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Four Financial Terms A New Investor Must Know

FourAces

When I first started investing, tuning into CNBC or Bloomberg felt like listening to a foreign language. EPS? Free Cash Flow? Leverage? What do all these mean?

In here, we’ll be taking a look at some basic financial terms that can help jump start your investing-aspirations.

Net Income

In the earnings announcements that companies release, we will come across the Net Income of a company. Net income is a company’s total profit or loss after deducting all expenses.

Common expenses include cost of goods sold, depreciation, interest, taxes and other administrative charges. Net income is also frequently referred to as “the bottom line” of a company.

Noble Group (SGX: N21), which announced its third quarter results last month, had quarterly net income of US$18.4m. That means that the company has earned about US$18m in profits after accounting for all possible expenses for the quarter. If a company is unable to cover its expenses with its revenue, it will report a Net Loss Instead.

Earnings Per Share (EPS)

Meanwhile, EPS is calculated by dividing a company’s net income with its total shares outstanding.

For Noble Group, they have roughly 6.3 billion shares outstanding. If we divide its net income of US$18.4m with its number of outstanding shares, we can see that Noble Group earned about 0.25 US Cents for the third quarter this year.

With the earnings per share for the last 12 months for a company, we could use it to compute its Price to Earnings Ratio (P/E Ratio)

Earnings before Interest, Taxes, Depreciation and Ammonization (EBITDA)

For companies that are making losses, a better way to value them might be through the Earnings before Interest, Taxes, Depreciation and Ammonization (EBITDA) figure.

EBITDA comes from adding back Interest, Taxes, Depreciation and Ammonization to a company’s net income. Some investors might prefer to use this number to compare between companies with different financing ratios.

Return of Equity (ROE)

Return of Equity is very valuable in comparing the profitability of a company with its peers. It shows how much money is made in relation to the money invested by the shareholders. The formula for ROE is:

Return on Equity = Net Income / Shareholder’s Equity

By looking at the latest annual report for Noble Group, we can see that it is able to produce a ROE of 9.2% for the year 2012. If we compare this number to its competitors, we will get a sense of the effectiveness of Noble Group’s management in generating returns per shareholders’ invested capital.

Some of Noble’s industry peers include Singapore-listed Olam International (SGX: O32). Both companies are part of Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI). For Olam, its ROE for its last completed financial year stood at 9.8%, which is slightly higher than that of Noble.

Foolish Bottom Line

While it’s true that there are many different financial terms that are used in the realm of investing, the concepts behind most can be quite basic. For any new investor who’s just starting to find his feet, hang in there. Such terms will likely start to make sense after a few more readings.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.