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ValuTool 2.0 - Definitions A/R: A/R is shorthand for accounts receivable. This is the money that is currently owed to a company by its customers. The reasons why the customers owe money is that the product has been delivered but has not been paid for yet. Accounts receivable can be found on the Balance Sheet. A/R Turnover: Accounts receivable turnover is a measure of how many times each year a company completely turns its accounts receivable over, meaning that creditors completely pay up. The higher this, the better. It is used to figure out days sales outstanding (DSO). Assets: Assets are anything that a company owns that has monetary value. Cap Size: Many investors use the size of the market capitalization as a measure of what kind of company they are buying. There are four sizes: micro, small, medium and large. Micro -- $150 million or less
Cash & Equivalents: This is the money that the company has in the bank that is considered completely liquid, meaning that it can be spent. Cash and equivalents can be found on the Balance Sheet. Combined PEG: Understanding that the PEG is not a perfect valuation tool by any stretch of the imagination, some Fools will average the results of all PEGs and then do some further work in order to determine whether a company's stock might be undervalued or overvalued. Cost of Goods Sold: Cost of goods sold, normally abbreviated as COGS, is what it actually costs to make the products including parts, material, labor and upkeep of plant and equipment. Some companies do not have COGS as part of their income statement due to the type of business they are in, most notably banks and insurance companies. COGS can be found on the Statement of Earnings. Current Ratio: The current ratio is a measure of how much liquidity a company has. It is simply the current assets divided by the current liabilities. As a general rule, a current ratio of 1.5 or greater is normally sufficient to meet near-term operating needs. A current ratio that is too high can suggest that a company is hoarding assets instead of using them to grow the business. The currnet ratio is also heavily influenced by the particular industry a company operates in, however. It always pays to compare it to peers in the business world in order to understand what it means in context. Days Sales Outstanding (DSO): Days sales outstanding is a measure of how many days worth of sales the current accounts receivable represents. It is a way of transforming the accounts receivable number into a handy metric that can be compared with other companies in the industry to determine which play is managing their receivables collection better. A company with a lower amount of days worth of sales outstanding is getting their cash back quicker and hopefully putting it immediately to use, getting an edge on the competition. Earnings Per Share (EPS): Earnings per share is the amount that a company earned over a given period divided by the number of shares outstanding. Enterprise Value: Enterprise value is the market capitalization plus debt minus cash and investments. The idea is that when you buy a company, you have to assume the debt and you get the cash as part of the deal, so that is in affect taken off the price. Enterprise value is an attempt to more accurately reflect the value of the company at any one time rather than using market capitalization. Enterprise to Sales: This compares the enterprise value to the trailing sales, much like the price sales ratio or the price plus long-term debt to sales ratio. Many investors look for PSRs below 1.0, although some are willing to go as high as 1.5 to 3.0 depending on the profit margin of the company. Normally above 3.0 you are getting into pretty rough territory, although some companies with very high profit margins will go as high as 10.0 for long periods of time. Estimates: Estimates are what analysts have determined that the company will earn in the future based on conversations with the company, comments in the publicly available documents, reading of goat entrails and what the voices tell them. Foolish Eight Criteria: These are the criteria that are explained in the Motley Fool Investment Guide over the course of about four chapters. Please feel free to check there for more details. Forward P/E: This is a price/earnings (P/E) ratio that is computed using the forward estimates for the company. This gives you a sense of how much the market will value the company at if it in fact meets its earnings estimates. Inventory: Inventory consists of the components and finished products that the company has currently stockpiled to sell to customers. Not all companies carry inventory, particularly if they are involved in advertising, consulting, services or information industries. Inventory can be found on the Balance Sheet. Inventory Turnover: Inventory turnover is a measure of how many times each year a company completely turns its inventory over, meaning that it completely uses it all up. The less money you have to have tied up in inventory in order to fill your distribution channels, the more money you will have to do all the other things a company needs done -- marketing, advertising, research and development, acquisitions, expansions and so on. Investments: Investments take a number of forms, but most often are bonds or stock. If they are bonds, they are simply valued at the current market price of the bonds. If they are stock, then these are the company's investments in other companies carried at their current market value. Sometimes companies have something called restricted cash, which means that it is cash but it cannot be spent because of some exigency. Treat this as an investment. Investments and restricted cash can be found on the Balance Sheet. Liabilities: Liabilities are bills or debts that the company owes to another party, normally a supplier or a bank. Long-Term Debt to Market Cap: This is a measure of how much debt the company has relative to its current price. You divide current long-term debt by the market capitalization. Many investors believe as a general rule you should never have a company have more than 0.20 to 0.25 or higher. The long-term debt to market cap is heavily influenced by the particular industry a company operates in, however. It always pays to compare it to peers in the business world in order to understand what it means in context. Long Term Liabilities: Long term liabilities, also known as long-term debt, is the money that the company has borrowed from lenders in order to fund its expansion, buy property or do other things that companies do. Long-term debt can be found on the Balance Sheet. Market Capitalization: The market capitalization is the total number of shares outstanding multiplied by the current price of the stock. This number tells you the total value of all a company's outstanding stock at any given moment. This is the price at which you can buy the entire company. PEG: The P/E and growth