SAVNG Glossary
Every financial term used on the site, defined in plain English.
Every financial term used on SAVNG, defined in plain English, with why it matters and what "normal" looks like. We try to be accessible to the lay reader — if anything here is still confusing, tell us and we will rewrite it.
AFFO (Adjusted Funds From Operations)
What it is: The REIT industry's standard cash-flow measure — net income + depreciation − maintenance CapEx.
Why it matters: Real-estate depreciation under GAAP isn't a real cost (properties typically hold or appreciate). AFFO undoes the accounting distortion and shows the actual cash the REIT generates.
What "normal" looks like: Used as the basis for REIT dividend coverage, P/AFFO multiples, and growth targets
NAREIT formula: FFO = Net Income + Depreciation + Amortization − Gains on Property Sales. AFFO = FFO − Maintenance CapEx − Amortization of Leasing Costs. We compute true AFFO when D&A line is available (assumes 70% of total CapEx is maintenance — typical for stable equity REITs). Falls back to FCF/share when D&A unavailable. The reported figure from a REIT's 10-K may differ slightly because management defines the maintenance-vs-growth CapEx split.
Allowed ROE (Utilities)
What it is: The regulator-approved rate of return a utility is allowed to earn on its rate-base equity. Typically 9–10%.
Why it matters: Regulated utilities can't just charge whatever they want — state Public Utility Commissions set rates designed to let the utility earn this approved ROE. It defines the long-run economics of the business.
What "normal" looks like: 9–10% in most US states · varies 8.5%–11% by jurisdiction · trended downward over the last decade as interest rates fell
The rate-making process: utility files a rate case → PUC reviews → sets allowed return based on cost-of-capital studies → utility recovers approved ROE plus pass-through costs. Operationally efficient utilities earn slightly above the allowed ROE; inefficient ones underearn. Combined with rate-base growth (capital investment), allowed ROE drives long-run book-value compounding.
Altman Z-Score
What it is: A bankruptcy-risk score combining 5 financial ratios into one number. Predictive of bankruptcy within 2 years.
Why it matters: Cheap-looking stocks (low P/E or P/B) often have low Z-scores because the market knows the company is dying. Z-score warns you before you fall into a value trap.
What "normal" looks like: > 3.0 = safe zone · 1.81–3.0 = grey zone · < 1.81 = distress zone
Developed by Edward Altman in 1968. Empirically validated at ~80% accuracy for predicting bankruptcy 1 year out, ~70% at 2 years out. Most useful for manufacturing companies; less reliable for banks, REITs, and pre-profit growth companies (where some inputs don't apply cleanly).
Beta
What it is: How much the stock moves when the overall market moves. 1.0 = moves with the market; 1.5 = moves 50% more than the market.
Why it matters: Higher beta = more volatile = should demand higher discount rate. Low beta stocks (utilities, consumer staples) move less.
What "normal" looks like: Most stocks 0.5–1.5 · Defensives ~0.3 · High-vol tech ~1.5–2.0
Calculated by regressing the stock's returns against the market (S&P 500) — SAVNG computes it from ~1 year of daily moves and shrinks it toward the sector average to tame noise. A beta of 1.2 means a 10% market move historically produced a 12% move in the stock. Why it feeds the discount rate: a US Treasury bond barely moves, so it needs only a small return to be worth owning; a stock that swings far more than the market must offer a higher expected return to compensate you for that extra bumpiness. Beta is how we size that extra compensation — we start at the safe Treasury rate and add a premium scaled by beta, so a high-beta stock has to clear a higher bar to look cheap. Beta does not predict crashes — it describes typical behavior, and a low-beta stock can still fall hard in a crisis.
CAGR (Compound Annual Growth Rate)
What it is: The smoothed average growth per year over a span of years.
Why it matters: It turns "grew from $1B to $1.6B over 5 years" into one clean number (about 10%/year) you can compare across companies.
CAGR answers "if it grew at one steady rate each year to get from the start value to the end value, what would that rate be?" It smooths out lumpy years into a single comparable annual growth rate.
