More often than not investors are confused or puzzled by the various financial terms used by different media like newspapers, websites and research reports. In this article, we try to make distinction between certain terms, which are mistakenly used with similar connotation.
Share and stock
There is a common belief that both these terms mean the same. However, there is a subtle difference. The term 'Stock' broadly refers to the shares held by an investor. Meaning that, if an investor says that he owns stock, he is generally referring to his overall ownership in one or more companies. A 'Share', however, refers to one unit of ownership in one company. An investor can own 100 shares of Infosys stock, but not 100 stocks of Infosys share.
Decline and de-growth
Both these terms are commonly used to refer to the trend of a particular company's topline (revenues) or bottomline (net profit). 'Decline' refers to a fall in the value of a parameter as compared to the previous year (revenues or profits). For instance when one says that there has been a 10% decline in revenues for company called XYZ compared to the previous year, it means that revenues have fallen by 10% compared to last year.
'De-growth' on the other hand refers to a fall in the company's growth rate. For instance, if XYZ company had grown its revenues by 20% in FY03 (as compared to FY02), but could grow revenues by only 10% in FY04 (as compared to FY03), then we say that there has been a de-growth in the company's growth rate in FY04 as compared to its growth in FY03.
Gross profit and operating profit
Operating margin is one of the key metrics that is used to gauge operational efficiency of a particular company. Having said that there is sometimes confusion regarding the usage of the terms 'Gross operating margin' and 'Operating margin'. While both these terms sound almost the same, the similarity ends there. 'Gross profit' is the figure derived by deducting direct costs (generally employee, raw material and energy costs) from the net sales. The gross profit, therefore gauges production related efficiency only. This metric is more useful for commodity companies or capital-intensive sectors, giving a direct view on input (direct cost) Vs the output (revenues). On the other hand, 'Operating profit' is derived from deducting all operating costs, direct as well as indirect (mainly marketing and distribution, general and administrative costs) from the net sales. This metric is useful for sectors like FMCG and pharma, where marketing and administrative costs too form a big chunk of their revenues.
'Operating profit' is a better indicator of the operational efficiency of the company as it takes in to account all costs, thus giving a more accurate picture of the operational health of the company.
Revenues and net sales
The important thing for you as an investor is to study how a particular company has calculated its revenue. If revenue for a company is equal to sales + other income, then it is wiser to exclude the other income portion and then look at its sales performance. This gives an accurate measure of its operational performance at the top.
Another thing to look out for is 'Gross sales Vs Net sales. Gross sales includes excise. Net sales is Gross sales minus the excise. For comparison between companies of one sector, it is better to look at sales minus the excise.
EPS and Diluted EPS
'EPS' refers to the net profit earned per share (Net profit / Number of shares outstanding). 'Diluted EPS' on the other hand, adjusted the net profit per share accounting for dilution in shareholding on account of convertible debentures, warrants, ESOPs etc. Investors should always look at the Diluted EPS, to get a correct picture on the Earnings Per Share (EPS).
Book value per share (BVPS) and Adjusted book value (Adj BVPS)
'BVPS' is essentially the ratio of total networth (Networth = Equity share capital + Total reserves) of the company to the total shares outstanding. This ratio indicates the book value of the company in the hands of the equity shareholders (BVPS = Networth / Shares outstanding).
'Adj BVPS' on the other hand, refers to the book value per share post deduction of items like miscellaneous expenses not written off and accumulated losses (Networth = Equity share capital + Total reserves - miscellaneous expenses not written off and accumulated losses). In the case of banks, this ratio is of greater importance as banks have significant non performing assets (NPA) on their books. 'Adj BVPS'is a better measure to gauge book value per share.
Subsidiary and Associate company
A 'Subsidiary' company is one in which the parent holds a 51% stake or more. On the other hand, an 'Associate' company is one in which the parent holds a stake of 26% or more, but less than 50%. Indian accounting laws mandate companies to give their consolidated accounts. This means that they have to consolidate the accounts of companies in which they have 51% or more stake (subsidiary companies) with their own accounts. Consolidation gives a better picture of the health of the company. Investors must also be mindful of the fact that certain companies in order to avoid the need for consolidation may resort to keeping an investment as an associate. This may be due to the fact that the 'Associate' company may be having poor financials and the consolidated picture may indicate a poor overall picture of the company.
In either case, investors need to keep tabs on the activities of 'Subsidiary' and 'Associate' companies of the parent, as it is shareholder wealth that is invested in these entities. To that extent the parent company is answerable to its shareholders to justify these investments.
These were some of the terms that required some clarity. For investors, it is vital to know these subtleties, as among the various asset classes that exist, equities are considered amongst the most risky. Therefore, as an equity investor, one needs to put in more efforts to make the correct investment. To that extent, equities are a relatively higher involvement asset class. Therefore, even subtle differences in terms used gain importance.