Terms

Momentum

test

PEG ratio

The EPS growth number is provided by the company and is their forecast of how much additional earnings they anticipate in the coming reporting period.  Although nowhere near as widely used as the basic P/E Ratio, many financial experts feel the PEG gives a better measure of whether the share price is undervalued or overvalued….

Market valuation ratios

To give you a working example, ere are the numbers for two stocks in the biotech sector (as at 29th May 2011):   SRX CSL Sector Price to Earnings (P/E) 25.31 19.2 14.8 Price to Earnings Growth (PEG) 10 2.06 10 Price to Book (P/B) 5.65 4.42 2.03 Price to Sales (P/S) 4.51 2.24 8.57…

Current Ratio

With liquidity ratios, higher numbers represent safer financial cushions against economic shocks.  A company with a high current ratio should have no trouble meeting its short-term debt obligations without sacrificing operational capability. However, taking the Current Ratio at face value without considering the nature of the company’s assets can lead to trouble.  This ratio assumes…

Profitability ratios

Return on Equity (ROE) tells us how a company utilises investor dollars to generate earnings growth, with ROEs between 15% and 20% indicating good performance. Return on Assets (ROA) tells us how well the company uses its assets to generate earnings growth, and dividend yield shows how much the company pays out in dividends for…

Debt to equity

Lower numbers here mean a company is using less leverage, or debt, to operate. Although larger companies can generally handle larger debt loads, the D/E Ratio taken in isolation doesn’t tell you anything about possible trends in the use of debt.  Has the company’s debt been steadily increasing over the past years?    If so,…

Credit Default Swaps (CDS)

Credit default swaps (CDS) were largely unknown until the ballooning CDS market eventually brought global financial markets unstuck, resulting in the global financial meltdown of 2008. Credit default swaps enabled banks to issue complex debt securities by reducing the risk to buyers. Before the financial crisis, the institutions that offered credit default swaps saw it…

Contingent Order

A contingent order enables you to place an order into the market ‘only if’ certain conditions are met. For example, an investor that wants to buy a set of shares and offload another set at the same time (a buy-write) would place a contingent order. These types of orders can be difficult to pull off…

Defensive Company

Companies that deal with products or services that have inelastic demand are likely to be defensive companies. In simpler terms, anything having ‘inelastic’ demand is something that is an essential good or service, irrespective of price changes. Such products and services include healthcare, water, electricity and fuel. The stability offered by a defensive company is…

Brokerage

Brokers can be found operating in multiple markets – insurance, stock exchanges, real estate, etc. The services they provide are in the area of intermediation, making demand and supply meet more easily. The fees they charge can take the form of a flat payment or a percentage of the transaction.