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Low price-earnings ratio effect

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Definition of Low price-earnings ratio effect

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Low price-earnings ratio effect

The tendency of portfolios of stocks with a low price-earnings ratio to
outperform portfolios consisting of stocks with a high price-earnings ratio.



Related Terms:

"Soft" Capital Rationing

Capital rationing that under certain circumstances can be violated or even viewed
as made up of targets rather than absolute constraints.


Abusive Earnings Management

The use of various forms of gimmickry to distort a company's true financial performance in order to achieve a desired result.


Abusive Earnings Management

A characterization used by the Securities and Exchange
Commission to designate earnings management that results in an intentional and material misrepresentation
of results.


Acceleration Clause

Clause causing repayment of a debt, if specified events occur or are not met.


Accelerationist Hypothesis

Belief that an effort to keep unemployment below its natural rate results in an accelerating inflation.



Accounting earnings

earnings of a firm as reported on its income statement.


accounts receivable turnover ratio

A ratio computed by dividing annual
sales revenue by the year-end balance of accounts receivable. Technically
speaking, to calculate this ratio the amount of annual credit sales should
be divided by the average accounts receivable balance, but this information
is not readily available from external financial statements. For
reporting internally to managers, this ratio should be refined and finetuned
to be as accurate as possible.


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Acid-test ratio

Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid
items to current liabilities.


ACID-TEST RATIO

A ratio that shows how well a company could pay its current debts using only its most liquid or “quick” assets. It’s a more pessimistic—but also realistic—measure of safety than the current ratio, because it ignores sluggish, hard-toliquidate current assets like inventory and notes receivable. Here’s the formula:
(Cash + Accounts receivable + Marketable securities) / (Current liabilities)


Acid-test Ratio

See quick ratio


acid test ratio (also called the quick ratio)

The sum of cash, accounts receivable, and short-term marketable
investments (if any) is divided by
total current liabilities to compute this ratio. Suppose that the short-term
creditors were to pounce on a business and not agree to roll over the
debts owed to them by the business. In this rather extreme scenario, the
acid test ratio reveals whether its cash and near-cash assets are enough
to pay its short-term current liabilities. This ratio is an extreme test that
is not likely to be imposed on a business unless it is in financial straits.
This ratio is quite relevant when a business is in a liquidation situation
or bankruptcy proceedings.


Adjusted Cash Flow Provided by Continuing Operations

Cash flow provided by operating
activities adjusted to provide a more recurring, sustainable measure. Adjustments to reported cash
provided by operating activities are made to remove such nonrecurring cash items as: the operating
component of discontinued operations, income taxes on items classified as investing or financing activities, income tax benefits from nonqualified employee stock options, the cash effects of purchases and sales of trading securities for nonfinancial firms, capitalized expenditures, and other nonrecurring cash inflows and outflows.


Adjusted Earnings

Net income adjusted to exclude selected nonrecurring and noncash items of reserve, gain, expense, and loss.


Allowance for bad debts

An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.


Allowance for doubtful accounts

A contra account related to accounts receivable that represents the amounts that the company expects will not be collected.


Allowance for Doubtful Accounts

An estimate of the uncollectible portion of accounts receivable
that is subtracted from the gross amount of accounts receivable to arrive at the estimated collectible
amount.


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Allowance method

A method of adjusting accounts receivable to the amount that is expected to be collected based on company experience.


Antidilutive effect

Result of a transaction that increases earnings per common share (e.g. by decreasing the
number of shares outstanding).



Appraisal ratio

The signal-to-noise ratio of an analyst's forecasts. The ratio of alpha to residual standard
deviation.


Arm's length price

The price at which a willing buyer and a willing unrelated seller would freely agree to
transact.


Articles of incorporation

Legal document establishing a corporation and its structure and purpose.


Ask price

A dealer's price to sell a security; also called the offer price.


Asset activity ratios

ratios that measure how effectively the firm is managing its assets.


Asset/equity ratio

The ratio of total assets to stockholder equity.


asset turnover ratio

A broad-gauge ratio computed by dividing annual
sales revenue by total assets. It is a rough measure of the sales-generating
power of assets. The idea is that assets are used to make sales, and the
sales should lead to profit. The ultimate test is not sales revenue on
assets, but the profit earned on assets as measured by the return on
assets (ROA) ratio.


Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.


basic earnings per share (EPS)

This important ratio equals the net
income for a period (usually one year) divided by the number capital
stock shares issued by a business corporation. This ratio is so important
for publicly owned business corporations that it is included in the daily
stock trading tables published by the Wall Street Journal, the New York
Times, and other major newspapers. Despite being a rather straightforward
concept, there are several technical problems in calculating
earnings per share. Actually, two EPS ratios are needed for many businesses—
basic EPS, which uses the actual number of capital shares outstanding,
and diluted EPS, which takes into account additional shares of
stock that may be issued for stock options granted by a business and
other stock shares that a business is obligated to issue in the future.
Also, many businesses report not one but two net income figures—one
before extraordinary gains and losses were recorded in the period and a
second after deducting these nonrecurring gains and losses. Many business
corporations issue more than one class of capital stock, which
makes the calculation of their earnings per share even more complicated.