CAPM (the discount-rate formula)
What it is: How we set the discount rate: the safe Treasury rate plus a premium scaled by the stock's beta (how volatile it is).
Why it matters: A riskier, more volatile stock (higher beta) gets a higher discount rate — which makes its future cash worth less today, so it has to grow more to justify its price.
What "normal" looks like: Roughly 7–15% for most stocks (4.5% risk-free + beta × ~5.5%).
The Capital Asset Pricing Model estimates the return investors should demand for a stock: risk-free rate + beta × equity-risk-premium. We use it to set each stock's discount rate, so the hurdle is tailored to that stock's volatility rather than a one-size-fits-all number.
DCF
What it is: Discounted Cash Flow — sums up all future cash a business will produce, adjusted for the fact that future dollars are worth less than dollars today.
Why it matters: It is the most fundamentally honest valuation method when applicable — but only works for companies with predictable, positive cash flow.
What "normal" looks like: Best for: mature, profitable businesses. Fails for: pre-profit growth, banks, REITs.
DCF projects free cash flow for 10+ years, discounts each year back to present value using a required-return rate, and sums them. Plus a terminal value for everything beyond year 10. The result is the intrinsic value. DCF fails when historical cash flows do not predict future ones (early-stage growth, cyclical, distressed) — for those cases use Reverse DCF or EV/Sales.
Discount Rate
What it is: The annual return you demand for taking single-stock risk instead of buying a safe Treasury or index fund.
Why it matters: Higher discount rate = stricter valuation (a stock has to produce more cash to be worth holding). Lower = more generous.
What "normal" looks like: 8–12% is standard · 9–10% matches S&P 500 historical return · Below 7% is illogical for single-stock risk
Sometimes called the "required rate of return" or "cost of equity". The reasoning: if you can earn ~10% in an index fund with low effort, you should demand more from a riskier single stock. SAVNG builds this rate from the stock's own Beta: we start with the rate on a safe Treasury bond and add a premium sized by how much more volatile the stock is than the market — so a steady business gets a lower rate (and a higher fair value), and a wild one gets a higher rate (and a lower fair value). Common practice: 9-10% for blue chips, 11-12% for cyclicals or smaller caps, 13-15% for distressed or speculative. Setting below 7% means you are willing to take stock risk for bond-level returns — usually wrong. See Beta.
Distribution Coverage Ratio
What it is: Distributable Cash Flow divided by distributions paid — how comfortably a midstream pipeline can fund its payout.
Why it matters: For MLPs and pipelines, the distribution is the whole reason to own the stock. Coverage <1.0× means the company is paying out more than it earns and is funding the difference with debt — a cut is almost always coming.
What "normal" looks like: <1.0 = distribution at risk · 1.0–1.1 = tight · 1.2+ = comfortable · 1.4+ = strong with growth headroom
DCF (Distributable Cash Flow) ≈ EBITDA − maintenance CapEx − interest. Companies report DCF separately in earnings releases; we approximate via FCF, which is conservative (over-penalizes growth-CapEx-heavy years). Watch for: management guidance on coverage, multi-quarter trend, and whether distribution growth is announced before or after coverage hits target.
Distribution Yield (MLPs)
What it is: For MLPs/LPs, "distributions" replace dividends — same idea (cash to investors) but with K-1 tax forms instead of 1099-DIVs.
Why it matters: MLP distributions are often higher than typical dividends (6-12%) because of pass-through tax structure. But some of each distribution is return-of-capital (reducing your cost basis) rather than current income — affects tax treatment.
What "normal" looks like: 6–10% typical for midstream MLPs · >10% often signals distribution at risk
MLP investors get a K-1 each year showing their share of partnership income/losses. Part of each distribution is treated as return-of-capital (tax-deferred until you sell, then taxed as capital gain). MLPs in IRAs can create UBTI (unrelated business taxable income) — generally hold them in taxable accounts. Pipeline C-corps (KMI, OKE) pay regular dividends without the K-1 complexity.
Dividend Yield
What it is: Annual dividends per share divided by current price — your cash income from holding the stock.
