Financial Glossary

Plain-English definitions for every metric the InvestSkill frameworks emit. Each entry gives the formula, a rough “good vs. bad” range, and which skill surfaces it. Ranges are rules of thumb, not absolute rules — context (industry, growth stage, rates) always matters.

Jump to: A · B · C · D · E · F · G · I · M · P · Q · R · S · T · W · Y

A

Altman Z-Score

Bankruptcy-risk score combining five weighted ratios (working capital, retained earnings, EBIT, equity, sales — all relative to assets).

Good / bad: > 3.0 safe · 1.8–3.0 grey zone · < 1.8 distress.
Surfaced by: financial-report-analyst, result-validator.

Alpha

Return earned above what the market (or a benchmark) would predict for a given level of risk. Positive alpha = skill or edge; zero alpha = you just matched the market.

Surfaced by: portfolio-review.

Asset Turnover

How efficiently a company converts assets into revenue. Revenue ÷ Total Assets.

Good / bad: higher is better, but it’s industry-specific (retail runs high, utilities low).
Surfaced by: fundamental-analysis.

B

Beta (β)

How much a stock moves relative to the market. β = 1 moves with the market; β > 1 is more volatile; β < 1 is calmer; negative β moves opposite.

Good / bad: not good or bad — it sizes risk. High beta amplifies both gains and losses.
Surfaced by: dcf-valuation (feeds WACC), technical-analysis, portfolio-review.

Book Value

Net assets on the balance sheet: Total Assets − Total Liabilities. The accounting “breakup” value of equity.

Surfaced by: stock-valuation, fundamental-analysis.

Burn Rate

How fast a company spends cash in excess of revenue, usually for pre-profit firms. Paired with runway (months of cash left).

Good / bad: lower burn + longer runway is safer. Negative free cash flow with short runway is a red flag.
Surfaced by: financial-report-analyst.

C

CAGR (Compound Annual Growth Rate)

The smoothed annual growth rate over a multi-year period. (End ÷ Start)^(1/years) − 1.

Surfaced by: dividend-analysis, fundamental-analysis.

Current Ratio

Short-term liquidity: Current Assets ÷ Current Liabilities. Can the company cover the next 12 months of bills?

Good / bad: > 1.5 comfortable · 1.0–1.5 adequate · < 1.0 potential strain.
Surfaced by: fundamental-analysis, financial-report-analyst.

D

Days-to-Cover (Short Interest Ratio)

Days of normal trading volume it would take short sellers to buy back (cover) all shorted shares. Shares Short ÷ Average Daily Volume.

Good / bad: higher = more squeeze fuel. > 5 days is notable; > 10 is high.
Surfaced by: short-interest.

DCF (Discounted Cash Flow)

Valuation method that projects future free cash flows and discounts them back to today’s value using a discount rate (WACC). The output is an intrinsic value per share.

Surfaced by: dcf-valuation, stock-valuation. See Concepts → How intrinsic value works.

Debt-to-Equity (D/E)

Leverage: Total Debt ÷ Shareholders' Equity. How much the company funds itself with debt vs. owner capital.

Good / bad: < 1.0 conservative · 1.0–2.0 moderate · > 2.0 leveraged (industry-dependent — banks and utilities run high).
Surfaced by: fundamental-analysis, dividend-analysis.

Dividend Coverage Ratio

How many times earnings (or free cash flow) cover the dividend. EPS ÷ Dividend per Share, or the FCF version.

Good / bad: > 2x healthy · 1.5–2x adequate · < 1.2x fragile.
Surfaced by: dividend-analysis.

Dividend Payout Ratio

Share of earnings paid out as dividends. Dividends ÷ Net Income.

Good / bad: < 60% generally sustainable · 60–80% watch · > 100% paying more than it earns (yield-trap warning).
Surfaced by: dividend-analysis.

Dividend Yield

Annual dividend as a percent of price. Annual Dividend ÷ Price.