Basic Earnings Power Ratio

Percentage of earnings relative to total assets; indication of how
effectively assets are used to generate earnings. It is calculated by
dividing earnings before interest and taxes by the book value of all
assets.



Basis price

price expressed in terms of yield to maturity or annual rate of return.


Benefit Ratio Method

The proportion of unemployment benefits paid to a company’s
former employees during the measurement period, divided by the total
payroll during the period. This calculation is used by states to determine the unemployment
contribution rate to charge employers.


Benefit Wage Ratio Method

The proportion of total taxable wages for laid off
employees during the measurement period divided by the total payroll during
the period. This calculation is used by states to determine the unemployment
contribution rate to charge employers.


Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.


Blow-off top

A steep and rapid increase in price followed by a steep and rapid drop. This is an indicator seen
in charts and used in technical analysis of stock price and market trends.


Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees

A committee formed in response to SEC chairman Arthur Levitt's initiative to improve the financial
reporting environment in the United States. In a report dated February 1999, the committee
made recommendations for new rules for regulation of financial reporting in the United States that
either duplicated or carried forward the recommendations of the Treadway Commission.


Calendar effect

The tendency of stocks to perform differently at different times, including such anomalies as
the January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect.


Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.


Call price

The price for which a bond can be repaid before maturity under a call provision.


Canadian Deposit Insurance Corporation

Better known as CDIC, this is an organization which insures qualifying deposits and GICs at savings institutions, mainly banks and trust companys, which belong to the CDIC for amounts up to $60,000 and for terms of up to five years. Many types of deposits are not insured, such as mortgage-backed deposits, annuities of duration of more than five years, and mutual funds.


Capital Consumption Allowance

See depreciation.


Capital Cost Allowance (CCA)

The annual depreciation expense allowed by the Canadian Income Tax Act.


Capital Flows

Purchase by foreigners of our assets (capital inflows) or our purchase of foreign assets (capital outflows).


Capital rationing

Placing one or more limits on the amount of new investment undertaken by a firm, either
by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital
budget.


capital rationing

a condition that exists when there is an
upper-dollar constraint on the amount of capital available
to commit to capital asset acquisition


capital rationing

Limit set on the amount of funds available for investment.


Capitalization ratios

Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.


Cash flow

In investments, it represents earnings before depreciation , amortization and non-cash charges.
Sometimes called cash earnings. Cash flow from operations (called funds from operations ) by real estate and
other investment trusts is important because it indicates the ability to pay dividends.


cash flow

An obvious but at the same time elusive term that refers to cash
inflows and outflows during a period. But the specific sources and uses
of cash flows are not clear in this general term. The statement of cash
flows, which is one of the three primary financial statements of a business,
classifies cash flows into three types: those from operating activities
(sales and expenses, or profit-making operations), those from
investing activities, and those from financing activities. Sometimes the
term cash flow is used as shorthand for cash flow from profit (i.e., cash
flow from operating activities).


cash flow

the receipt or disbursement of cash; when related
to capital budgeting, cash flows arise from the purchase,
operation, and disposition of a capital asset


Cash flow

Cash received and paid over time.


Cash Flow

In investments, NET INCOME plus DEPRECIATION and other noncash charges. In this sense, it is synonymous with CASH earnings. Investors focus on cash flow from operations because of their concern with a firm's ability to pay dividends.


Cash flow after interest and taxes

Net income plus depreciation.


Cash-flow break-even point

The point below which the firm will need either to obtain additional financing
or to liquidate some of its assets to meet its fixed costs.


Cash flow coverage ratio

The number of times that financial obligations (for interest, principal payments,
preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental
payments, and depreciation.


Cash Flow Forecast

An estimate of the timing and amount of a company's inflows and outflows of money measured over a specific period of time typically monthly for one to two years then annually for an additional one to three years.


cash flow from operating activities, or cash flow from profit

This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilities—and depreciation
expense is added back (as well as any other noncash outlay
expense)—to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.


Cash flow from operations

A firm's net cash inflow resulting directly from its regular operations
(disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing
securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net
income.


Cash flow matching

Also called dedicating a portfolio, this is an alternative to multiperiod immunization in
which the manager matches the maturity of each element in the liability stream, working backward from the
last liability to assure all required cash flows.


Cash flow per common share

Cash flow from operations minus preferred stock dividends, divided by the
number of common shares outstanding.


Cash Flow Provided by Operating Activities

With some exceptions, the cash effects of transactions
that enter into the determination of net income, such as cash receipts from sales of goods
and services and cash payments to suppliers and employees for acquisitions of inventory and
expenses.


