This figure, diluted EPS, is calculated by dividing net income net of preferred dividends by a weighted average of total shares outstanding for the year. This figure is found at the bottom of the company's income statement. See also Diluted EPS

The trailing one- and three-year annualized growth rates in a company's earnings per share. EPS growth shows how rapidly a company has been able to boost its "bottom line" on a per-share basis. Growth investors might look for companies with EPS growth of, say, 20% or more. If EPS growth says NMF, it means the company lost money in one of the years used in the growth-rate calculation, making any growth rate not meaningful.

Economic Moat is a proprietary Morningstar data point. The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. One of the keys to finding superior long-term investments is buying companies that will be able to stay one step ahead of their competitors, and it's this characteristic-think of it as the strength and sustainability of a firm's competitive advantage-that Morningstar is trying to capture with the economic moat rating.

At Morningstar, one of the first things we do when we're thinking about the size of a firm's economic moat is look at the company's historical financial performance. Companies that have generated returns on capital higher than their cost of capital for many years running usually have a moat, especially if their returns on capital have been rising or are fairly stable. Of course, the past is a highly imperfect predictor of the future, so we look carefully at the source of a company's excess economic profits before assigning a moat rating. For example, a competitive advantage created by a hot new technology usually isn't very sustainable, because it won't be too long until someone comes along and invents a better widget.

Here are some of the attributes that can give companies economic moats:

Huge Market Share: When a firm enjoys economies of scale in areas like manufacturing, sales, and marketing, it can be pretty tough for a competitor to catch up.

Low-Cost Producer: The ability to produce products or services at a lower cost than competitors is an advantage that's especially potent in commodity industries.

Patents, Copyrights, or Governmental Approvals and Licenses: Some companies generate enormous profits when their products or markets are artificially protected by the government.

Unique Corporate Culture: Although you should be careful of placing too much emphasis on this attribute, since it's such a "soft" method of determining competitive advantage, there's no question it can make a difference.

High Customer-Switching Costs: If you can make it tough for your customers to use a competitor, it's usually easy to keep ratcheting prices up just a bit year after year-which can lead to big profits.

The Network Effect: This is a relatively rare, but potentially quite potent, source of competitive advantage, and often applies to the first mover in an emerging technology. Since a network's value increases as more people use it, the company that creates the network can create a massive economic moat.

Like index funds, this group includes funds that attempt to match an index's performance. Unlike an index fund, however, enhanced-index funds attempt to better the index by either adding value or reducing volatility through selective stock-picking. See also Index Funds.

At the most basic level, exchange-traded funds are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular open-end mutual funds, ETFs can be bought and sold throughout the trading day. They can also be sold short and bought on margin-in brief, anything you might do with a stock, you can do with an ETF.

Most also charge lower annual expenses than even the least costly index mutual funds. However, as with stocks, you must pay a commission to buy and sell ETF shares, which can be a significant drawback for those who trade frequently or invest regular sums of money.

There are a number of different ETFs on the market currently, including Qubes, SPDRs, sector SPDRs, MidCap SPDRs, HOLDRs, iShares, and Diamonds. All of them are passively managed, tracking a wide variety of sector-specific, country-specific, and broad-market indexes. See also Index Funds

Expense Ratio

Often referred to as the Audited Expense Ratio, Morningstar pulls the net annual expense ratio from the fund’s audited annual report. Annual-report expense ratios reflect the actual fees charged during a particular fiscal year. The annual report expense ratio for a fund of funds is the wrap or sponsor fee only.

The expense ratio expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund's average net assets, is accrued on a daily basis. If the fund's assets are small, its expense ratio can be quite high because the fund must meet its expenses from a restricted asset base. Conversely, as the net assets of the fund grow, the expense percentage should ideally diminish as expenses are spread across the wider base. Funds may also opt to waive all or a portion of the expenses that make up their overall expense ratio.

Expense Ratio

The net prospectus expense ratio is pulled from the fund’s prospectus and shows expenses the fund company anticipates will actually be borne by the fund’s shareholders in the upcoming fiscal year less any expense waivers, offsets or reimbursements. In summary, the net prospectus expense ratio is forward looking and the net annual report expense ratio is backward looking.

The expense ratio expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund's average net assets, is accrued on a daily basis. If the fund's assets are small, its expense ratio can be quite high because the fund must meet its expenses from a restricted asset base. Conversely, as the net assets of the fund grow, the expense percentage should ideally diminish as expenses are spread across the wider base. Funds may also opt to waive all or a portion of the expenses that make up their overall expense ratio.

