Fundamental Analysis & Valuation — 70 Terms Defined

Economic Value Added Fundamental Analysis & Valuation ₹ crore The profit a business earns above the full cost of the capital employed to produce it. EVA = Net Operating Profit After Tax - (Invested Capital x Weighted Average Cost of Capital)

Effective Tax Rate Fundamental Analysis & Valuation % The tax charge in the accounts expressed as a percentage of profit before tax. Effective Tax Rate = Total Tax Expense / Profit Before Tax x 100

Enterprise Value Fundamental Analysis & Valuation ₹ crore The value of the whole business regardless of how it is financed, equal to market capitalisation plus net debt. Enterprise Value = Market Capitalisation + Total Debt - Cash and Cash Equivalents + Non-Controlling Interests

EV to EBITDA Fundamental Analysis & Valuation ratio (x, times) Enterprise value divided by EBITDA, valuing the whole business against its operating cash generation before capital charges. EV/EBITDA = Enterprise Value / EBITDA

EV to Sales Fundamental Analysis & Valuation ratio (x, times) Enterprise value divided by annual revenue, a capital-structure-neutral version of the price-to-sales ratio. EV/Sales = Enterprise Value / Annual Revenue

Financial Leverage Fundamental Analysis & Valuation ratio (x, times) The use of borrowed money to increase the return on shareholders' capital, and the risk that comes with it. Equity Multiplier = Total Assets / Shareholders' Equity; Degree of Financial Leverage = Percentage Change in Net Profit / Percentage Change in Operating Profit

Forward Price-to-Earnings Fundamental Analysis & Valuation ratio (x, times) The price-to-earnings ratio computed using forecast earnings for a future period rather than reported ones. Forward P/E = Current Market Price / Estimated Earnings per Share for the Forecast Period

Free Cash Flow to Equity Fundamental Analysis & Valuation ₹ crore The cash available to shareholders after operating costs, capital expenditure, debt interest and net debt movements. FCFE = Free Cash Flow to Firm - Interest x (1 - Tax Rate) + Net New Borrowing

Free Cash Flow to Firm Fundamental Analysis & Valuation ₹ crore The cash generated by operations available to all capital providers, before any payments to lenders or shareholders. FCFF = EBIT x (1 - Tax Rate) + Depreciation and Amortisation - Capital Expenditure - Increase in Working Capital

Free Cash Flow Yield Fundamental Analysis & Valuation % Free cash flow expressed as a percentage of market capitalisation or enterprise value. Free Cash Flow Yield = Free Cash Flow / Market Capitalisation x 100

Fundamental Analysis Fundamental Analysis & Valuation qualitative The study of a company's financial statements, industry and economics in order to estimate what its shares are worth. Test: the conclusion rests on the issuer's business economics rather than on the behaviour of its price

Gordon Growth Model Fundamental Analysis & Valuation ₹ A single-stage dividend discount model that values a share assuming dividends grow at a constant rate forever. Value = Next Year's Dividend / (Required Return - Constant Growth Rate)

Gross Margin Fundamental Analysis & Valuation % Gross profit as a percentage of revenue, showing what proportion of each sale survives the direct cost of producing it. Gross Margin = (Revenue - Cost of Goods Sold) / Revenue x 100

Growth at a Reasonable Price Fundamental Analysis & Valuation qualitative An approach that seeks companies growing above average while refusing to pay a multiple that assumes the growth continues indefinitely. Test: above-market earnings growth with a PEG near or below 1 and a defensible reason for the growth to persist

Guidance Fundamental Analysis & Valuation qualitative A company's own published expectation for a future financial metric, such as revenue growth or margin. Test: the statement is forward-looking, quantified or bounded, and issued by the company rather than by an analyst

Impairment Fundamental Analysis & Valuation ₹ crore A write-down of an asset's carrying value when its recoverable amount falls below what the balance sheet records. Impairment Loss = Carrying Amount - Recoverable Amount, where Recoverable Amount is the higher of fair value less costs to sell and value in use

Interest Coverage Ratio Fundamental Analysis & Valuation ratio (x, times) Operating profit divided by interest expense, measuring how many times over the company's earnings can pay its interest bill. Interest Coverage = Operating Profit (EBIT) / Interest Expense

Intrinsic Value Fundamental Analysis & Valuation ₹ The value of a business justified by the cash it can be expected to produce over its life, discounted to today. Intrinsic Value = Sum of Future Free Cash Flows discounted at the required rate of return

Inventory Turnover Ratio Fundamental Analysis & Valuation ratio (x, times) Cost of goods sold divided by average inventory, showing how many times stock is sold and replaced in a year. Inventory Turnover = Cost of Goods Sold / Average Inventory; Inventory Days = 365 / Inventory Turnover

Margin of Safety Fundamental Analysis & Valuation % The discount between the price paid for a security and the analyst's estimate of its intrinsic value. Margin of Safety = (Estimated Intrinsic Value - Market Price) / Estimated Intrinsic Value x 100

Moat Fundamental Analysis & Valuation qualitative A durable structural advantage that lets a company earn returns above its cost of capital for many years without being competed away. Test: returns on capital stay above the cost of capital across a full cycle, and the reason can be named as a specific barrier

Net Debt Fundamental Analysis & Valuation ₹ crore Total borrowings less cash and readily realisable investments, measuring debt after the cash available to repay it. Net Debt = Short-Term Borrowings + Long-Term Borrowings + Lease Liabilities - Cash and Cash Equivalents

Net Profit Margin Fundamental Analysis & Valuation % Net profit as a percentage of revenue, showing what proportion of each rupee of sales the company finally keeps. Net Profit Margin = Net Profit / Revenue x 100

Operating Leverage Fundamental Analysis & Valuation ratio (x, times) The degree to which a company's fixed costs amplify the effect of a revenue change on its operating profit. Degree of Operating Leverage = Percentage Change in Operating Profit / Percentage Change in Revenue