5 Financial Terms Every New Investor Should Understand
As a new investor, one of the major sources for getting your information about the market would be to follow the news or read blog posts. However, whenever a quarter ends and a company begins to declare its results, most tend to get frazzled trying to decode the terms used. Richard Cayne of Meyer International explains that understanding the basic financial terms will help new investors gain more confidence and take better decisions, especially those from a non-accounting background.
Richard Cayne of Meyer International mentions that the first and most commonly used term is Net Income or NI, which essentially declares a company’s profits or total earnings. The Net Income is arrived at after subtracting all the expenses from the revenue of the company. However, these expenses not only include the general costs of running the company, but also include any interest, depreciation, taxes, etc. that need to be paid out of the company’s assets. Richard Cayne of Meyer International further adds that it is quite obvious that an increase in the NI of a company is perceived as a positive factor and is considered while evaluating the stock’s performance.
EBITDA or Earnings before Interest, Tax, Depreciation and Amortization is another element of a company’s profit and loss statement that is generally advertised. While some say it offers a simplified insight into the earnings and growth in revenue of a firm, others argue that these numbers can be quite misleading and only the Net Income should matter. Richard Cayne of Meyer International comments that as a new investor, you should be careful while reading the statements of any company and understand how a distinction between NI and EBITDA numbers can have a major impact on the final payouts by the company.
Another important term to keep on your new watch list according to Richard Cayne of Meyer International is GAAP and non-GAAP figures. GAAP, expanding into Generally Accepted Accounting Principles, are the rules and guidelines that are used to report financial information. The GAAP measures are used to ensure standardized statements and consistency in reporting. However, Richard Cayne of Meyer International warns new investors against putting their full faith in non-GAAP figures, as they leave a lot of room for manipulations.
Richard Cayne of Meyer International says that EPS is one of the most common terms brought up while announcing the earnings of a company. The EPS or Earning Per Share is calculated by subtracting the preferred dividends from the net income and dividing the difference by the average number of outstanding shares. A major indicator of the company’s financial health, the EPS is usually compared to that of the previous quarter or year to measure performance. Earnings Estimates is another important term to keep an eye out for says Richard Cayne of Meyer International. Often published by financial analysts, these estimates are forecasted on the basis of the revenues expected from future projects and due research into the operations of the company, and have a major impact on the stock values.
