Plain-English definitions of the terms that actually decide whether a stock is worth owning. No jargon for its own sake.
Most investing glossaries define a term and stop. Each entry here also says why the term matters to a decision, because a definition you cannot act on is trivia.
A durable structural advantage that lets a company keep earning high returns while competitors try to take them away. Warren Buffett popularised the term. A moat is not a good product or a strong brand on its own; it is the reason those advantages survive competition for years rather than quarters.
Why it matters: The single best predictor of whether high returns persist.
A moat where each additional user makes the product more valuable to every other user. Marketplaces, payment networks and social platforms are the classic examples. Network effects are powerful because they strengthen as the company grows, making late entrants progressively less able to compete on product alone.
Why it matters: Strengthens with scale rather than eroding.
The money, time, risk or disruption a customer absorbs to move to a competitor. High switching costs let a company raise prices without losing customers, because leaving is more expensive than paying more. Enterprise software and banking relationships are typical examples.
Why it matters: Explains pricing power without a better product.
A company's ability to raise prices without materially losing customers. It is the most direct evidence a moat is real, because it shows customers have no acceptable substitute. Test it by looking at whether gross margins hold or expand through periods of cost inflation.
Why it matters: The cleanest observable proof of a moat.
A moat where a company produces at a structurally lower cost than competitors, through scale, process, location or access to cheaper inputs. It allows the company either to undercut rivals on price or to earn higher margins at the same price.
Why it matters: Durable only if the source cannot be copied.
The stages a business moves through: launch, growth, shakeout, maturity and decline. The metrics that matter change completely at each stage. Judging a hyper-growth company on profitability, or a mature one on revenue growth, is one of the most common analytical errors investors make.
Why it matters: Determines which metrics are even relevant.
Compound annual growth rate: the constant yearly rate that would take a starting value to an ending value over a period. It smooths out volatile individual years into one comparable number, which makes it useful for comparing growth across companies and misleading if the underlying path was erratic.
Why it matters: Comparable growth across different businesses.
The degree to which a company's fixed costs cause profits to grow faster than revenue. High operating leverage means each extra dollar of sales drops disproportionately to the bottom line, and it works just as violently in reverse when revenue falls.
Why it matters: Explains why margins expand as revenue scales.
A rough test for software companies: revenue growth rate plus profit margin should exceed 40%. It captures the trade-off between growing fast and being profitable, allowing a company to justify low margins if growth is high, or slow growth if margins are strong.
Why it matters: One number balancing growth against profitability.
Return on invested capital: operating profit after tax divided by the capital the business employs. It answers the central question of business quality, which is how much profit the company generates per dollar invested. A ROIC durably above the cost of capital is what creating value actually means.
Why it matters: The clearest single measure of business quality.
The cash left after a company pays operating expenses and the capital expenditure needed to maintain and grow the business. Unlike net income, it is difficult to manipulate with accounting choices, which is why many investors treat it as the truest measure of earnings.
Why it matters: Harder to manipulate than reported profit.
Revenue minus the direct cost of producing goods or services, expressed as a percentage of revenue. It shows how much a company keeps from each sale before overheads, and it is often the first place a weakening competitive position becomes visible.
Why it matters: An early warning signal for eroding advantage.
Buffett's preferred measure of profit: reported earnings plus depreciation and amortisation, minus the capital spending required to maintain the business's competitive position. It aims to capture the cash an owner could actually withdraw each year without weakening the company.
Why it matters: What an owner could genuinely take out.
What a business is actually worth, based on the cash it will generate over its remaining life discounted back to today. It is an estimate, not a fact, and it depends entirely on assumptions about growth, margins and duration. Two careful analysts will reach different numbers.
Why it matters: The number price should be judged against.
A valuation method that projects a company's future free cash flows and discounts them to present value. DCF is theoretically the most correct approach and practically the most sensitive to assumptions, since small changes in growth or discount rate produce very different answers.
Why it matters: Rigorous in theory, fragile in practice.
A DCF run backwards. Instead of estimating a fair value, you take the current share price and solve for the growth rate the market must already be expecting. It converts an unanswerable question into a checkable one: are those expectations reasonable?
Why it matters: Turns valuation into a judgement you can actually make.
Share price divided by earnings per share, showing what investors pay for each dollar of profit. It is the most widely used multiple and the most widely misused, because it is meaningless without context on growth, business quality and where the company sits in its lifecycle.
Why it matters: Useful only alongside growth and quality.
The gap between a company's estimated intrinsic value and the price you pay. Benjamin Graham's core idea: because every valuation rests on assumptions that may be wrong, buying well below your estimate protects you from your own errors rather than from the market's.
Why it matters: Protection against your own analytical mistakes.
Total addressable market: the full revenue opportunity if a company captured all demand for its product. Useful for sizing ambition in young companies, easily abused, since a large TAM says nothing about whether this particular company can win a meaningful share of it.
Why it matters: Sizes the opportunity, not the odds.
Enterprise value divided by earnings before interest, tax, depreciation and amortisation. Because enterprise value includes debt, it compares companies with different capital structures more fairly than P/E. It also flatters businesses with heavy real capital spending, since it excludes depreciation.