Why it matters: For REITs, MLPs, and utilities, dividend yield is half the total return. A 5% yield + 3% AFFO growth = ~8% total return before any multiple expansion.
What "normal" looks like: Typical REIT 3–6% · S&P 500 average ~1.5% · Yield >7% = either premium income vehicle or dividend at risk
Yield + payout ratio together tell the story. A 6% yield with 70% payout ratio is comfortable. A 6% yield with 110% payout (paying out more than free cash flow) is borrowing to pay dividends and will get cut. Always check payout ratio alongside yield.
EPS
What it is: Earnings per share — net income divided by shares outstanding.
Why it matters: The basis for the P/E ratio. But "earnings" is an accountant's figure — easier to manipulate than cash flow.
EPS can be inflated by non-cash items, one-time gains, or aggressive accounting choices. Always cross-check against FCF per share — if EPS is consistently higher than FCF per share, the earnings quality is questionable.
EV / EBITDA
What it is: Enterprise value divided by earnings before interest, tax, depreciation, and amortization.
Why it matters: A classic "what would a private buyer pay" multiple — used in M&A. Strips out tax and capital-structure noise.
What "normal" looks like: 8–12x for mature businesses · 15–25x for growth · Below 5x often signals distress
EBITDA is a rough proxy for operating cash generation. EV/EBITDA tells you the multiple of operating cash a buyer is paying. Useful for comparing across companies with different debt levels (since EV includes debt). Less reliable for asset-heavy capex-intensive businesses where depreciation matters.
EV / Gross Profit
What it is: Enterprise value divided by gross profit — the multiple paid for what each dollar of sales contributes after direct costs.
Why it matters: More refined than EV/Sales for high-margin businesses (software, marketplaces) where gross margin is the real economic engine.
What "normal" looks like: 8–15x for SaaS · 15–25x for hypergrowth software · >30x demanding
A 90%-margin SaaS company and a 30%-margin hardware company can have identical EV/Sales while having radically different unit economics. EV/Gross Profit normalizes for that, exposing which businesses are paying more per dollar of "good revenue" (revenue that converts to operating leverage).
EV / Sales
What it is: For every $1 of yearly revenue, this is how many dollars investors pay to own the whole business (including debt).
Why it matters: Works for pre-profit growth companies where P/E and FCF don't apply. The most apples-to-apples cross-company multiple because it ignores accounting choices.
What "normal" looks like: 1–3x for mature companies · 4–10x for software/SaaS · 10–20x for hypergrowth · >20x is rare and demanding
Enterprise Value (EV) = market cap + total debt − cash. That's "what would I pay to own the whole business outright" — you pay equity-holders the market cap AND take over their debt, but you also keep their cash. Then divide by annual revenue. A 5x EV/Sales is cheap for software, expensive for grocery retail — always compare within an industry.
Enterprise Value (EV)
What it is: The "true price" of owning the entire company outright: market cap + debt − cash.
Why it matters: Two companies with identical market caps can be very different deals if one carries $5B of debt and the other has $5B of cash. EV fixes that by including what the new owner inherits or keeps.
What "normal" looks like: For a debt-heavy company, EV >> market cap · For a cash-rich company (e.g. AAPL), EV ≈ market cap · For a company with more cash than market cap, EV can be negative
Calculated as: market cap + total debt + preferred stock + minority interest − cash & equivalents. Practical example: if a stock has $100B market cap, $30B debt, $10B cash, then EV = 100 + 30 − 10 = $120B. The reason this matters: a private buyer purchasing the whole business would pay $100B to shareholders and inherit $30B of debt (which they'd have to pay back at some point), but keep the $10B of cash on the balance sheet.
FFO (Funds From Operations)
What it is: A REIT's cash earnings: net income with property depreciation added back.
Why it matters: Accounting assumes buildings lose value every year, but well-kept real estate usually holds or gains value — so reported earnings understate a REIT's real cash. FFO fixes that.
What "normal" looks like: The basis for REIT dividend coverage and price-to-FFO multiples.
