Definition Unsystematic risk, commonly known as specific or idiosyncratic risk, refers to the risk that is inherent to a particular company or industry rather than the broader market. This risk can stem from a multitude of factors, including management decisions, product recalls, labor strikes or regulatory changes that affect only a specific entity. A crucial aspect of unsystematic risk is that it can be mitigated or even eliminated through diversification within an investment portfolio.
Definition Cash flow from investing activities refers to the cash generated or spent as a result of a company’s investment decisions. This component of cash flow is crucial for understanding how a business allocates its resources to foster growth, acquire assets or divest from non-core operations. It is part of the cash flow statement, one of the three core financial statements that provide insights into a company’s financial health.
Definition The Efficient Frontier is a cornerstone concept in modern portfolio theory (MPT), developed by Harry Markowitz in the 1950s. It serves as a vital tool for investors aiming to maximize returns while minimizing risk. The Efficient Frontier graphically illustrates the optimal portfolios that yield the highest expected return for a specified level of risk, effectively allowing investors to visualize their investment alternatives. By analyzing different asset allocations, investors can make informed decisions regarding portfolio management, aligning their strategies with personal risk tolerances and financial goals.
Definition Earnings yield is a financial metric that represents the earnings generated by an investment relative to its price. It serves as an essential tool for investors to evaluate the profitability of their investments, particularly in the stock market. You can calculate earnings yield using the formula:
\( \text{Earnings Yield} = \frac{\text{Earnings per Share (EPS)}}{\text{Market Price per Share}} \) This metric is often expressed as a percentage, making it easier for investors to compare different stocks or investment opportunities.
Definition The Fixed Charge Coverage Ratio (FCCR) is a crucial financial metric that evaluates a company’s capability to meet its fixed financial obligations, which typically include interest payments on debt, lease expenses and other financial commitments. This ratio provides insights into a company’s financial stability and liquidity by calculating the proportion of earnings available to cover these fixed charges. The FCCR is computed by dividing a firm’s earnings before interest and taxes (EBIT) by its total fixed charges.
Definition The Gordon Growth Model (GGM), also known as the Dividend Discount Model (DDM), is a widely used method for valuing a company’s stock based on the premise that dividends will continue to be paid and grow at a constant rate indefinitely. This model is particularly beneficial for investors who focus on companies that pay regular dividends, allowing them to estimate the intrinsic value of a stock based on its dividend payouts.
Definition Current yield is a fundamental financial metric that provides investors with insights into the income generated from an investment relative to its market price. It is particularly relevant for bonds and dividend-paying stocks, helping to gauge the return on investment based on current market conditions. The formula for calculating current yield is simple:
\( \text{Current Yield} = \frac{\text{Annual Income}}{\text{Current Market Price}} \) Essentially, current yield offers a snapshot of how much an investor can expect to earn from their investment if they were to purchase it at its current market price.
Definition The Debt-to-Capital Ratio is a key financial metric that illustrates the proportion of debt a company utilizes to finance its operations relative to its total capital. This ratio is instrumental in evaluating a company’s financial health, risk profile and overall leverage. It is expressed as follows:
\(\text{Debt-to-Capital Ratio} = \frac{\text{Total Debt}}{\text{Total Debt} + \text{Total Equity}}\) This ratio is particularly important for investors and analysts as it helps gauge the level of financial risk a company carries due to its reliance on debt financing.
Definition The Risk-Free Rate is a foundational concept in finance that signifies the return on an investment devoid of any risk. It is the interest rate that an investor would anticipate from an absolutely secure investment over a defined period. In practical terms, this rate is often represented by the yield on government bonds, particularly U.S. Treasury bonds, which are widely regarded as free from default risk due to the backing of the U.
Definition Cash dividends are a form of profit distribution that companies pay to their shareholders. Essentially, when a company earns a profit, it can choose to reinvest that profit back into the business or distribute a portion of it to its investors as cash. This payment is made on a per-share basis, meaning that shareholders receive a certain amount of money for each share they own.
Types of Cash Dividends Understanding the different types of cash dividends is essential for any investor.