Financial Metrics Glossary

P/E Ratio (Price-to-Earnings)

Formula: Market Price per Share / Earnings per Share (EPS)

The P/E ratio measures how much investors pay for each dollar of a company's earnings. A P/E of 20 means investors pay $20 for every $1 of annual profit. Lower P/E generally suggests a cheaper stock, but comparisons should be made within the same sector — technology companies typically trade at higher P/E ratios than utilities due to faster growth expectations.

Good range: 10-25 for most sectors. Below 10 may signal distress or cyclical low. Above 30 may indicate overvaluation or high growth expectations.

In AlphaStocks:displayed on every stock page on trailing-twelve-month earnings and used in the Lynch PEG model. Graham's P/E criterion divides by the three-year average EPS instead, as he wrote it. The “good range” above is a general rule of thumb, not a model threshold.

PEG Ratio (Price/Earnings-to-Growth)

Formula: P/E Ratio / Annual EPS Growth Rate

The PEG ratio adjusts the P/E for growth. A stock with a P/E of 30 and 30% EPS growth has a PEG of 1.0 — fairly valued relative to growth. A PEG below 1.0 suggests the market underprices the company's growth rate. Peter Lynch popularized this metric for finding growth-at-a-reasonable-price (GARP) stocks.

Good range: Below 1.0 is attractive. 1.0-1.5 is fairly valued. Above 2.0 suggests the growth premium is stretched.

In AlphaStocks: the core metric of the Lynch PEG model, which scores the dividend-adjusted version (PEGY) for growers only and carries 25% of the Value axis in the general profile.

Enterprise Value (EV)

Formula:Market Cap + Total Debt - Cash & Equivalents

Enterprise value represents the total cost of acquiring a company, including its debt obligations minus available cash. It provides a more complete picture of a company's price tag than market cap alone, because a buyer must also assume the company's debts.

In AlphaStocks:the Greenblatt model's version also adds preferred stock and minority interest and subtracts only cash the business does not need; it is used to calculate Earnings Yield (EBIT/EV) in the Greenblatt Magic Formula.

Book Value per Share (BVPS)

Formula: (Total Assets - Total Liabilities) / Shares Outstanding

Book value represents the net asset value of a company on its balance sheet. BVPS is what each share would theoretically be worth if the company liquidated all assets and paid all debts. It serves as a floor for valuation, especially for asset-heavy businesses like banks and REITs.

In AlphaStocks:an input to Graham's price-to-book criterion and to the Graham Number shown on the Graham model card, and the base of the justified price-to-book fair value for banks, insurers and holding companies.

EPS (Earnings per Share)

Formula: Net Income / Weighted Average Shares Outstanding

EPS is the most widely cited profitability metric. It shows how much profit a company generates per share of stock. Consistent EPS growth over multiple years is a hallmark of a strong business.

In AlphaStocks:used in Graham's earnings-record, earnings-growth and P/E criteria, the P/E ratio and Lynch's growth rate and PEG.

ROE (Return on Equity)

Formula:Net Income / Shareholders' Equity

ROE measures how efficiently a company uses shareholder capital to generate profits. Warren Buffett considers ROE consistency one of the most reliable indicators of a durable competitive advantage. His 1987 letter set the bar AlphaStocks uses: ROE on average equity ≥ 15% in every year and ≥ 20% on average over 10 years (judged on at least 5).

Caution:a very high ROE can come from heavy leverage or buybacks rather than a great business, and with negative equity ROE is undefined — the models treat that as a fail, never as a high return.

In AlphaStocks: a primary metric in the Buffett quality assessment (65% of the Quality axis in the general profile).

EBIT (Earnings Before Interest & Taxes)

Formula: Revenue - Operating Expenses (excluding interest and taxes)

EBIT isolates a company's operating profitability from its financing and tax decisions. This makes it useful for comparing companies across different countries (tax rates) and capital structures (debt vs equity financing).

