10 Common Finance Terms Every Newbie Needs To Know

While most news covers sports and politics in a largely intuitive language that caters to 

a wide audience, stock market news is typically delivered to a more educated, affluent 

demographic that is assumed to be well-versed in investing jargon – even more so in 

updates reporting the quarterly and annual successes of a publicly traded company.

In order to get a better understanding of what you read, we’ll briefly explore the terms 

you commonly encounter in market news – specifically when a company announces its 

earnings. This article will illustrate where you will see these words, what they mean, and 

what they pose for a company, using excerpts from an earnings news report covering a 

fictional company, Hemlock Incorporated.

Earnings Announcement

Hemlock Incorporated announced its fiscal 2017 Q3 results after the markets closed

, reporting non-GAAP earnings per share of 67 cents, an increase of 17% from the 

last quarter, coupled with a net income of $250 million, up from $235 million. 

Earnings guidance from Hemlock Incorporated fell within range, with EBITDA, 

net income from continuing operations, and free cash flow beyond the high-end of their 

respective guidance ranges.

Highlights from the third quarter of 2017 include:

• Cash and cash equivalents of $128 million.
• EBITDA increase of 19% from Q2.
• Free cash flow of $35 million, up from Q2’s $32.7 million
• Total debt increased from $95 million to $100 million.

However, despite the 17% EPS gain, Hemlock Incorporated fell well below the 

analyst earnings estimate of 71 cents. Coupled with Hemlock’s increasing total debt,

some analysts are left questioning the company’s ability to service its debt moving 

forward.

4 Common Terms

Net income in its most basic definition refers to a company’s total earnings or profit. 

Simply put, net income is the difference calculated when subtracting all expenses 

(including tax expenses) from revenue. When a company’s net income increases, 

it’s normally a result of either revenue increasing or expenses being slashed. It goes 

without saying that an increase in net income is generally perceived as a positive thing 

and factors into a stock’s performance.

Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) is calculated by 

subtracting operating expenses from revenue and adding back depreciation and 

amortization to operating profit (aka EBIT). EBITDA can be used as a proxy for 

free cash flow (FCF) because it accounts for the non-cash expenses of depreciation and 

amortization.

On the income statement, EBITDA is a line item above net income that excludes other 

non-operating expenses, as well as interest expenses and taxes. Some could argue that 

compared to net income, EBITDA paints a rawer image of profitability. 

While some proponents of EBITDA argue that it’s a less-complicated look at a company’s

financial health, many critics state that it oversimplifies earnings, which can create 

misleading values and measurements of company profitability.

As a new investor, it’s important to know the distinction between like measurements 

because the market allows firms to advertise their numbers in ways not otherwise 

regulated. For instance, often companies will publicize their numbers using either 

GAAP or non-GAAP measures. GAAP, or Generally Accepted Accounting Principles, 

outlines rules and conventions for reporting financial information. It is a means to 

standardize financial statements and ensure consistency in reporting.

When a company publicizes their earnings and includes non-GAAP figures, it means they

want to provide investors with an arguably more-accurate depiction of the company’s 

health, like removing one-time items to smooth out earnings. However, the further away a 

company deviates from GAAP standards, the more room is allocated for some 

creative accounting and manipulation (like in the case of EBITDA). 

When looking at a company publishing non-GAAP numbers, new investors should be 

careful of these pro-forma statements, as they may differ greatly from what GAAP deems 

acceptable.

Finally, earnings per share (EPS) is one of the most common things highlighted in an 

earnings announcement and provides investors insight into a company’s earnings health 

and often affects its stock price after an announcement. EPS is calculated by taking net 

income, subtracting the preferred dividends 

(for the sake of simplicity, let’s assume Hemlock Incorporated doesn't pay dividends on 

preferred shares), and taking that difference and dividing it by the average number of 

outstanding shares.

In the case of Hemlock, its current quarterly EPS is calculated by dividing its net income 

of $250 million by the company’s 37 million outstanding shares. 

When reported, EPS is typically compared to earnings from either the previous quarter or 

the same quarter in the previous fiscal year (year over year, or YoY). It is also used in 

basic valuation calculations like the P/E ratio.

Cash on Hand, Money in the Bank

Another thing most news reports look at is how companies manage their money – specifically, 

how much they have in free cash flow, total debt, and what assets they have available in 

cash equivalents, such as short-term government bonds that they can sell to settle debts.

In Hemlock Inc.’s announcement, free cash flow is increasing, meaning that after all 

expenses have been laid out in order to maintain the business’ continuing operations, 

the amount of cash it has on hand is growing. On Hemlock’s balance sheet, 

the company shows cash and cash equivalents of $128 million, which can be converted 

into cash if required, especially in the event that their total debt increases 

and/or income takes a hit.

When assessing a company’s quarterly success or failure, pay attention to those terms. 

How effectively a company handles the cash it possesses and how it pays down its 

debts are both indicators of its ability to grow and increase shareholder value.

Plans and Expectations

Even though Hemlock has seen numbers jump in various areas over the past quarter, 

the fact that it missed analysts' estimates may not bode well for investor confidence. 

Earnings estimates are forecast expectations of earnings or revenue based on 

projections, models and research into the company’s operations and most frequently 

published by financial analysts. Some companies will provide "guidance" of management's 

expectations for future results.

Even if a company sees an increase in profitability, if the actual earnings fall below 

expected earnings, the market will see to it that the stock price adjusts to the new information 

(read: drop in value.) This is due to the fact that estimates are usually built into the 

current price of a stock. Thus, when investors hear how a company “missed expectations” 

in spite of higher revenues being reported, the market corrects the price of the stock 

accordingly.