FFO = Net Income + Depreciation & Amortization − gains on property sales. AFFO goes one step further and subtracts the upkeep spending needed to maintain the buildings. Both are far better than GAAP earnings for judging a REIT.
Free Cash Flow (FCF)
What it is: Operating cash flow minus capital spending: cash left after a company covers operating costs, taxes and interest and reinvests in the business — but BEFORE repaying debt principal or paying dividends. The cash actually available to investors.
Why it matters: A company can show big profits on paper while burning through cash. FCF is what actually fills the bank account.
What "normal" looks like: Healthy mature businesses convert 8–15% of revenue into FCF · Growth companies often negative
Computed as operating cash flow minus capital expenditures. Free cash flow is the basis for DCF valuation, dividends, buybacks, and debt paydown. Negative FCF is fine for an early-stage growth company funding rapid expansion; it is alarming for a mature business that should be self-funding.
Implied Growth
What it is: The annual cash-flow growth rate the market's current price requires to be justified.
Why it matters: If the implied growth is higher than what you believe the company can actually deliver, the price is too high.
What "normal" looks like: Same scale as Reverse DCF: 10-15% sustainable · 30%+ historically rare
Computed by solving for the growth rate that makes our DCF model output equal to the current market price. It is what the market is "saying" about the company's future. Compare to historical growth — if a company has grown 8% historically and implied growth is 30%, the bull case requires a dramatic re-acceleration.
Intrinsic Value
What it is: Our DCF model's estimate of what each share is mathematically worth based on projected cash flows.
Why it matters: Compare to current price. Below IV = potentially undervalued. Above IV = priced for growth that must actually happen.
What "normal" looks like: Model-derived; quality depends on data and assumptions.
Intrinsic value is the present value of the future free cash flows we expect the company to generate, discounted back to today. It is a model output, not a fact. The accuracy depends on the quality of the inputs (historical FCF, growth assumptions, discount rate) and whether DCF is the right model for the business at all. Growth stocks with no FCF cannot be valued with DCF — see Reverse DCF instead.
MACD
What it is: Moving Average Convergence Divergence — compares a fast and a slow price trend to gauge momentum direction.
Why it matters: When the fast line crosses above the slow line, short-term momentum is turning up; below, turning down. A timing cue, not a value signal.
What "normal" looks like: Line above signal = bullish momentum · below = bearish
MACD subtracts a 26-day moving average from a 12-day one, then compares that to a 9-day "signal" line. It does not say whether a stock is cheap — only which way recent momentum is leaning. Most useful confirming or questioning the timing of a thesis you already hold on fundamentals.
MLP (Master Limited Partnership)
What it is: A pipeline or energy partnership that trades like a stock and passes its income straight to investors.
Why it matters: MLPs pay high "distributions" (often 6–10%) but send you a K-1 tax form instead of a 1099. They are judged on whether cash flow covers the distribution, not on P/E.
What "normal" looks like: Distribution yields 6–10%; watch the distribution-coverage ratio.
Master Limited Partnerships (mostly oil & gas pipelines) avoid corporate tax by passing income to unit-holders. The trade-off is a K-1 tax form and some "return of capital" treatment. The key health check is the distribution-coverage ratio — does cash flow comfortably cover what they pay out?
Macro Regime
What it is: A label summarizing the current market environment — risk-on, risk-off, late cycle, etc.
Why it matters: Stocks behave differently in different regimes. The same "cheap" valuation has different odds of working in a recession vs a bull market.
Derived from VIX (volatility), CNN Fear & Greed Index (positioning), and the 10-year Treasury yield (rate environment). A risk-off regime favors quality and defensives; risk-on favors growth and beta. Regime is context, not destiny — fundamentals still rule longer-term.
Margin of Safety
What it is: How much room there is between the current price and intrinsic value, in your favor.
Why it matters: Benjamin Graham's core idea: only buy when there is enough discount that you can be wrong about your assumptions and still not lose money.