Expense Waivers, also referred to as expense offsets, expense reimbursements, etc., represent the amount the fund company waives or assumes in order to keep the fund’s actual (net) expenses low. A company may reduce different components of overall expenses: management fee, 12b-1 fee, other fees etc. If the prospectus discloses which component is being waived, Morningstar will capture this information as "waiver type".

Expense Waivers may be voluntary or contractual, and can be set to expire at a particular date or timeframe. Morningstar assumes a waiver is voluntary if no disclosure is made in the prospectus to the contrary. Morningstar collects waiver expiration dates if these are disclosed in the prospectus.

Named for a section of the Internal Revenue Code, 401(k)s may not have the catchiest name, but they have definitely caught on since their introduction in the 1970s. With many popular features, 401(k)s are the most common defined-contribution retirement plan in America today.

Employees have taken to these plans, in part, because they can make contributions on a pretax basis (before taxes are deducted from paychecks).

Employers often encourage participation by contributing money to the accounts. Usually, the employer's contribution is determined by a formula connected to the employee's contribution level. For example, an employer might match 50% of the first 5% of salary an employee contributes. Employer contributions are not taxed as salary, but are taxable when you withdraw them at retirement.

When companies offer to match your 401(k) contributions, "highly compensated employees" (generally, those with annual salaries above $85,000) have to think doubly hard about how much to contribute from each paycheck. If they set their contribution rate too high, they could reach the maximum before the year is up. When they don't contribute, the employer's match is zero, forcing the employee to miss out on free money. If you're fortunate enough to have this dilemma, you should calculate a deferral percentage that leaves you just under the cap by year's end.

The 403(b) has long been the retirement plan of choice for employees of public schools, universities, and nonprofit organizations such as hospitals, churches, and charitable institutions. In the past, however, 403(b) participants have also contended with an unwieldy set of contribution regulations that often made the investment process a headache.

Fortunately, the tax bill of 2001 eliminated most of these complications, making the 403(b) much more like its better-known sibling, the 401(k) plan. As with the 401(k), a 403(b) will allow you to make pretax contributions to your plan, and your investments will be protected from taxes until you make a distribution.

Not all of the differences have been eliminated. Investment choices, for example, aren't confined to a list of mutual funds. Instead, 403(b) options consist mainly of annuities, which are insurance products that guarantee a minimum periodic payout at retirement. In addition to traditional fixed annuities, most 403(b) plans offer variable annuities, which offer beyond their insurance components mutual fund-like investments called "subaccounts." Annuity policies can vary greatly in terms of fees, penalties, payouts, and survivor benefits; as a result, the 403(b) investor has a lot to consider when choosing a portfolio.

Deciding how much to contribute to a 403(b), on the other hand, has gotten easier. The old maximum exclusion allowance (MEA) and so-called alternative rules have now (thankfully) gone the way of the abacus. Catch-up provisions (a way to make up for paltry contributions in earlier years), once the sole province of the 403(b), now are available to employees aged 50 or older in 403(b), 401(k), and 457(b) plans. But the special case for 403(b)s-a catch-up exception for current employees with at least 15 years of service-remains in effect for now.

Named for a section of the Internal Revenue Code, 457(b) plans help government employees add to their retirement savings in much the same way as 401(k) plans offer retirement help to private-sector employees.

Government employees have taken to these plans, in part, because they can get away with shorting Uncle Sam his due. By investing in 457(b) plans, their contributions are made on a pretax basis (before taxes are deducted from paychecks). Contributions are also deducted from gross income at tax time, which can tip those teetering on the edge of a tax bracket to the lower (and, of course, preferred) tax rate. The level you can contribute to a 457(b) plan has a yearly dollar cap but the dollar amount gets a gradual boost each year until 2006. Employers often offer a 457(b) plan to supplement a defined benefit pension plan.

Fair Value Estimate is a proprietary Morningstar data point. It is the Morningstar analyst's estimate of what the stock is worth. The Fair Value Estimate should be used in conjunction with our Economic Moat rating and our Business Risk rating. See also Business Risk, Economic Moat, Morningstar Rating for Stocks

• Sales predictability
• Operating leverage
• Financial leverage
• A firm’s exposure to contingent events

A proprietary Morningstar data point, fund family scores are designed to give investors a measure of how well a firm has done as a whole in one of four asset classes.

