Glossary

Every figure and term used on the company pages, in plain words: what it measures, how it is computed, what to watch for and where it appears.

Quality

Quality points Grade Operating margin Return on equity Net debt to operating income Current ratio Equity ratio Free cash flow Profit covered by cash flow Growth per year Competitive strengths

Quality points

The four grades added up, 0 to 20.

Quality points = balance sheet + profitability + cash flow + growth

Each of the four grades counts the same; nothing is weighted. If a grade is missing because data is missing, there are no quality points rather than estimated ones. More points mean more of the published rules are met. From 15 points the page says “high”, from 10 “moderate”, below that “low”.

What to watch for

The same points total does not mean the same situation: 12 from four threes is a different company from 12 made of 5, 4, 3 and 0.
Banks and insurers get no cash flow grade and therefore no quality points. That is not a poor result but no result.

Grade

One of the four quality grades, 0 to 5 each.

Each grade is built from two or three figures. Each figure is tested against five fixed thresholds; every threshold reached counts one point. The grade is the mean of these points, rounded half up: 3.5 becomes 4. Each grade comes with a word: 5 very strong, 4 strong, 3 solid, 2 weak, 1 very weak.

What to watch for

A grade of 0 means no threshold was reached. Missing data does not give 0 but no grade.
The grades are absolute and not adjusted to the industry.

See also: Worked example · All thresholds

Operating margin

How much of revenue is left as operating income.

Operating margin = operating income / revenue

Operating income is the profit from ongoing business before interest and taxes. The margin reflects pricing and cost structure. One of the two figures in the profitability grade, measured on the latest fiscal year.

Thresholds for points 1 to 5

1 ≥ 0 %2 ≥ 5 %3 ≥ 12 %4 ≥ 20 %5 ≥ 30 %

What to watch for

Margins hardly compare across industries: a retailer at 4% can be better run than a software firm at 25%.
A single year can contain one-off effects. The history is shown under “Figures over the years”.

Return on equity

What the company earns on its owners’ capital.

Return on equity = net income / shareholders’ equity

The second figure in the profitability grade, weighted equally with operating margin. If equity is negative, the figure is left out rather than producing a high grade.

Thresholds for points 1 to 5

1 ≥ 0 %2 ≥ 5 %3 ≥ 10 %4 ≥ 18 %5 ≥ 25 %

What to watch for

Debt raises return on equity without improving the business. That is why the balance sheet grade sits next to it.
Share buybacks shrink equity and raise the figure arithmetically.

Net debt to operating income

Debt after subtracting cash, measured against earning power.

Net debt = (financial debt − cash) / operating income before depreciation

The figure says how many years of operating income it would take to repay the debt. Where no depreciation is reported, it is computed against operating income, with stricter thresholds. If the company holds more cash than financial debt, that is net cash: the figure then gets the full grade without a ratio being computed. The first figure in the balance sheet grade.

Thresholds for points 1 to 5

1 ≤ 5.0×2 ≤ 4.0×3 ≤ 3.0×4 ≤ 2.0×5 ≤ 1.0×

Thresholds without reported depreciation

1 ≤ 4.0×2 ≤ 3.0×3 ≤ 2.0×4 ≤ 1.0×5 ≤ 0.0×

What to watch for

For utilities and real estate companies high debt is part of the business. The grade is not raised; the page says it does not compare with other industries.
For banks and insurers net debt is not a meaningful measure. The equity ratio takes its place.

Current ratio

Whether the assets of the next twelve months cover the bills due in the same period.

Current ratio = current assets / current liabilities

Current assets are what turns into cash within a year: cash, receivables, inventory. A value below 1 does not mean insolvent, but dependent on ongoing income or new credit. The second figure in the balance sheet grade.

Thresholds for points 1 to 5

1 ≥ 0.82 ≥ 1.03 ≥ 1.34 ≥ 1.85 ≥ 2.5

What to watch for

Inventory that does not sell still counts and can flatter the figure.
Businesses paid in advance, such as annual software subscriptions, show low values by design, because prepayments count as liabilities.

Equity ratio

Which share of the balance sheet belongs to the owners. The balance sheet measure for banks and insurers.

