Investment Definitions - What Do These Terms Mean?Welcome to my page of Investment definitions! Here you will learn the nitty gritty details that will help you to assess whether an investment is a 'beauty' or a 'beast'. I'm sorry in advance for this, but if you aren't aware, as sexy as investment may sound and be, it is a numbers game. The Tao of Investing (if such a thing exists) is the Way of the Accountant!!! Let us start with the basics. What is 'Profit'? Profit is a fairly general description. There are actually a number of types of profit and they all have different meanings and uses to the investor. Operating Profit Operating profit is earned from the manufacture of goods or the providing of services. This means that it is before overhead costs, R&D and other sources of gains or losses. operating profits = sales (turnover) - direct costs Pre-tax Profit This takes into account indirect costs. These might include interest being paid on loans or the costs of central management. Equity analysts will focus on this figure for business vs business comparison. pre-tax profit = operating profit - indirect costs Net of Tax Profit Net of tax profit is the profit after tax has been deducted. The rates of tax to be paid will vary from company to company. This may be because of overseas interests or differing capital expenditure levels. net of tax profits = pre-tax profits - taxation Attributable profits These are profits left after all costs have been deducted and are therefore available for shareholders. Often these will be the same as net of tax profits, though in some cases there will be 'minority interests'. These occur where a subsidiary is partly owned by another person or firm. attributable profit = net of tax profit - minority interests Retained profit This amount is left after any dividends have been paid to shareholders. The money is therefore 'retained' by the company for future investment. The money will initially be placed in the company reserves. retained profit = attributable profits - dividends paid out Earnings per share This is a widely used number because it describes a company's post-tax profits per ordinary share. This makes it far easier for the investor to understand and use as a comparison figure. earnings per share (EPS) = attributable profits - preference dividends divided by the number of shares in issue Other pages of interest are:
|