Common fundamental analysis terms

When delving into fundamental analysis, you will come across a number of acronyms during your research.

Here is a handy list of some common acronyms and what they mean:

  • EBIT
    Earnings before interest and tax: An indicator of a company's financial performance calculated as revenue minus expenses excluding tax and interest. Also referred to as operating earnings. 
  • EBITDA
    Earnings before interest, tax, depreciation and amortisation:  A measure of profits, EBITDA helps you analyze and compare profitability between companies and industries, as it eliminates the effects of financing, government or accounting decisions. This provides a rawer, clearer indication of your earnings.
  • EBITDAR
    Earnings before interest, tax, depreciation, amortisation and rent/restructuring: It is useful for companies undertaking restructuring efforts since restructuring charges are typically one-time or non-recurring expenses. Removing the restructuring costs shows a clearer picture of the operating performance of the company.
  • PAT
    Profit after tax: This is the final residual amount which remains with the company after paying all its stakeholders other than shareholders. 
  • CROA
    Cash return on assets: commonly used to compare the performance of businesses within the same industry. Valuable when there is a notable difference between cash flows and reported net income, as can sometimes be the case when the accrual basis of accounting is used. In this situation, calculating the return on total assets can be misleading, so cash flow is used instead of the net income figure.
  • CROIC
    Cash return on invested capital: measures the cash profits of a company as a proportion of the funding required to generate them. Also known as "cash return on cash invested."
  • ROIC / ROI
    Return on invested capital/ Return on investment: Measures whether a proposed investment is wise, and how well it will repay the investor. It is calculated as the ratio of the amount gained (taken as positive), or lost (taken as negative), relative to the initial investment. 
  • ROE
    Return on equity: Measures the rate of return on the ownership interest (shareholders equity) of members, ie. book value (not to be confused with market price of shares). It measures a company’s efficiency at generating profits from every unit of shareholders’ equity and shows how well a company uses investment funds to generate earnings growth. 
  • ROA
    Return on assets: Measures how much profit a company is making on the assets used in its business.  If a company is geared, then the value of assets is greater than book value (equity) and ROA usually is less than ROE.