What "normal" looks like: 20%+ is the classic Graham target · 30%+ for higher-risk companies
Calculated as (intrinsic value − price) ÷ intrinsic value. Positive margin of safety means the price is below your IV estimate. Graham argued you should aim for 30%+ margin of safety on individual stocks because the math is uncertain — the discount is your cushion against errors in your projections.
Market Cap
What it is: The total dollar value the market is assigning to the entire company.
Why it matters: This is the number that actually matters when comparing companies. Two companies with the same business but different share counts have the same market cap.
What "normal" looks like: Mega cap >$200B · Large $10–200B · Mid $2–10B · Small $300M–2B · Micro <$300M
Market capitalization = share price × shares outstanding. It is what the public market thinks the equity of the whole company is worth, ignoring debt and cash. To compare companies, market cap is the right yardstick — share price alone is meaningless.
NCAV
What it is: Net Current Asset Value — current assets minus all liabilities, divided by shares.
Why it matters: Benjamin Graham's "buy a dollar for fifty cents" screen. Stocks trading below NCAV are theoretically worth more dead than alive.
What "normal" looks like: Almost always small caps in distress · Statistically powerful as a basket; risky individually
Pure liquidation-value calculation. If a company shut down today and sold off inventory, receivables, and cash at book value and paid all debts, NCAV is what would be left for shareholders. Stocks below NCAV are rare and usually distressed — many will go bankrupt, but historically a diversified basket of NCAV stocks has outperformed the market.
P/E Ratio
What it is: Stock price divided by annual earnings per share — how much you pay for $1 of yearly earnings.
Why it matters: High P/E = market expects fast growth or you are overpaying. Low P/E = market expects slow growth or the stock is cheap (sometimes for good reason).
What "normal" looks like: 12–20 for mature businesses · 25–50 for growth · 80+ for speculative
A P/E of 20 means it would take 20 years of current earnings to "earn back" what you paid (assuming no growth). The market sets P/E based on expected growth, risk, and interest rates. Comparing P/E across industries is misleading — software typically trades much higher than utilities, and for good reasons. Compare within an industry.
P/IV
What it is: Current price divided by our intrinsic value estimate.
Why it matters: Below 1.0 = stock trades below model fair value. Above 1.0 = stock trades above model fair value (must justify with growth that exceeds our assumptions).
What "normal" looks like: < 0.85 = potentially undervalued · 0.85–1.10 = fair · > 1.10 = premium
P/IV is a quick "where am I" gauge against our DCF. Read alongside the QA flags and data-quality tier — a P/IV of 0.3 on a stock with poor data is not a screaming buy, it is a "verify the inputs" warning.
P/TBV (Price to Tangible Book Value)
What it is: Price compared to the company's hard net assets — book value with intangibles like goodwill stripped out.
Why it matters: It's the standard cheap-or-expensive gauge for banks, whose value really is their balance sheet. Around 1× is fair for an average bank; a premium implies high returns on equity.
What "normal" looks like: Banks: ~1× is fair; >1.5× implies sustained high ROE.
Tangible book value is what shareholders would theoretically have left if the company sold its real assets and paid its debts, ignoring soft items like goodwill. For banks and insurers — whose assets are mostly financial — price-to-tangible-book plus return-on-equity is the right lens, not a DCF.
Payout Ratio
What it is: Percentage of free cash flow (or AFFO for REITs) paid out as dividends.
Why it matters: A payout ratio above 100% means the company is paying more than it earns — funded by debt or asset sales. That's unsustainable and the dividend usually gets cut.
What "normal" looks like: REITs: 80–95% (high payout is by-design — they must distribute 90%+ of taxable income) · Regular stocks: 20–50% typical · >100% = unsustainable
Calculated as dividends ÷ FCF (or AFFO for REITs). Required REIT minimum payout is 90% of taxable income — that's why REITs naturally show high payout ratios that would alarm you in a non-REIT. Watch for trend: payout ratio creeping up year-over-year is a yellow flag.
Peer Basket
What it is: A handpicked group of similar companies used as a comparison benchmark.
Why it matters: Industry-wide medians can be misleading (a SaaS company shouldn't be valued against legacy IT consulting). A tight peer basket of 5–10 close comparables is more accurate.
