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Fundamental Finance Terms for Investors

Feb 1, 2025

Essential Finance Terms for Investors

Introduction

  • Presenter: Ben, former JPMorgan investment banker
  • Covers 15 essential finance terms for investors
  • Divided into three categories: Beginner, Intermediate, Advanced
  • Mention of Applied Value Investing Certificate program by Wall Street Prep and Wharton
    • Taught by Wharton professors and notable investors
    • 8-week program on value investing principles
    • Offers networking opportunities
  • Discount code available: RARELIQUID

Beginner Finance Terms

1. EBIT

  • Earnings Before Interest and Taxes
  • Also known as Operating Income
  • Measures profitability of operations without interest and taxes

2. Net Income

  • Known as the "bottom line"
  • Remaining income after interest and taxes

3. Assets

  • Resources owned by a company that hold economic value
  • Current Assets: Can be converted to cash within a year (e.g. cash, accounts receivable)
  • Non-current Assets: Long-term resources (e.g. property, patents)

4. Liabilities

  • Obligations or debts to be settled
  • Current Liabilities: Due within a year (e.g. accounts payable)
  • Non-current Liabilities: Long-term obligations (e.g. long-term debt)

5. Growth Rates and Margins

  • Growth Rates: Indicators of how financial metrics increase over time
  • Margins: Efficiency of turning revenue into profit
  • Common growth rates: Revenue growth, EBIT, EBITDA, Net income growth

Intermediate Finance Terms

1. EBITDA

  • Similar to EBIT but includes non-cash expenses (depreciation & amortization)
  • Proxy for cash flow

2. Shareholders Equity

  • Value of a company to shareholders after liabilities are deducted
  • Known as Book Value of Equity

3. Equity Value

  • Market capitalization (share price x total shares)

4. Enterprise Value

  • Includes Equity Value plus debt, non-controlling interest, preferred stock, minus cash
  • Total value of a company

5. Multiples

  • Valuation ratios (e.g. revenue, EBITDA, PE multiples)
  • Used to compare company valuations

Advanced Finance Terms

1. Beta

  • Measures stock price fluctuation relative to market index
  • Beta > 1: More volatile; Beta < 1: Less volatile

2. CAPM

  • Capital Asset Pricing Model
  • Formula: Risk-free rate + Beta x Market risk premium
  • Calculates expected return based on risk

3. WACC

  • Weighted Average Cost of Capital
  • Average return required by investors

4. ROIC

  • Return on Invested Capital
  • Measures returns generated from invested capital
  • ROIC > WACC indicates value creation

5. Sharpe Ratio

  • Measures risk-adjusted return
  • Formula: (Return - Risk-free rate) / Standard deviation of returns
  • Useful for comparing investments' performance

Conclusion

  • Offers investment banking community resources
  • Includes resume, cover letter, financial models, Q&A sessions
  • Available for $29/month for first 100 users
  • Encourages watching next video on company valuation

Notes taken from a lecture by Ben, aimed at helping investors understand essential finance terms.

Full transcript