# Declassifying Banking Acronyms

6 minutes

Have you ever been at a party or meeting and someone starts throwing out acronyms and looks smart? How often do you have to stop reading an article to go Google the acronyms and abbreviations it refers to?

Be that person at your next social event, and better yet, keep up with the quick pace of the financial world with these common and well-used phrases.

Below is our top ten list with descriptions of commonly used acronyms and abbreviations related to all things financial, from stocks to real estate.

## ROI – Return on Investment

This is a common and versatile phrase since “investment” can relate to a real estate investment, stock investments, or any type of investment really.

Simply put, an ROI is the amount of profit made on any investment. This includes the total amount; meaning before taxes and after any depreciation of the original investment.

ROI is usually expressed in a percentage form, and this is the basic formula:

ROI = Net Profit / Total Investment x 100

As an example, let’s say you buy a condo for \$200,000. Any renovations or financial additions would be added to the Total Investment, but we will keep it simple for this example and stick with the Total Investment cost being \$200,000.

After a couple of years, let’s say you sell the condo for a profit. After sales, expenses, and commission, you net \$250,000 on the sale of the condo.  What is the ROI?

Your net profit is going to be what you netted from the sale (\$250,000), minus what you spent (purchase price of \$20,000 + any renovations etc), so \$50,000.

ROI = 50,000 / 200,000 * 100

ROI = .25 * 100

ROI = 25%

Shareholders in stock can calculate their ROI with this formula:

ROI= Net Income + (Current Value – Original Value)) / Original Value x 100

## EBIDTA – Earnings Before Interest, Depreciation, Taxes, and Amortization

Pronounced EB-I-DA, this is a company’s total or net earnings before interest, taxes, depreciation, and amortization is deducted. This accounting measure is a proxy for any company’s current operating profitability.

While the exact numbers of a company’s income fluctuate and also take accounting efforts, people can say EBIDTA as an approximation of the earnings.

EBITDA ideally would eliminate the distortions of temporary loans and debts, or temporarily having cash before being dispersed and allocated accordingly.

You can think of EBIDTA  as the approximation of cash flow.

## Cap Rate – Capitalization Rate

The capitalization rate is the rate of return on a real estate investment property, based on the income that the property is expected to generate.

Cap rates allow an investor to guestimate the potential value of an income-producing property, and to estimate what a similar property should sell for.

Cap rate = Net operating income / Current market value (sales price) of the asset.

Net operating income (NOI) is found by calculating the income after operating expenses are deducted.

The higher the cap rate is, the higher the return on investment (ROI).

## YTD – Year to Date

Year to date refers to the period extending from the beginning of the year to the present. In business, the beginning of the year is not always January 1; many companies have fiscal years beginning at other times.

YTD is referenced when calculating a company’s income and can then be compared to the business trends or performance data from previous years.

## CPI – Consumer Price Index

CPI measures changes in the price level of a given market from one time period to the next.

By taking price changes for each item in a predetermined “basket” of goods and averaging them together, companies and even countries can find variations in prices paid by typical consumers for retail goods and/or other items.

It is calculated by dividing the price of the basket of goods in the year for which you are calculating CPI, by the price of the basket of goods in the base/first year.  Then multiply the result by 100.

So, if an item sells for \$50 in the first year of production, but the next year sells for \$70, then:

CPI = (\$70/\$50) × 100 = 140

Then subtract 100 from the new result to find the change in CPI. By doing this, you are subtracting the baseline (100) to determine the change over the predetermined time.

So 140 – 100 = 40 = 40% CPI

All in all, the CPI measures inflation or deflation over a given time for a country, a company, or purchasable products. Positive results represent the rate of inflation while negative numbers reflect deflation.

## P/E Ratio – Price Over Earnings Ratio

The P/E Ratio is used to evaluate a company’s approximate worth. This common formula is the price an investor is paying for each dollar of a company’s earnings or profit. So, if a company reports its earnings at \$5 per share while the stock sells for \$50 per share, the P/E Ratio would be 10.

(\$50 per share / \$5 earnings per share = 10 P/E)

The P/E Ratio can use estimated earnings to get the forward-looking P/E ratio of any company and draws attention to successful companies such as Amazon.

The average market P/E ratio is 20-25 times earnings, however the fast-growing company of Amazon has a lingering P/E Ratio (TTM or Trailing Twelve Months) of around 96.30, while a consistent bank that doesn’t differ much, such as Wells Fargo, has a P/E Ratio (TTM) of 11.43.

Companies that are losing money do not have a P/E Ratio.

## Cord Cutting – Wireless Media

Cord Cutting or referring to cutting the cord is based on not paying for subscription television – in favor of some combination of broadband TV or free to air satellite, etc.

Since cable television runs through a cable, the phrase cord-cutting suggests doing away with any cabled landline. The new and preferred replacement options are available by wireless Internet technology.

Another example is smartphones replacing landlines. A bit of a misnomer since these cord cutters usually have internet connection through a cord, but you get the idea.

Ways to use this phrase is to reference a cord cutting stock such as Netflix, Itunes, or the new and anticipated Disney+.  Millennials are also often referred to as cord cutters, frequently having cell phones and no home line.

## REITs – Real Estate Investment Trust

A real estate investment trust is a company that owns, and usually operates any type of real estate. This can range from commercial buildings to residential apartment buildings, and shopping malls to hotels.

Dividends in these trusts have a 100% payout ratio for all income at lower rates. Though 100% seems attractive, it looks less attractive when compared to any bonds that offer increasing rates.

## ETF – Exchange Traded Fund

This type of low-risk investment splits every dollar you invest in to different stocks. This option protects you from any major fall of a stock because you will only lose part of your money. In reverse, you probably won’t hit it big, because again, all your money is so well diversified into multiple stocks.

ETF’s are a low risk/low rewards and “steady eddy” option. Remember the well-known quote “Diversify, diversify, diversify” when thinking of exchange-traded funding.

The difference from mutual funds is that ETF’s are traded on stock exchange markets, just like regular stocks. So while you get the flexibility of a stock, you also get the diversification of a mutual fund.

## APR – Annual Percentage Rate

While an interest rate calculates the amount of money needed for a loan, the annual percentage rate is more inclusive. The APR includes the interest rate, closing costs on the loan, and broker fees etc.

The primary difference between an APR and interest rate is that the APR shows you the total cost of your loan. The interest rate will give you the amount of your monthly payment, so if you are shopping for a loan you may want to look at both.

Just remember that if you’re focused on finding the lowest total cost for a loan, compare the APR’s.