We pick the 5–10 closest peers by sector + industry + market cap proximity + fundamentals shape. The multiples of those peers (median, p25, p75) form a tight valuation range for the target stock. Always check the peer list — sometimes the auto-picker is off and you need to manually curate.
Piotroski F-Score
What it is: A 9-point quality checklist scoring profitability, leverage, and operating efficiency.
Why it matters: High score = fundamentals improving. Low score = deteriorating. Especially powerful for filtering cheap stocks: cheap + high F-score historically outperforms; cheap + low F-score is often a value trap.
What "normal" looks like: 7–9 = strong · 4–6 = mediocre · 0–3 = weak
Joseph Piotroski (2000) showed that buying the cheapest 20% of stocks filtered to those with F-score ≥ 7 substantially beat the market. The score consists of: positive net income, positive operating cash flow, OCF > net income, improving ROA, decreasing leverage, increasing current ratio, no share issuance, improving gross margin, improving asset turnover.
Price-to-AFFO
What it is: Share price divided by Adjusted Funds From Operations per share — the REIT-equivalent of P/E.
Why it matters: For REITs, AFFO is the right cash measure (not net income) because property depreciation under GAAP isn't a real economic cost — properties typically hold or appreciate.
What "normal" looks like: <12× = potentially cheap or distress · 13–18× = typical for quality REITs · 20–25× = premium · >25× = expensive
AFFO ≈ Funds From Operations − maintenance CapEx − amortization of leasing costs. We approximate AFFO using FCF per share — directionally correct, but exact match to company-reported AFFO may differ. P/AFFO is the REIT-industry standard yardstick analogous to P/E for industrial companies.
Price-to-Book (P/B)
What it is: Share price divided by book value per share — what you pay for $1 of accounting equity.
Why it matters: For banks and insurers, book value is the regulatory capital they earn returns on. P/B is the cleanest comparison: 1.0× means buying the bank at the same price the accountants say it's worth.
What "normal" looks like: 0.8–1.2× = fair for average bank · 1.5–2.0× = solid franchise · >2.5× = premium · <0.8× = potentially cheap or distress
Book value = total assets − total liabilities, divided by shares outstanding. For banks, P/B is more meaningful than P/E because earnings can be smoothed via loan-loss provisions but equity is what regulators care about. Watch for tangible book value (TBV) — strips out goodwill from acquisitions and is more conservative.
REIT (Real Estate Investment Trust)
What it is: A company that owns income-producing real estate and is required to pay out about 90% of its profit to shareholders as dividends.
Why it matters: Because they pay out almost everything, REITs are judged on the cash they distribute (price-to-AFFO and dividend yield), not on ordinary earnings — a normal P/E or DCF misleads here.
What "normal" looks like: Dividend yields often 3–6%; valued on price-to-AFFO, not P/E.
A REIT owns buildings — apartments, warehouses, data centers, cell towers — and rents them out. In exchange for paying out ~90% of taxable income as dividends, it pays little corporate tax. That payout rule is why REITs are valued on cash-flow measures (FFO/AFFO) and dividend yield rather than earnings, and why they deliberately carry high debt against long-life property.
RSI
What it is: Relative Strength Index — a 0-100 momentum gauge. Above 70 = overbought; below 30 = oversold.
Why it matters: Short-term contrarian indicator. Extreme readings often precede mean reversion, though not always.
What "normal" looks like: 30–70 normal · >70 overbought · <30 oversold
Computed from the ratio of recent up-day price changes vs. recent down-day price changes over 14 days. Not predictive on its own; useful as one input alongside fundamentals. Extreme readings (>80, <20) are more reliable signals than moderate ones.
Return on Assets (ROA)
What it is: Net income divided by total assets — how productive each dollar of assets is.
Why it matters: For banks especially, ROA isolates underwriting and operating efficiency from leverage. Two banks with identical ROE may have very different ROAs — one earning it cleanly, one earning it on borrowed money.
