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Understanding companies
How businesses make money and how investors describe them.
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Understanding companies
What is market capitalisation?
Market capitalisation estimates what all of a company's shares are worth at the current market price.
Understanding companies
What happens when a company reports earnings?
An earnings report is a regular update on what a listed company sold, earned and expects next.
Understanding companies
Revenue
Revenue is the amount recognised from selling goods or services before related operating costs are deducted. Recognition rules determine when activity enters the income statement.
Understanding companies
Profit
Profit is what remains after defined revenues and expenses are matched for an accounting period. Different profit measures stop at different layers, so the label needs a definition.
Understanding companies
Gross profit
Gross profit is revenue minus the direct cost assigned to producing or delivering the goods and services sold. It sits before wider operating expenses such as administration and marketing.
Understanding companies
Operating profit
Operating profit is profit from the company's operations after operating expenses but before specified financing and tax items. The precise reported or adjusted definition must be checked.
Understanding companies
Profit margins
A profit margin expresses a defined profit as a percentage of revenue. It shows how much of each revenue unit remains at that stage of the income statement.
Understanding companies
Earnings per share
Earnings per share, or EPS, allocates a defined profit attributable to ordinary shareholders across a weighted share count. Diluted EPS also reflects specified potential shares.
Understanding companies
What is a P/E ratio?
A P/E ratio compares a company's share price with the earnings attributed to each share.
Understanding companies
What does valuation mean?
Valuation is the process of relating an asset's price to the cash, earnings, assets or outcomes it may provide. It produces a conditional estimate or comparison, not an observable fact.
Understanding companies
Book value
Book value is the accounting value of assets minus liabilities attributable to owners. It records recognised balance-sheet amounts, which can differ greatly from market or economic value.
Understanding companies
Price-to-book ratio
Price-to-book compares the market value of equity with its accounting book value. It shows the premium or discount applied to the recognised net assets, not whether that pricing is justified.
Understanding companies
Enterprise value
Enterprise value is a market-based estimate of the value of a company's operations to all capital providers. A common bridge adds debt-like claims to equity value and subtracts available cash.
Understanding companies
Free cash flow
Free cash flow is cash generated after a defined set of operating and investment needs. There is no single universal version, so the calculation must state what is free and for whom.
Understanding companies
Cash flow
Cash flow records cash entering and leaving a business during a period. It complements profit because accounting recognition and actual payment often occur at different times.
Understanding companies
The balance sheet
A balance sheet reports recognised assets, liabilities and owners' equity at a point in time. The accounting equation links them: assets equal liabilities plus equity.
Understanding companies
The income statement
An income statement reports revenue, expenses and profit for a period under accounting recognition rules. It explains performance, not the complete movement in cash or financial position.
Understanding companies
Financial statements
Financial statements are linked reports describing performance, financial position, cash movements and changes in owners' interests. The notes and accounting policies are part of the evidence.
Understanding companies
Assets and liabilities
Assets are recognised resources expected to provide economic benefit; liabilities are present obligations expected to require resources. Equity is the residual after liabilities are deducted from assets.
Understanding companies
Company debt
Company debt is borrowed capital that creates contractual payment obligations. It can fund productive investment, but fixed claims make the owners' remaining outcome more sensitive.
Understanding companies
Return on equity
Return on equity, or ROE, relates a defined profit for ordinary owners to their accounting equity. It measures reported earning power on that book-value base, not investment return from the share price.
Understanding companies
Return on invested capital
Return on invested capital, or ROIC, compares operating profit after tax with capital committed to operations. It asks how productively the business uses funding before owner-specific financing effects.
Understanding companies
Company guidance
Company guidance is management's stated expectation or range for future performance under current assumptions. It updates the information set but remains a forecast, not a commitment.
Understanding companies
Analyst estimates
Analyst estimates are forecasts for company measures such as revenue or earnings. A consensus combines selected forecasts, but dispersion and update timing reveal information hidden by the average.
Understanding companies
Earnings surprises
An earnings surprise is the difference between a reported earnings measure and a defined pre-release expectation. Its sign and size depend on the measure, estimate source and cut-off time.
Understanding companies
Share buybacks
A share buyback is a company purchase of its own shares. Retiring or holding those shares can reduce the count outstanding, but value depends on price, funding and alternative uses of capital.
Understanding companies
Share dilution
Share dilution occurs when additional ownership claims reduce an existing share's percentage interest or economic claim. New capital or compensation may still create value if used productively.
Understanding companies
Stock splits
A stock split changes the number of shares and the price per share in inverse proportions. By itself it does not change the company's equity value or an owner's percentage interest.
Understanding companies
Competitive advantage
A competitive advantage is a capability or position that helps a company sustain attractive economics against rivals. It matters only while it remains valuable, difficult to copy and properly exploited.
Understanding companies
Cyclical and defensive companies
Cyclical companies' demand and profits tend to move strongly with economic conditions; defensive companies tend to face steadier demand. The distinction is a spectrum, not a permanent label.