Cash Flow Provided or Used from Financing Activities

Cash receipts and payments involving
liability and stockholders' equity items, including obtaining cash from creditors and repaying
the amounts borrowed and obtaining capital from owners and providing them with a return on,
and a return of, their investments.


Cash Flow Provided or Used from Investing Activities

Cash receipts and payments involving
long-term assets, including making and collecting loans and acquiring and disposing of
investments and productive long-lived assets.


CASH-FLOW STATEMENT

A statement that shows where a company’s cash came from and where it went for a period of time, such as a year.


Cash Flow statement

A financial report that shows the movement in cash for a business during an accounting period.


Cash flow time-line

Line depicting the operating activities and cash flows for a firm over a particular period.


Cash Flow–to–Income Ratio (CFI)

Adjusted cash flow provided by continuing operations
divided by adjusted income from continuing operations.


CASH FLOWS FROM FINANCING ACTIVITIES

A section on the cash-flow statement that shows how much cash a company raised by selling stocks or bonds this year and how much was paid out for cash dividends and other finance-related obligations.


CASH FLOWS FROM INVESTING ACTIVITIES

A section on the cashflow statement that shows how much cash came in and went out because of various investing activities like purchasing machinery.


CASH FLOWS FROM OPERATIONS

A section on the cash-flow Stockholders’ equity statement that shows how much cash came into a company and how much went out during the normal course of business.


Cash ratio

The proportion of a firm's assets held as cash.


Cash Ratio

ratio of cash and cash equivalents to liabilities; in the case of a bank, the ratio of cash to total deposit liabilities.


Circular Flow

Income payments to factors of production are spent to buy output. The receipts from these sales are used to pay factors of production, creating a circular flow of income.


Clean price

Bond price excluding accrued interest.


Clientele effect

The grouping of investors who have a preference that the firm follow a particular financing
policy, such as the amount of leverage it uses.


Coinsurance effect

Refers to the fact that the merger of two firms decreases the probability of default on
either firm's debt.


Common stock ratios

ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.


Concentration account

A single centralized account into which funds collected at regional locations
(lockboxes) are transferred.


concentration banking

System whereby customers make payments to a regional collection center which transfers funds to
a principal bank.


Concentration services

Movement of cash from different lockbox locations into a single concentration
account from which disbursements and investments are made.


Configuration audit

A review of all engineering documentation used as the basis
for a manufactured product to see if the documentation accurately represents
the finished product.


Configuration control

Verifying that a delivered product matches authorizing
engineering documentation. This also refers to engineering changes made subsequent
to the initial product release.


Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.


Consumer Price Index (CPI)

An index calculated by tracking the cost of a typical bundle of consumer goods and services over time. It is commonly used to measure inflation.


contribution margin ratio

the proportion of each revenue dollar remaining after variable costs have been covered;
computed as contribution margin divided by sales


Controlled foreign corporation (CFC)

A foreign corporation whose voting stock is more than 50% owned
by U.S. stockholders, each of whom owns at least 10% of the voting power.


Conversion parity price

Related:Market conversion price


Conversion ratio

The number of shares of common stock that the security holder will receive from
exercising the call option of a convertible security.


Convertible price

The contractually specified price per share at which a convertible security can be
converted into shares of common stock.


Core Earnings

A measure of earnings that includes only the results of the primary operating
activities of the firm. It is most common to see the measure used by financial firms.


Corporation

A legal "person" that is separate and distinct from its owners. A corporation is allowed to own
assets, incur liabilities, and sell securities, among other things.


Corporation

A legal entity, organized under state laws, whose investors purchase
shares of stock as evidence of ownership in it. A corporation is a legal entity, which
eliminates much of the liability for the corporation’s actions from its investors.


corporation

Business owned by stockholders who are not personally
liable for the business’s liabilities.


Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.


Cost Plus Estimated Earnings in Excess of Billings

Revenue recognized to date under the percentage-of-completion method in excess of amounts billed. Also known as unbilled accounts
receivable.


Coverage ratios

ratios used to test the adequacy of cash flows generated through earnings for purposes of
meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.


Credit Rationing

Restriction of loans by lenders so that not all borrowers willing to pay the current interest rate are able to obtain loans.


Cumulative-Effect Adjustment

The cumulative, after-tax, prior-year effect of a change in accounting
principle. It is reported as a single line item on the income statement in the year of the
change in accounting principle. The cumulative-effect-type adjustment is the most common accounting
treatment afforded changes in accounting principle.


Cumulative Effect of a Change in Accounting Principle

The change in earnings of previous years
based on the assumption that a newly adopted accounting principle had previously been in use.


Cumulative Effect of Accounting Change

The change in earnings of previous years assuming
that the newly adopted accounting principle had previously been in use.


Current ratio

Indicator of short-term debt paying ability. Determined by dividing current assets by current
liabilities. The higher the ratio, the more liquid the company.



 

 

 

 

 

 

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