So What’s a Debt-to-Equity Ratio? : Understanding the Market’s Lingo Is Vital; Here’s a Glossary of Common Terms

Here’s a glossary of valuable financial words, phrases and terms that figure prominently in analysts’ reports, in annual statements to shareholders and in the financial pages of this newspaper.

Assets: The total of what the company owns in property, equipment, inventory and investments before accounting for any debt.

Board of directors: A group of people elected by shareholders and charged with looking after shareholder interests. Members of the board are consulted on matters of great import to the company but generally are not given authority over day-to-day operations. Directors usually meet several times a year and are paid for their services. Some directors may also be members of the company’s management.

Book value: Equity--the sum of the company’s assets minus debts--divided by the number of shares outstanding. In other words, if the company has $1 million in equity and has issued 500,000 common shares, its book value is $2 per share.

Closely held: Refers to situations in which all of a company’s common shares are owned by a small number of people. A closely held company’s shares typically are not available for the general public.

Debt-to-equity ratio: Long-term debt divided by total equity. This is a snapshot indicating whether or not the company is overextended. However, companies that are growing rapidly can usually carry a higher level of debt than slower-growing firms--just as individuals who get large raises every year can afford more debt than those who don’t.

Dividend: Payments to shareholders that typically come at regular intervals--usually once every three months. These payments can be made in either cash or stock.

Dividend yield: The value of annual dividends paid to shareholders as a percentage of the company’s current market price. For example: Company X pays $1 in cash dividends each year, and its shares sell for $30 each on the New York Stock Exchange. It’s dividend yield would be 3.3% of its stock price.

Earnings estimate: Financial analysts estimate the earnings they believe the company will report next year--and several years into the future--by talking to the company’s management and analyzing the company’s financial reports. These estimates are used by brokers and analysts to determine whether a company’s shares will be worth owning in the future.

Earnings per share: This is the company’s total earnings divided by the number of shares it has outstanding. A company with $1 million in earnings and 250,000 shares would report earnings per share of $4.

Equity: The value of what the company owns once debts are taken into account. It’s similar to equity in your home. If the home is worth $100,000, but you owe $50,000 on the mortgage, you have $50,000 in equity.

Extraordinary dividend: A one-time payment to shareholders, made in either cash or stock.

Extraordinary item: A one-time profit or loss, usually from the sale or liquidation of a subsidiary that didn’t cut the mustard.

Income: Usually refers to a company’s net earnings, after tax. However, it can also refer to pretax income and income “before extraordinary items.”

Initial public offering: Also, IPO. The sale, for the first time, of a company’s shares to the public. The term also refers to companies that went public within the last year.

Market value: The value of the company, based on the selling price of its cumulative shares on the open market. In other words, if the company had 2 million shares outstanding and its shares sold on the New York Stock Exchange for $4 each, its market value would be $8 million.

Market value as a percentage of book: This ratio gives an indication of the company’s selling price compared with the value of its assets. It helps analysts determine whether the company’s stock is overpriced or a relative bargain. However, it can be deceiving in some instances in which the value of certain assets--such as goodwill--is hard to quantify.

Price-to-earnings ratio: Comparison of the company’s per-share market price with its current or estimated per-share earnings. For example: Company Y’s shares sell for $10 each at a time when it earned $1 per share. Its price/earnings ratio is 10, or $10 divided by $1.

Privately held: A company that is owned by one or a handful of related people. The company’s shares are not available to the general public or sold on any public exchange.

Profit margin: A ratio indicating how a company’s profit compares with its sales or revenues. Generally speaking, the higher the profit margin, the better.

Over the counter: The sale of a company’s shares through computerized trading but not through a formal exchange such as the AMEX or the NYSE.

Return on assets: A measure of profitability, usually used for banks and savings and loans, which is calculated by dividing annual net income by total average assets.

Return on equity: A measure of profitability calculated by dividing annual net profit by total equity. This measurement can be deceiving, however, because the smaller the company’s equity, the more profitable it seems.

Ticker symbol: A three- or four-letter code used by brokers to call up a company’s financial information and stock price and is used in trading shares.