Why it matters: Fairer across different debt levels.
Annual dividends per share divided by share price. An unusually high yield is more often a warning than a bargain, because it usually means the price has fallen on concerns the market has about the business, not that the company has become generous.
Why it matters: High yields usually signal risk, not value.
The share of earnings or free cash flow paid out as dividends. A low ratio suggests room to keep paying and raising through a downturn. A ratio near or above 100% means the dividend depends on the business not deteriorating.
Why it matters: The clearest test of whether a dividend is safe.
An assessment of how likely a company is to sustain and grow its dividend. It depends on the payout ratio, the stability of cash flows, the amount of debt and how discretionary the spending is. Cyclical businesses carry more dividend risk at any given payout level.
Why it matters: Yield means nothing if the payment stops.
The reduction in existing shareholders' ownership when a company issues new shares, through capital raises or stock-based compensation. A business can grow revenue and profit while per-share value stagnates if the share count grows just as quickly.
Why it matters: Growth per share is what you actually own.
Operating profit divided by interest expense, showing how many times over a company can pay the interest on its debt. Low coverage means modest declines in profit can threaten solvency, which is why it matters far more for cyclical businesses.
Why it matters: How much room the balance sheet leaves for error.
The share of revenue coming from a small number of customers. When one client is a large share of sales, losing them is an existential event rather than a setback, and it usually hands that customer significant pricing leverage.
Why it matters: One lost contract can break the thesis.
The statement showing revenue, costs and profit over a period. It answers whether the company made money, using accounting rules that spread costs and recognise revenue by judgement rather than by cash movement. That judgement is why it should always be read alongside the cash flow statement.
Why it matters: Profit, but assembled from estimates.
A snapshot of what a company owns, owes and what is left for shareholders at one moment. Assets equal liabilities plus equity, always. It answers whether the company can survive a bad year, which the income statement cannot tell you.
Why it matters: Where solvency is either visible or hidden.
Current assets minus current liabilities: the short-term cash cycle of the business. Rising working capital consumes cash even in a growing company, which is why fast-growing businesses sometimes run short of money while reporting healthy profits.
Why it matters: Growth can consume cash faster than it earns it.
The premium paid above the fair value of a company's assets in an acquisition. Large goodwill balances mean the company has bought growth rather than built it. Write-downs of goodwill are an admission that the price paid was too high.
Why it matters: A record of what management paid for growth.
Cash collected for products or services not yet delivered, recorded as a liability until earned. For subscription businesses it is a genuinely useful signal, because growing deferred revenue means customers are committing ahead of delivery.
Why it matters: Customers paying in advance is a quality signal.
Share price multiplied by shares outstanding: what the market says the equity is worth. It is the honest starting point for valuation, since price alone tells you nothing without knowing how many shares exist.
Why it matters: Price is meaningless without share count.
Market capitalisation plus debt minus cash: what it would cost to buy the whole business outright. It is the fairer basis for comparing companies with different debt levels, because it counts what an acquirer would actually assume.
Why it matters: Compares businesses, not capital structures.
The shares actually available for public trading, excluding those held by insiders and locked-up holders. A small float means thinner liquidity and sharper price moves, which is why small-float stocks can swing violently on modest volume.
Why it matters: Explains volatility that has nothing to do with the business.
The proportion of a company's float sold short by investors betting the price will fall. High short interest signals that informed money disagrees with the current price, and it also creates the conditions for a violent rally if that view is wrong.
Why it matters: A visible measure of who is betting against you.
The share of a company owned by its executives and directors. Meaningful ownership aligns their outcomes with yours, though very high ownership can also entrench management against accountability. Watch the direction of buying and selling more than the level.
Why it matters: Alignment, when they own what you own.
The set of businesses you understand well enough to judge. Buffett's point was never that the circle should be large, only that you should know precisely where its edge is. Most permanent losses come from acting confidently just outside it.
Why it matters: Knowing the edge matters more than the size.
Benjamin Graham's metaphor for the stock market as a manic business partner who quotes you a price every day, sometimes euphoric and sometimes despairing. You are free to ignore him. The price he offers is information about his mood, not about the business.
Why it matters: Price is an offer, not a verdict.
How much of a portfolio to allocate to a single holding. It is where conviction meets risk management: a position too small to matter cannot help you, and one too large means a single mistaken thesis can undo years of good decisions.
Why it matters: Where good analysis is most often undone.
How long you intend to hold. It determines which questions matter: quarterly momentum for months, competitive durability for years. Most disagreements about whether a stock is a good buy are really disagreements about horizon.
Why it matters: Changes which analysis is even relevant.
These terms are not a list to memorise. They are the questions a complete analysis works through in order: what the business does, where it sits in its lifecycle, whether its advantage is durable, how profitably it grows, what could break it, and what it is worth. Answer those in sequence and you have a thesis rather than a hunch.
Stock Simplifier walks you through the business model, lifecycle phase, moat, management, growth, risk and valuation for any stock, filling in real data at every step and explaining each term as it comes up. You review it, score it, and reach your own conclusion.
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