An Investor's Guide to Earnings Lingo


By Eileen AJ Connelly -- AP Personal Finance Writer

NEW YORK (AP) — When companies release their quarterly financial results, do you feel like you need an interpreter? Do "loan-loss provisions," ''other-than-temporary impairments" and "low visibility" leave you scratching your head?
You're not alone. Much of the language used when companies release results can be mystifying.

"Corporate earnings are probably as confusing, if not more so, than personal taxes," said Sam Stovall, chief investment strategist for Standard & Poor's.

Fresh off the annual 1040 challenge comes "earnings season," the quarterly ritual when companies give investors a glimpse into their operations. After suffering brutal investment losses, more investors are trying to assess the health of companies in their portfolios. But they're only running into an abundance of arcane terms that shed little light for the uninitiated.

"I don't think that companies are trying to deceive anyone or create a secret club, where you need a decoder ring to figure out what's being said," said Paul Larson, who writes Morningstar's stock investors' newsletter. Most of the terminology developed over time to reflect specialized situations.

Part of the problem stems from companies trying to both follow standardized rules, known as generally accepted accounting principles, or GAAP, while at the same time giving investors a broader picture of their operations. There are a host of things that companies can add or subtract from their GAAP bottom line to offer a different view of their results, a list that may seem to be expanding in this difficult economy.

"As a result, jokingly some people now call operating earnings 'earnings before bad stuff,'" said Stovall.

For amateur investors, it can end up sounding like reports are issued from the Tower of Babel. "If you don't have the accounting background, it just flabbergasts people," said Larry Reno, a board member for BetterInvesting, a nonprofit that provides investor education. "It's like osmosis. You start digging in there and after five or six years, you finally figure out what they're talking out."

For those trying to figure out what the companies they own are saying now, here's a sample of some terms they might run across:


Typically used in the technology industry to illustrate the relationship between orders received and orders filled. A ratio greater than 1 means a company has more orders than it can fill.


The portion of a corporation's profit that can be attributed to rising sales and controlling expenses, as opposed to "paper" profit linked to the value of non-cash assets, such as inventories for manufacturers or securities linked to mortgages.


The total number of shares of stock that would be in circulation, if all preferred shares and debt that could be converted to common stock were converted, and all warrants and stock options were also converted to common shares. Companies typically report their profits as earnings per diluted share.


A non-physical asset on the balance sheet that reflects the value of things like brand names, good customer relations, patents and technology. "Goodwill impairment" is the reduction in value of such assets.


A term frequently used to refer to issues specific to an industry, like problems with supply of an important material, or to the broader economy, like the recession, that can slow down a company's growth. Its opposite, "tailwinds" is also used.


The amount of profit, or loss, the company tallied after paying out a part of its earnings to preferred stock holders in the form of dividends.


Also "credit loss provision." Money that banks and other financial companies set aside to cover unpaid loans. The foreclosure crisis, real estate meltdown and increasing problems with missed credit card payments have driven up the amount these companies must set aside, resulting in lower profits.


Also "profit margin" or "gross margin." The difference between a company's expenses and its revenue, which is one way to gauge performance.


A drop in the value of assets a company owns that is not expected to recover. Many companies are deducting the lost value of things like stock holdings and real estate.


A class of ownership in a company held by select investors that has preference, or a higher claim, on assets and profits. Dividends on preferred stock get paid before dividends on common stock. Some preferred shares, called convertible preferred shares, may under certain circumstances be exchanged for common shares, the kind anyone can buy. The U.S. government has become a preferred shareholder of the banks that received bailout funds.


Also frequently called "adjusted earnings" or "operating earnings." The result of companies adding or subtracting things considered "one-time items," from GAAP figures, like costs for paying severance to laid off workers, or expenses for opening a new plant. Wall Street analysts often discount one-time items too, so it's frequently these adjusted figures that are compared with analysts' expectations.


Used to describe a long-term time frame, typically 10 to 50 years, as opposed to a seasonal, or "cyclical" one. If an analyst thinks a company is strong enough to ride out the recession, for example, he might say the company's "secular story is strong despite the current downturn."


The degree to which a company can predict what future earnings might be. If a company says it has "low visibility," it probably won't offer guidance. Analysts sometimes say a company hasn't revealed enough information to provide them with visibility.

Copyright 2009 The Associated Press.  All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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