ratio (PEG) is a measure of the P/E versus the estimated rate of growth, and gives you a sense of whether or not the market is valuing a company's future earnings potential well relative to its earnings rate of growth. The PEG simply takes the annualized rate of growth out to the furthest estimate and compares this with the current stock price. As a rule of thumb, 1.0 means a company is fairly valued assuming that it is not a cyclical or financial company. Below 1.0 means it might be undervalued and above 1.0 means it might be overvalued. The PEG is most often used for smaller to medium-sized growth companies. Prepaid Expenses: Prepaid expenses are bills that the company has paid in advance. Many times a company will pay for a year-long service in one lump sum, but for accounting purposes still charge the service at a monthly rate against the revenues it takes in to find out what its earnings are. The expenses that have been paid but not recognized are carried on the books are prepaid expenses. Not all companies have prepaid expenses. Prepaid expenses can be found on the Balance Sheet. Profit Margins: Profit margins are a measure of how much a company earned divided by their revenues the company has generated over a given period. The higher the percentage, the more profitable a company is. If a company has 10% profit margins, that means that ten cents of every dollar it makes is pure profit. Price to Book: Shareholder equity helps you value a company when you use it to figure out book value. Book value is literally the value of a company that can be found on the accounting ledger. You take a company's shareholder's equity and divide it by the current number of shares outstanding. When you have book value, you take the stock's current price and divide by the current book value in order to arrive at a price-to-book ratio. The closer to book value you can buy something at, the better it is. Book value is actually somewhat skeptically viewed as it is subject to change when accounting rules are modified. Price to Sales: The price to sales ratio takes the current market capitalization of a company and divides it by the last 12 months trailing revenues. Many investors look for PSRs below 1.0, although some are willing to go as high as 1.5 to 3.0 depending on the profit margin of the company. Normally above 3.0 you are getting into pretty rough territory, although some companies with very high profit margins will go as high as 10.0 for long periods of time. Price to Sales (with LT debt): The price plus long-term debt to sales ratio takes the current market capitalization of a company plus the long-term debt and divides it by the last 12 months trailing revenues. The thinking here is that because an acquirer would get the debt, you should count it as part of the market value of the company. Many investors look for PSRs below 1.0, although some are willing to go as high as 1.5 to 3.0 depending on the profit margin of the company. Normally above 3.0 you are getting into pretty rough territory, although some companies with very high profit margins will go as high as 10.0 for long periods of time. Quarterly Dividend: Many companies pay investors a portion of earnings once every quarter. This is called the quarterly dividend.Shares Outstanding: Publicly traded companies issue shares of stock to the individual stakeholders. Shares outstanding tells you how many shares have been issued of a particular company. Quick Ratio: The quick ratio is current assets minus inventories over current liabilities. By taking inventories out of the equation, you can check and see if a company has sufficient liquid assets to meet short term operating needs. Most people look for a quick ratio in excess of 1.0 in order to ensure that there is enough cash on hand to pay the bills and keep on going. The current ratio is also heavily influenced by the particular industry a company operates in, however. It always pays to compare it to peers in the business world in order to understand what it means in context. Revenues: Revenues is another word for sales. Whenever a company sells something or makes money somehow, it is booked as revenues by the company's accountants. Short Term Liabilities: Short-term liabilities are also known as Current Liabilities. These are the debts that the company has to pay within the next year. There are five main categories of current liabilities: Accounts Payable, Accrued Expenses, Income Tax Payable, Short-Term Notes Payable and Portion of Long-Term Debt Payable. Short-term liabilities can be found on the Balance Sheet. Trailing P/E: The price/earnings (P/E) ratio simply takes the price and divides it by the last four quarters' worth of earnings, known as the trailing four quarters. This is a measure of how the market is currently valuing the shares. Working Capital: Working capital is simply current assets minus current liabilities and can be positive or negative. Working capital is basically an expression of how much in liquid assets the company currently has to build its business, fund its growth and produce shareholder value. If a company has ample positive working capital, then they are in good shape with plenty of cash on hand to pay for everything they might need to buy. If a company has negative working capital, then their current liabilities are actually greater than their current assets and they lack the ability to spend with the same aggressive nature as a working capital positive peer. All other things being equal, a company with positive working capital will always outperform a company with negative working capital. Working Capital to Market Capitalization (with LT debt): By comparing working capital to market capitalization plus long-term debt, you can get a sense of how much of a company's current price is backed up by liquid assets. The higher this is, the better. In some magical cases, you can actually buy a company for below the value of its current working capital. YPEG: The year-ahead P/E and growth ratio (YPEG) is another way of using estimates to figure out whether or not a company might be undervalued. The YPEG is best suited for valuing larger, more-established growth companies.The YPEG uses the estimated 5-year growth rates as a fair P/E for the company and multiples this P/E by next year's expected earnings to see if the company might be undervalued or overvalued. Y/YPEG: The year over year P/E and growth ratio (Y/YPEG) is something that some Fool's use to get another potential P/E for a company. Taking the estimates for next year and dividing them by the estimates for this year, you get another potential growth rate that the P/E can equal. Yield: To figure out the yield, you take the dividend paid in the last four quarters and divide this by the current share price. This tells you the income that you can expect to earn over the next twelve months. It is in a percentage yield just like a bond or a certificate of deposit.
Introduction
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