Current ratio - is equal to current assets divided by current liabilities. It is an indication of company's ability to pay its short term liability with its short term assets. A current ratio of 2 or more is generally desirable, as it would indicate that the company is in good financial condition. If it's bellow 1, it could mean that company would not be able to pay off its short term liabilities, at that time, as it does not have enough cash on hand (it's not liquid).

A current ratio that is too high is not desirable as well. It could mean that the company is not using assets to grow the business, which could hurt it in the long run. Current ratio varies through the industries so make sure that you compare the companies from the same industry. Some industries will require of companies to have more cash on hand, to survive the potential recession. The high current ratio would, in this case, make sense.

Cumulative Dividend - is paid on cumulative preferred stocks. Must be paid before dividends on common stock, is not dependant on earnings of the company and is an obligation for the company. If company fails to distribute dividends to preferred shareholders in one period, it must be compensated in the next period, and before common stockholders distribution.

Debt to Asset Ratio - is calculated by dividing total liabilities with total assets. A ratio below 1 means that majority of assets are financed through equity. A ratio above 1 means that they are financed more by debt.

Dividends - are payments made by a company to its shareholders. Typically, when a company is making a profit, it distributes those profits to its owners (the shareholders) by way of a dividend.

When a company makes a profit, some of this money is typically reinvested in the business and called retained earnings, and some of it can be paid to its shareholders - as a dividend. Paying dividends reduces the amount of cash available to the business.

Dividends are taxable as a regular income and at much higher rate than that applied to long term capital gain. As of 2003, cash dividends are taxed at a maximum rate of 15% as long as the stock has been held for at least 60 out of the 120 days beginning 60 days prior to the ex-dividend date. If you have held the stock for a period of less than this the dividend will be taxed at your regular income level.

Earnings Growth - is an average growth of earnings over the period of time. Beware of the earnings growth in a new, start-up company. This can easily be misleading because earnings for a startup can be quite small. When looking at the possible investment, aim for companies with steady and high earnings growth. For big and established companies earnings growth might be smaller, but higher dividends are to be expected.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) - Earnings excluding expenses from depreciation, amortization, interest, and taxes (earnings + ITDA). It's the operating income with expenses for depreciation and amortization backed out. In layman's terms, EBITDA is called "Earnings, before all the bad stuff." EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.

Investment Dictionary

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