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Glossary of investing terms
Does the term “price-to-cash-flow ratio” make you think you missed out on a bargain? Does “offering price” make you want to negotiate? Financial terms can be confusing. The following are definitions of some commonly used terms to help you increase your financial savvy. Net Asset Value (NAV): The value of one mutual fund share, calculated once a day, based on the closing market price for each security in the fund’s portfolio. Offering Price: The price at which one share of a mutual fund may be purchased. It includes the net asset value per share plus the applicable sales charge. Operating Expenses: The day-to-day costs of running a business paid from a fund’s assets before earnings are distributed to shareholders. Price-to-Earnings Ratio (P/E): The share price is divided by annual earnings per share, which indicates how much investors are willing to pay for $1 of earnings. Generally, the higher the P/E ratio, the more confident investors are about the prospects of an individual stock or the market overall. Stocks with the fastest earnings growth command the highest P/Es. Price-to-Cash-Flow Ratio (P/CF): The share price divided by annual cash flow (annual earnings plus non-cash charges such as depreciation and amortization) per share. This ratio can be used to gauge the value of businesses that make large capital outlays that can result in non-cash charges that can depress reported earnings per share. Price-to-Growth-Flow Ratio (P/GF): The share price divided by growth flow (annual earnings plus spending on research and development) per share. This ratio is used to identify companies that are pouring money into new products that have the potential to boost future profits. Price-to-Book-Value Ratio (P/BV): The share price divided by book value (assets less liabilities) per share. Value investors look for low price-to-book-value ratios to find stocks that are selling for less than they are really worth. |