What "normal" looks like: <0.8% = weak · 1.0–1.2% = solid · >1.5% = excellent (very rare for big banks)
ROA = net income ÷ total assets. A 1% ROA on $1T of assets = $10B of profit. Banks naturally have lower ROA than software companies (loans-to-assets ratio mechanics) — comparison only makes sense within the same business model.
Return on Equity (ROE)
What it is: How much profit the company generates on every dollar of shareholder equity.
Why it matters: For a bank, ROE is the engine. A bank earning 15% on equity will compound book value at ~15%/year if it retains earnings. Combined with P/B, ROE tells you whether a premium price is supported by returns.
What "normal" looks like: <8% = weak · 10–12% = solid · 15%+ = excellent · >20% sustained = exceptional franchise
ROE = net income ÷ shareholders' equity. Decomposes (DuPont) into: net margin × asset turnover × leverage. High ROE driven by leverage alone is fragile (banks pre-2008). High ROE driven by margin + turnover is the durable kind. A bank can't sustainably earn ROE much higher than ~20% without unusual moat or excessive leverage.
Reverse DCF
What it is: Instead of asking "what is this stock worth?", asks "what growth rate is the current market price already assuming?"
Why it matters: It crystallizes the bull thesis as a single number you can argue with. If the market expects 40% growth for 10 years and you do not believe that, the stock is overvalued.
What "normal" looks like: 10–15% = sustainable for strong companies · 20–25% = exceptional · 30%+ = historically very rare
Reverse DCF inverts the question. Given the current price, the discount rate, and a terminal growth assumption, it solves for the annual growth rate the cash flow MUST achieve to make the price fair. If the implied growth is 5%, the bar is low. If it is 35%, very few companies in history have cleared that bar for a full decade. Useful on every stock, especially overvalued-looking growth names.
Rule of 40
What it is: Revenue Growth % + FCF Margin % — the gold-standard quality screen for pre-profit growth companies.
Why it matters: Growth-stage tech companies trade off speed against profitability. Rule of 40 lets you compare a hyper-growth-but-burning-cash company against a slower-growing-but-profitable one on a single number.
What "normal" looks like: ≥40 = healthy growth-stage company · 60+ = excellent · <20 = burn not justified by growth
Popularized by Brad Feld / Bessemer Venture Partners for SaaS. A company with 60% growth + (-20%) FCF margin scores 40 (passing). A company with 20% growth + 20% FCF margin also scores 40 (passing). The threshold is empirical: companies sustaining R40 ≥ 40 historically command premium valuation multiples. Best used alongside revenue scale (a $50M company can compound 60% indefinitely much harder than a $5B one can).
SBC (Stock-Based Compensation)
What it is: Paying employees with company shares instead of cash.
Why it matters: It's a real cost — it dilutes your ownership — so we subtract it from free cash flow even though accounting rules add it back, which would otherwise flatter cash-heavy tech companies.
What "normal" looks like: Can be 10–30% of revenue at high-growth software firms.
Stock-based comp doesn't cost the company cash, so standard cash-flow statements add it back — inflating "free cash flow," especially for tech. But issuing shares to staff shrinks your slice of the company, a genuine economic cost. We deduct it to get an owner-earnings view of free cash flow.
TTM (Trailing Twelve Months)
What it is: The most recent 12 months of results, added up from the last four quarters.
Why it matters: It gives the freshest full-year picture between annual reports, instead of waiting for the calendar year to close.
Companies report quarterly. "Trailing twelve months" stitches the last four quarters together so you always have an up-to-date annual figure — more current than the last fiscal-year report.
Terminal Growth Rate
What it is: The growth rate we assume the company holds forever, after the explicit 10-year forecast period ends.
Why it matters: It anchors the long-tail value. Cannot mathematically exceed long-term GDP growth or the company eventually becomes larger than the global economy.
What "normal" looks like: 2–3% (matches long-term US GDP growth) · Above 4% is mathematically problematic
A company cannot grow faster than the economy forever. Standard practice is 2–3%, roughly matching long-term inflation + real GDP. Pushing this higher inflates intrinsic value unrealistically. We cap at 4% in our model and warn at 3%.