Equity ratio = shareholders’ equity / total assets

For banks and insurers, liabilities are the business itself. There the equity ratio replaces net debt and the current ratio in the balance sheet grade. Its thresholds are therefore much lower than for industrial companies.

Thresholds for points 1 to 5

1 ≥ 4 %2 ≥ 6 %3 ≥ 8 %4 ≥ 11 %5 ≥ 15 %

What to watch for

The accounting ratio is not the regulatory capital ratio, which weights assets by risk.

Free cash flow

The cash left after running and investing in the business.

Free cash flow = operating cash flow − capital expenditure

Unlike profit, it does not depend on depreciation assumptions. The cash flow grade measures it three ways: its size relative to revenue, how well it covers profit, and in how many of the last up to five years it was positive.

Thresholds for “free cash flow to revenue”

1 ≥ 0 %2 ≥ 5 %3 ≥ 10 %4 ≥ 18 %5 ≥ 25 %

Thresholds for “free cash flow positive”

1 1 of 5 years2 2 of 5 years3 3 of 5 years4 4 of 5 years5 5 of 5 years

What to watch for

Acquisitions do not count as capital expenditure. A company growing through acquisitions looks better here.
For banks and insurers cash flow follows lending and deposits. They get no cash flow grade.

Profit covered by cash flow

How much of reported profit arrives as free cash.

Coverage = free cash flow / net income

A value around 1 means the profit arrives as cash. Well below that can mean profit is tied up in inventory, receivables or investment. Only computed when profit is positive. Part of the cash flow grade.

Thresholds for points 1 to 5

1 ≥ 0.4×2 ≥ 0.6×3 ≥ 0.8×4 ≥ 1.0×5 ≥ 1.2×

What to watch for

A year of heavy investment lowers the value, even if it pays off later.

Growth per year

The steady annual rate at which revenue or operating income grew.

Growth per year = (value today / value n years ago)^(1/n) − 1

Computed over as many years as are available, at most five, and only when the first and last values are positive. The growth grade uses revenue and operating income, weighted equally.

Thresholds for revenue

1 ≥ 0 %2 ≥ 3 %3 ≥ 8 %4 ≥ 15 %5 ≥ 25 %

Thresholds for operating income

1 ≥ 0 %2 ≥ 3 %3 ≥ 8 %4 ≥ 15 %5 ≥ 25 %

What to watch for

Only the start and end count. A slump in between stays invisible.
Acquired revenue counts like organic revenue.

Competitive strengths

How durably an advantage shows in the figures. Not part of the quality points.

What is measured is the trace of an advantage over up to ten years: the level and consistency of return on capital, pricing power through the gross margin, and the stability of the operating margin in the downturn years 2020 and 2022. At most 10 points in total. The causes, such as brand, network effects or switching costs, appear in no report and are not claimed.

Valuation range

Valuation range Price-to-earnings ratio (P/E)Price-to-sales ratio (P/S)Price-to-book ratio (P/B)Price to free cash flow Price to FFO Enterprise value Enterprise value to revenue (EV/Revenue)Enterprise value to operating income (EV/EBIT)Market value

Valuation range

The price band in which the share was usually valued over the last up to ten years.

For each fiscal year, the page computes how the market valued the company, for example as a P/E ratio. From these years the lower and upper quarter are taken and applied to the latest report. That gives one price band per figure; the range is the median of these bands. The page says whether the latest closing price is below, within or above the range.

What to watch for

The range is not a fair value and not a price target. It describes the company’s own past.
A price below the range often has a reason the range does not know.

Price-to-earnings ratio (P/E)

How many years of earnings the share price represents.

P/E = price / earnings per share

The best-known valuation figure. Only computed with positive earnings; years with almost no earnings produce very high values and are not counted above a cap.

What to watch for

One-off gains and losses feed straight through.

Price-to-sales ratio (P/S)

The share price relative to revenue per share.

P/S = price / revenue per share

Works even when there is no profit. Only used outside finance, real estate and utilities; for banks, for example, revenue is not comparable.

