Glossary
Key terms and concepts used in our analyses. Hover over underlined terms for quick definitions.
Treadmill Test
Measures if buybacks actually benefit shareholders after accounting for stock-based compensation dilution.
Definition
The Treadmill Test answers a critical question: Are shareholders actually gaining ground, or is management running on a treadmill—buying back stock while simultaneously diluting shareholders through SBC?
Many companies tout aggressive Buyback programs, but if they're issuing nearly as many shares to executives as they're repurchasing, the net effect is zero or negative. The shareholder is running to stand still.
Formula
Interpretation
| Value | Meaning |
|---|---|
| > 5% | STRONG — Shareholders gaining significant ground |
| 0-5% | PASSING — Modest gains, thesis intact |
| -3% to 0% | MARGINAL — Running to stand still |
| < -3% | FAILING — Shareholders losing ground despite buybacks |
Example
CHRD — The Cannibal
STRONGCHRD has minimal SBC dilution (only 0.5% of market cap), so buybacks translate almost entirely to shareholder value. Your ownership stake grows ~11% per year even if the business stays flat.
Why It Matters
The Treadmill Test exposes "value traps"—stocks that look cheap with high buyback yields but are actually destroying shareholder value through Dilution. It's particularly important for:
- Tech companies with high SBC (often 5-15% of market cap annually)
- Declining businesses trying to shrink their way to prosperity
- Any company touting buybacks as a reason to invest
A stock can have a 20% FCF yield and still be a bad investment if management is giving it all away to themselves.
EV/EBITDA
Enterprise Value divided by earnings before interest, taxes, depreciation, and amortization. A valuation multiple.
Definition
EV/EBITDA is a valuation ratio that compares a company's total value (including debt) to its operating earnings. It's often preferred over P/E because it's capital-structure neutral and excludes non-cash charges.
Enterprise Value = Market Cap + Net Debt + Minority Interests + Preferred Stock
EBITDA = Operating income before depreciation and amortization
Interpretation
| Value | Meaning |
|---|---|
| < 5x | Very cheap (or something is wrong) |
| 5-8x | Cheap for most industries |
| 8-12x | Fair value for quality businesses |
| 12-20x | Premium valuation |
| > 20x | Expensive or high-growth |
Example
CHRD — Cheap E&P
Very CheapCHRD trades at 3.5x EBITDA vs. 6x for E&P peers. The market is pricing in fears about oil prices or inventory exhaustion that the fundamentals don't support.
Why It Matters
EV/EBITDA is the go-to valuation metric for comparing companies with different capital structures. Two companies with identical P/E ratios can have wildly different EV/EBITDA if one is loaded with debt.
Key uses:
- Comparing acquisition targets (acquirers pay Enterprise Value, not market cap)
- Evaluating leveraged companies where P/E is distorted by interest expense
- Cross-industry comparisons (though industry context still matters)
FCF Yield
Free Cash Flow divided by Market Cap (or Enterprise Value). Shows how much cash the business generates relative to its price.
Definition
FCF Yield measures the cash generation power of a business relative to what you're paying for it. It's one of the most important metrics for value investors.
FCF = Operating Cash Flow - Capital Expenditures
FCF Yield = FCF ÷ Market Cap (or Enterprise Value)
Higher is better. A 10% FCF yield means the company generates 10% of its market cap in free cash annually — cash that can fund Buybacks, dividends, or acquisitions.
Interpretation
| Value | Meaning |
|---|---|
| > 15% | Extremely high (verify it's sustainable) |
| 10-15% | Very attractive |
| 6-10% | Good |
| 3-6% | Fair |
| < 3% | Low (acceptable for high-growth) |
Example
CHRD — Cash Machine
Extremely HighCHRD generates nearly 17% of its market cap in free cash annually. Even if the stock price goes nowhere, the company can buy back ~17% of itself each year or pay massive dividends.
Why It Matters
FCF Yield is the ultimate "show me the money" metric. Unlike earnings (which can be manipulated with accounting), FCF represents actual dollars the company can return to shareholders or reinvest.
A high FCF yield can indicate:
- A genuinely undervalued stock (buy!)
- A business in secular decline (the market knows something)
- Unsustainable peak earnings (commodity cyclicals at the top)
Always ask: "Is this FCF sustainable, or am I buying at the peak?"
Net Debt/EBITDA
Leverage ratio showing how many years of earnings it would take to pay off debt.
Definition
Net Debt/EBITDA is a leverage ratio that indicates how many years it would take a company to pay off its debt using operating earnings.
Net Debt = Total Debt - Cash & Equivalents
A company with negative Net Debt (more cash than debt) has a "fortress balance sheet." This provides safety in downturns and optionality for acquisitions or Buybacks.
Interpretation
| Value | Meaning |
|---|---|
| < 0x | Net cash position (fortress) |
| 0-1x | Very low leverage |
| 1-2x | Conservative leverage |
| 2-3x | Moderate leverage |
| 3-4x | Elevated leverage |
| > 4x | High leverage (risky) |
Example
CHRD — Fortress Balance Sheet
FortressCHRD could pay off all its debt in about 4 months using operating earnings. This is a fortress balance sheet that can survive oil price crashes and fund aggressive buybacks.
Why It Matters
Net Debt/EBITDA is a survival metric. In "Roadkill" investing, we're buying hated stocks — which means we need to be absolutely certain they won't go bankrupt before the market recognizes their value.
Rules of thumb:
- < 2x: Sleep well at night
- 2-3x: Acceptable if business is stable and non-cyclical
- > 3x: Proceed with caution; requires deep understanding of cash flows
- > 4x: Avoid unless you're a distressed debt specialist
Remember: Debt is a fixed obligation, EBITDA is variable. In a recession, leverage ratios can double or triple as earnings collapse.