In AlphaStocks:used in both Greenblatt metrics — Earnings Yield (EBIT/EV) and Return on Invested Capital (EBIT/Invested Capital).

ROIC (Return on Invested Capital)

Formula: EBIT / (Net Fixed Assets + Net Working Capital)

ROIC measures how effectively a company turns invested capital into operating profit. High ROIC means the company earns more per dollar of capital deployed. Joel Greenblatt uses ROIC as the quality dimension of his Magic Formula.

Good range: Above 20% is excellent. 12-20% is solid. Below 8% suggests the business is not generating adequate returns on capital.

In AlphaStocks: one of the two ranking dimensions in the Greenblatt Magic Formula.

Gross Margin

Formula: (Revenue - Cost of Goods Sold) / Revenue

Gross margin shows what percentage of revenue remains after direct production costs. Improving gross margins indicate pricing power or cost efficiency. Declining margins may signal competitive pressure.

In AlphaStocks: one of the 9 Piotroski F-Score signals (signal 8: improving gross margin).

Operating Margin

Formula: Operating Income / Revenue

Operating margin measures profitability after all operating expenses but before interest and taxes. Stable or expanding operating margins over 3-5 years signal a durable competitive position — the company can maintain profitability without cutting prices.

In AlphaStocks: used in the Buffett quality model to assess margin stability as an indicator of moat durability.

Debt-to-Equity Ratio

Formula:Total Liabilities / Shareholders' Equity

Measures how much a company relies on debt versus equity financing. Lower ratios indicate less financial risk. However, optimal leverage varies by sector — banks naturally operate at higher leverage than software companies. AlphaStocks uses sector-specific calibration to account for these structural differences.

In AlphaStocks: Piotroski signal 5 uses long-term debt to average total assets; Buffett compares total debt with owner earnings; Lynch compares debt with equity. Negative equity never reads as low debt.

Current Ratio

Formula: Current Assets / Current Liabilities

Measures short-term liquidity — the ability to pay bills due within 12 months. A ratio above 1.0 means the company has more short-term assets than short-term obligations.

In AlphaStocks:Piotroski F-Score signal 6 (improving current ratio) and Graham's financial-condition criterion. Banks, insurers and asset managers report no current ratio, so Piotroski does not rate them, and Graham's working-capital test does not apply to them.

Free Cash Flow

Formula: Operating Cash Flow - Capital Expenditures

Free cash flow is the cash remaining after a company funds its operations and maintains its assets. It represents the true cash available for dividends, buybacks, debt reduction, or reinvestment. Companies with consistently positive free cash flow have more financial flexibility and lower risk.

In AlphaStocks:close to Buffett's owner earnings (net income plus depreciation and amortization, less capital spending), which the Buffett model and the general fair value use; operating cash flow drives Piotroski signals 2 and 4.

Dividend Yield

Formula: Annual Dividends per Share / Current Stock Price

Dividend yield shows the annual cash return as a percentage of the stock price. A 3% yield means $3 income per $100 invested annually. High yields (above 6-7%) can signal the market expects a dividend cut.

In AlphaStocks: displayed on every stock page, used in Lynch dividend-adjusted PEG, and featured in the dividend rankings.

Asset Turnover

Formula: Revenue / Total Assets

Asset turnover measures how efficiently a company uses its assets to generate revenue. Higher turnover indicates better asset utilization. Improving asset turnover over time signals operational efficiency gains.

In AlphaStocks: Piotroski F-Score signal 9 (improving asset turnover).

Market Capitalization

Formula:Current Stock Price × Total Shares Outstanding

Market cap represents the total market value of a company's outstanding shares. AlphaStocks covers 1,500+ stocks spanning large-cap, mid-cap, and small-cap companies. Market cap is used as a screener filter, not a scoring input — bigger is not necessarily better.

In AlphaStocks: available as a screener filter and displayed on every stock page.