing: Adjusting allocations back to target weights (risk control / discipline mechanism).
Thesis: Core hypothesis for owning a business—must be falsifiable.
Monitoring Plan: Predefined metrics/events you track to update or exit a position.

10-K / Annual Report: Comprehensive yearly filing (US) detailing business performance and risks.
10-Q / Quarterly Report: Interim update (US) on financials and operations.
MD&A: Management Discussion & Analysis—qualitative context for financial results.
SEDAR+ / EDGAR: Canadian / US regulatory filing systems.

Liquidity: Ease of buying/selling without moving the price materially.
Overhang: Expected future share supply (e.g., large unlock, pending secondary offering).
Runway: Time a company can operate before needing additional capital (often for early-stage firms).
Sharpe Ratio: Risk-adjusted return metric (excess return ÷ volatility).

Last updated: 2025-10-16