What to watch for

Debt and cash are not in the calculation. That is what enterprise value to revenue is for.

Price-to-book ratio (P/B)

The share price relative to equity per share.

P/B = price / book value per share

Important for banks and insurers, whose assets are mostly financial. For companies with few physical assets, such as software, book value says little.

What to watch for

Share buybacks lower book value and raise P/B.

Price to free cash flow

The share price relative to free cash flow per share.

Price / free cash flow per share

Values the cash that is actually left over. Not used for banks, insurers, real estate companies and utilities: for utilities, heavy network investment keeps free cash flow low without that being a sign of trouble.

Price to FFO

The valuation figure for real estate companies.

Price / FFO per share

FFO (funds from operations) is the result from ongoing business before depreciation and without gains from disposals. For real estate, depreciation lowers profit without the building value falling accordingly, so price to FFO replaces the P/E ratio there.

Enterprise value

Market value plus net debt: what the whole company costs including its debt.

Enterprise value = market value + financial debt − cash

Unlike price-based figures, it accounts for debt and cash. With a lot of net cash it is below the market value. For banks and insurers it is not meaningful and is not used.

Enterprise value to revenue (EV/Revenue)

Enterprise value relative to revenue.

EV/Revenue = enterprise value / revenue

Like P/S, but including debt and cash. Important for companies with high net cash, whose P/S would otherwise overstate the valuation.

Enterprise value to operating income (EV/EBIT)

Enterprise value relative to operating income.

EV/EBIT = enterprise value / operating income

Like P/E, but independent of how the company is financed: interest and taxes have not yet been deducted.

Market value

Share price times the number of shares.

Market value = share price × number of shares

The share count comes from the latest SEC filing. If market value and price do not fit together, for example after a stock split not yet reflected in the latest report, the page shows no value and gives the reason.

Data, test and reading aids

Rule set SEC, 10-K and XBRL Split adjustment Median Percentage points Historical test Forward test Survivorship bias

Rule set

All rules and thresholds together, with a number for each version.

Every page names the rule set version it was computed with, for example “rule set version 2.7.0”. When a rule changes, the rule set gets a new number and the change is listed on the method page.

SEC, 10-K and XBRL

Where the financial figures come from.

The SEC is the US securities regulator. Listed companies file their annual reports there: US companies on Form 10-K, foreign ones on 20-F or 40-F. XBRL is the machine-readable version of these reports. Inside Stocks reads only that version; no figure is estimated or taken from analysts.

What to watch for

Companies reporting under the international IFRS standard are not covered yet.

Split adjustment

Past prices and per-share figures are converted to today’s share count.

After a 10-for-1 split a share costs a tenth, and there are ten times as many. To keep figures comparable over the years, prices and per-share values are adjusted to today’s share count. If a split happened after the latest report and is not yet included, the page shows no value at that point.

Median

The middle value when all are sorted by size.

Unlike the average, the median is hardly moved by a few very large or very small values. That is why the valuation range uses the median.

What to watch for

The median and the average of the same data can be far apart when a few values are very large.

Percentage points

The difference between two percentages.

If a margin rises from 10% to 12%, that is 2 percentage points but a 20 percent increase. The page always writes percentage points in full.

Historical test

A test of the quality points on past years. It provides no reliable evidence, so we publish no return figures.

On every 30 April from 2011 to 2016, every S&P 500 member at the time was graded by the rules using only the reports available by then, including companies that no longer exist. The return over the next five years including dividends was measured and compared with the S&P 500 including dividends.

What to watch for

A look back, not evidence of future returns. The rules were developed with these years in view.

Forward test

A test that runs into the future from a fixed date.

Grades are frozen at fixed dates and stored with a timestamp before the price development is known. That way the result cannot be improved afterwards. The forward test has been running since 12 October 2026; the first evaluation after 36 months is scheduled for October 2029. This is a test plan, not a promise of proof.

Survivorship bias

Testing only companies still listed today leaves out those that disappeared.

Bankrupt companies are missing, which tends to flatter a result. Acquired ones are missing too, which tends to depress it. The historical test avoids this bias: it uses all S&P 500 members at the time, including those that later disappeared.