Good / bad: a very high yield (e.g., > 7%) is often a warning, not a gift — the market may expect a cut. See yield trap.
Surfaced by: dividend-analysis.

E

EBITDA

Earnings Before Interest, Taxes, Depreciation & Amortization — a proxy for operating cash generation that strips out capital structure and accounting choices.

Caution: ignores real capital costs; “EBITDA is not cash flow.”
Surfaced by: stock-valuation, fundamental-analysis.

Net income attributable to each share. Net Income ÷ Shares Outstanding. “Diluted EPS” includes options/convertibles.

Surfaced by: nearly every fundamental skill.

EV (Enterprise Value)

The whole-company price a buyer pays: Market Cap + Total Debt − Cash. Used instead of market cap so debt-heavy and cash-rich firms compare fairly.

Surfaced by: stock-valuation.

EV/EBITDA

Enterprise value relative to operating earnings — a capital-structure-neutral valuation multiple.

Good / bad: < 10x often cheap · 10–15x fair · > 15x rich (sector-dependent).
Surfaced by: stock-valuation.

F

FCF (Free Cash Flow)

Cash left after operating expenses and capital spending. Operating Cash Flow − CapEx. The cash an owner could actually take out.

Good / bad: consistently positive and growing is the gold standard. Negative FCF needs a growth story to justify it.
Surfaced by: dcf-valuation, fundamental-analysis, dividend-analysis.

FCF Yield

Free cash flow relative to market cap. FCF ÷ Market Cap. The cash-return version of an earnings yield.

Good / bad: > 5% attractive · 3–5% fair · < 3% expensive.
Surfaced by: stock-valuation.

G

Gross Margin

Profit after the direct cost of goods. (Revenue − COGS) ÷ Revenue. A first read on pricing power.

Good / bad: higher and stable signals a moat; falling margins signal competition.
Surfaced by: fundamental-analysis, competitor-analysis.

Greeks (Options)

Sensitivities of an option’s price: Delta (vs. underlying price), Gamma (rate of delta change), Theta (time decay), Vega (vs. volatility), Rho (vs. interest rates).

Surfaced by: options-analysis.

I

Implied Volatility (IV)

The market’s expected future volatility, baked into option prices. Higher IV = pricier options = bigger expected swings.

Surfaced by: options-analysis.

IV Rank / IV Percentile

Where current implied volatility sits versus its own past year (0–100). Tells you if options are “expensive” or “cheap” relative to their own history.

Good / bad: high IV rank favors selling premium; low favors buying it.
Surfaced by: options-analysis.

Interest Coverage Ratio

How easily operating earnings pay interest. EBIT ÷ Interest Expense.

Good / bad: > 5x safe · 2–5x adequate · < 1.5x danger.
Surfaced by: financial-report-analyst, dividend-analysis.

M

Margin of Safety

The discount between a stock’s price and its estimated intrinsic value. The buffer that protects you if your estimate is wrong.

Good / bad: value investors often want 20–40%+ before buying.
Surfaced by: dcf-valuation, stock-eval. See Concepts → Margin of safety.

Moat

A durable competitive advantage that protects long-term profits — brand, network effects, switching costs, scale, or patents.

Good / bad: wide > narrow > none. Shows up as persistently high ROIC and stable margins.
Surfaced by: competitor-analysis, stock-eval. See Concepts → Reading a moat.

P

P/B (Price-to-Book)

Price relative to accounting net worth. Price ÷ Book Value per Share.

Good / bad: most useful for asset-heavy/financial firms; < 1.0 can mean cheap or troubled.
Surfaced by: stock-valuation.

P/E (Price-to-Earnings)

Price per dollar of earnings. Price ÷ EPS. The most-quoted multiple; compare to the company’s own history and peers, not in isolation.

Good / bad: there is no universal “good” P/E — a 40x grower can be cheaper than a 10x decliner. Pair with growth (see PEG).
Surfaced by: stock-valuation, stock-eval.

