Category: Definitions

Times Interest Earned

Written by admin on Mar 10, 2011

What is times interest earned? What does TIE stand for?

Times Interest Earned (TIE), also called the “fixed charge coverage” or “interest coverage ratio,” is a measure of a company’s ability to pay its debt obligations.

TIE is calculated by dividing a company’s Earnings Before Interest and Taxes (EBIT) by the total interest payable on its debt, including bonds. The ratio computed reveals how many times over a company can pay its interest obligations with pretax earnings.

Somewhat counterintuitively, too high a TIE (meaning a company can very easily cover its interest payments) is not always considered beneficial because a company may have very low debt due to a lack of investment in projects that could yield higher returns than the costs of carrying debt.

 

Normal Market Size

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What is normal market size? What is NMS?

Normal market size is a classification that determines whether market makers have to honor their quoted bid and offer prices. To clarify, if a company has a relative small number of outstanding shares (perhaps only 1 million) and someone attempts to buy 10,000 shares, it would be unfair to force the market maker to apply its quoted bid price for such a relatively large order. Thus, the normal market size calculation defines the size of orders that market makers must honor their quoted prices on.

Normal market size, abbreviated NMS, is calculated for each stock based on the average daily turnover in the previous year.

 

Dividend Cover

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What is the dividend cover? How is dividend cover calculated?

The dividend cover is a calculation of how many times the profits of a firm could pay for its dividend. For example, if a firm earns $10 million but has dividend payments of $5 million, the dividend cover is 2.

Dividend cover is most easily calculated by dividing Earnings Per Share (EPS) by the Dividend Per Share (DPS). In the above example assuming one million shares, EPS would have been $10 and DPS $5, with the dividend cover once again being 2 ($10 / $5 = 2).

 

Retention Ratio

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What is the retention ratio?

The retention ratio is simply the ratio of retained earnings to net income. A higher retention ratio indicates that more money is being put into the business rather than being paid out as dividends. The retention ratio is also called the “retention rate” and the “plowback ratio.”

How is the retention ratio calculated?

It is calculated by subtracting dividends from net income, thus calculating retained earnings, and dividing this figure by net income.

  • Retention Ratio = (Net Income – Dividends) / Net Income

For instance, if net income is $10 million and dividends are $5 million, the retention ratio is 0.5 [ ($10 million – $5 million) / $10 million = 0.5].

Why are investors interested in the retention ratio?

In theory, a company with a high retention ratio can grow more quickly because it has more capital to spend on all aspects of its business.

 

Earnout

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Arrangements in which sellers of a business generate additional income, based on future earnings.

Plow Back

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What is “plow back”?

Depending on the source, “plow back” is defined as either:

  • retained earnings, which can be calculated by taking a company’s net income and subtracting the earnings distributed as dividends
  • the act of reinvesting net income into the business rather than paying it to shareholders as dividends

In both definitions, plow back refers to investing money back into the business. The first definition simply defines “plow back” as a noun that is synonymous with retained earnings.

The second definition defines “plow back” as a verb that indicates a company is retaining all or most of its earnings rather than paying dividends. For example, “corporation X is plowing back strong second quarter results into its new product line.”

What is the plowback ratio?

The plowback ratio draws upon the definition of plow back as synonymous with retained earnings. Theplowback ratio is simply the ratio of retained earnings to net income. A higher plowback ratio indicates that more money is being put into the business rather than being paid out as dividends.

The plowback ratio is more commonly called the “retention rate” or “retention ratio.”

How do you calculate the plowback ratio?

It is calculated by subtracting dividends from net income, thus calculating retained earnings, and dividing this figure by net income.

For instance, if net income is $10 million and dividends are $5 million, the retention ratio is 0.5 [ ($10 million – $5 million) / $10 million = 0.5].

 

Price-Earnings Ratio

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Financial performance ratio used to analyze and compare the stock of companies in a given industry, market, or region of the country. To compute the P/E ratio, take the market price of a share of common stock and divide by the earnings per share over a 12 month period.

Dual Currency Bond

Written by admin on Mar 09, 2011

Dual currency bonds are denominated in one currency, but pay interest in another currency at a fixed rate of exchange. Dual currency bonds can also pay redemption proceeds in a different currency from the currency of denomination.

Bid and Ask

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Quoted prices of securities traded on the over-the-counter market. Bid price is the highest price a buyer is willing to offer, while the ask price is the lowest price a seller is willing to accept…the difference is called spread.

Uptick Rule

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Though the rule was eliminated in 2007, the uptick rule was a Securities and Exchange Commission (SEC) requirement that every short sale be entered at a price above the price of the previous trade. The uptick rule was designed to prevent short sellers from further depressing the price of a stock that was already in a steep decline because the rule meant a short seller could only sell securities after a price increase.

Why is it called the uptick rule?

The rule is referred to as the “uptick rule” because an uptick is a transaction occurring at a higher price than the previous transaction, and the rule required every short sale to be conducted on an uptick. The rule is sometimes also referred to as the “plus tick rule.”

What is the history of the uptick rule?

The uptick rule was introduced in the Securities Exchange Act of 1934 and formally called Rule 10a-1. After the SEC temporarily suspended the uptick rule on some securities in 2004, the rule was completely eliminated on July 6, 2007. The economic turmoil of 2008 has led to increased calls for the uptick rules reinstatement, though research on whether the uptick rule is effective in preventing stock market manipulation is mixed.

Did the uptick rule apply to all financial instruments?

The uptick rule never applied to certain financial instruments that were considered liquid enough that short selling could not manipulate the price. For instance, futures, currencies or market Electronically Traded Funds (ETFs) could be sold short on a downtick.