The Fund Family Score is an asset-weighted average of all of a fund company's Morningstar Ratings, also known as star ratings, within an asset class. At Morningstar, we aggregate the star ratings earned by each of the family's funds within domestic stocks, foreign stocks, municipal bonds, and taxable bonds. We use each fund's asset level from three years ago in order to reflect investors' actual recent experience at the firm.

The Fund Family Score can help you gauge a firm's overall ability within a specific asset class (domestic stock, international stock, municipal bond, or taxable bond). The scores range from 1.0 to 5.0. A score below 2.5 is an indication that the firm has met with little success in that asset class. A score between 2.5 and 3.5 indicates the firm is about average. A score above 3.5 indicates the firm has a fair amount of prowess. The more funds a firm manages in an asset class, the stronger a signal the Fund Family Score is about the firm's performance.

The score is intended as a check on the quality of a firm's management in each asset class. A score of 2 or lower indicates that a firm has performed poorly in that asset class. This may signal the firm has structural problems such as weak research or high costs. Thus, a low fund family score indicates you should be wary of a fund even if the fund itself has a high rating.

The score is not intended to serve as a ranking among fund families. The law of averages dictates that a firm with a lot of funds in an asset class is more likely to have a fund family score near the average (3). Conversely, a smaller firm is more likely to have a score near the low or high end because only a few funds are being measured. If you want to compare fund family scores, be sure to do it using firms that offer a similar number of funds.

The date on which the fund began its operations. The inception year is followed by the month. A fund with an inception date of February 1986, for example, would be listed as 1986-02. Funds with long track records offer more history by which investors can assess overall fund performance. However, another important factor to consider is the fund manager and his or her tenure with the fund. Often a change in fund performance can indicate a change in management.

The commencement date indicates when a fund began investing in the market. Many investors prefer funds with longer operating histories. Funds with longer histories have longer track records and can thereby provide investors with a more long-standing picture of their performance. Because of the explosion in the mutual fund industry, the fund universe now consists of thousands of investment offerings. Many of these new contenders have very little history by which an investor can hope to gauge their possible performance in various market climates.

This information is taken directly from the fund's annual report.

The percentage of common shares owned by mutual funds. It is derived by dividing the aggregate number of company shares owned by mutual funds by the total shares outstanding and multiplying by 100. A high % Fund Ownership figure can be an indication of the market's overall belief in the value of a stock. Conversely, a low % Fund Ownership figure can indicate that the stock has not proven to be worthy of its valuation. This information is calculated using the latest portfolio for each mutual fund included in Morningstar's mutual-fund database. The company's total shares outstanding are found in the company's most recent 10-K report.

Example: Company A has a Fund Ownership % of 84.5%, even though it is currently held by only two mutual funds-Fund B and Fund C. The company has a very small market cap ($8.8 million) and only 1.2 million shares outstanding, so even though the stock only makes up 0.1% of Fund B, the fund owns more than 83% of Company A's outstanding shares.

The purchase of a particular company's stock by a number of mutual funds can indicate the market's overall sentiment toward the stock. If many funds own a stock and are still buying it, the overall sentiment is probably bullish. Because mutual funds can purchase large amounts of a company's stock, this leaves a smaller pool of common stock available to other investors. The actions of large fund owners can also affect the price of the company's shares; if a major fund owner decides to sell, for example, it puts downward pressure on the firm's share price. Thanks to their large ownership stakes, large fund owners might also have the ability to influence and monitor company management.

Funds that specializes in buying shares in other mutual funds rather than individual securities. Quite often this type of fund is not discernible from its name alone, but rather through prospectus wording (i.e: the fund's charter).

The month-end net assets of the mutual fund, recorded in millions of dollars. Net-asset figures are useful in gauging a fund's size, agility, and popularity. They help determine whether a small-company fund, for example, can remain in its category if its asset base reaches an ungainly size. This information can be useful in gauging a fund's mass and agility. Morningstar lists the month-end assets, as they have been reported by the fund. Example: It is important to keep in mind that the size of the fund as measured by net assets has little or no correlation to the size of the companies in which the fund invests. For example, Fund A has more than $2 billion in net assets, with a median market cap of $863 million. In other words, this is a very large fund that invests primarily in equity securities of small companies with market capitalizations less than $1 billion.