P/S (Price-to-Sales)

Price per dollar of revenue. Market Cap ÷ Revenue. Useful for unprofitable or early-stage firms where P/E is meaningless.

Surfaced by: stock-valuation.

PEG Ratio

P/E adjusted for growth. P/E ÷ Earnings Growth Rate (%). Puts fast and slow growers on the same footing.

Good / bad: ~1.0 fairly priced · < 1.0 potentially cheap · > 2.0 expensive.
Surfaced by: stock-valuation, stock-eval.

Piotroski F-Score

A 0–9 checklist of fundamental health across profitability, leverage/liquidity, and operating efficiency. Each “yes” scores a point.

Good / bad: 7–9 strong · 4–6 middling · 0–3 weak.
Surfaced by: stock-eval, fundamental-analysis.

Porter’s Five Forces

A framework rating industry attractiveness across five pressures: competitive rivalry, supplier power, buyer power, threat of substitutes, threat of new entrants.

Surfaced by: competitor-analysis.

Q

Quick Ratio (Acid Test)

Stricter liquidity than current ratio — excludes inventory. (Current Assets − Inventory) ÷ Current Liabilities.

Good / bad: > 1.0 comfortable.
Surfaced by: fundamental-analysis.

R

Residual Income

Earnings above the cost of the equity capital used to produce them. Value is created only when returns exceed the cost of capital.

Surfaced by: stock-valuation.

ROA (Return on Assets)

Profit per dollar of assets. Net Income ÷ Total Assets. How well management uses the asset base.

Good / bad: > 5% solid (industry-dependent).
Surfaced by: fundamental-analysis.

ROE (Return on Equity)

Profit per dollar of shareholder equity. Net Income ÷ Equity. Watch for ROE inflated by heavy debt.

Good / bad: > 15% strong · 10–15% decent · < 10% weak.
Surfaced by: fundamental-analysis, stock-eval.

ROIC (Return on Invested Capital)

The cleanest profitability measure: returns on all capital (debt + equity) put to work. NOPAT ÷ Invested Capital. Compare to WACC — value is created only when ROIC > WACC.

Good / bad: > 15% excellent · 10–15% good · below WACC = destroying value.
Surfaced by: stock-eval, fundamental-analysis, competitor-analysis.

S

Sharpe Ratio

Risk-adjusted return: excess return per unit of volatility. (Return − Risk-free Rate) ÷ Std Dev.

Good / bad: > 1 good · > 2 very good · < 1 weak.
Surfaced by: portfolio-review.

Short Float (Short Interest %)

Percent of freely tradable shares sold short. Shares Short ÷ Float.

Good / bad: > 10% elevated · > 20% high (crowded short, squeeze potential).
Surfaced by: short-interest.

Support & Resistance

Price levels where buying (support) or selling (resistance) has historically clustered. Breaks of these levels are technical signals.

Surfaced by: technical-analysis.

T

Terminal Value

In a DCF, the value of all cash flows beyond the explicit forecast period — often 60–80% of the total. Highly sensitive to the assumed perpetual growth rate.

Surfaced by: dcf-valuation. See Concepts → How intrinsic value works.

W

WACC (Weighted Average Cost of Capital)

The blended required return on a company’s debt and equity — the discount rate in a DCF. (E/V × Cost of Equity) + (D/V × Cost of Debt × (1−tax)).

Good / bad: not good/bad — it’s the hurdle. A small WACC change swings intrinsic value a lot.
Surfaced by: dcf-valuation.

Y

Yield Trap

A stock with a tempting dividend yield that is unsustainable — the market has priced in a coming cut. Spotted via payout ratio > 100%, falling FCF, or rising debt.

Surfaced by: dividend-analysis. See Use Cases → The dividend investor.

See also: Concepts for the mental models behind these metrics · Choose a Skill to find the right framework · Data & Accuracy for how to trust the numbers.

Educational reference only. Not financial advice.

Glossary