This article describes the methodology and use of the Morningstar Style Box.

Median Market Capitalization

The median market capitalization of a fund's equity portfolio gives you a measure of the size of the companies in which the fund invests. (Market capitalization is calculated by multiplying the number of a company's shares outstanding by its price per share.) We use a trimmed mean to calculate a fund's median market cap. First, we rank the common stocks (domestic and international) in a fund's portfolio from highest to lowest based on their market capitalizations. Next, we identify the stocks that fall into the middle quintile of the portfolio. We then calculate the average-weighted market cap of the stocks in this middle quintile. The result is the fund's median market cap. The advantage of using a median rather than an average is that the median is not disproportionately affected by one or two extremely large-cap or small-cap holdings. For example, a small-company fund that holds a small position in General Electric for liquidity purposes won't have its market cap unduly skewed by that company's market cap, unless it has a substantial portion of its assets in that stock.

Price/Book

The price/book (P/B) ratio of a fund is the weighted average of the price/book ratios of all the stocks in a fund's portfolio. Book value is the total assets of a company, less total liabilities (sometimes referred to as carrying value). A company's book value is calculated by dividing the market price of its outstanding stock by the company's book value, and then adjusting for the number of shares outstanding. (Stocks with negative book values are excluded from this calculation.) In computing a fund's average P/B, Morningstar weights each portfolio holding by the percentage of equity assets it represents, so that larger positions have proportionately greater influence on the final P/B.

Price/Earnings

The price/earnings (P/E) ratio of a fund is the weighted average of the price/earnings ratios of the stocks in a fund's portfolio. The P/E ratio of a company, which is a comparison of the cost of the company's stock and its trailing 12-month earnings per share, is calculated by dividing these two figures. In computing the average, Morningstar weights each portfolio holding by the percentage of equity assets it represents, so that larger positions have proportionately greater influence on the fund's final P/E. A high P/E usually indicates that the market will pay more to obtain the company's earnings because it believes in the firm's ability to increase its earnings. (P/Es can also be artificially inflated if a company has very weak trailing earnings, and thus a very small number in this equation's denominator.) A low P/E indicates the market has less confidence that the company's earnings will increase; however, a fund manager or an individual with a "value investing" approach might believe such stocks have an overlooked or undervalued potential for appreciation.

Price/Cash Flow

This represents the weighted average of the price/cash-flow ratios of the stocks in a fund's portfolio. Price/cash-flow represents the amount an investor is willing to pay for a dollar generated from a particular company's operations. Price/cash-flow shows the ability of a business to generate cash and acts as a gauge of liquidity and solvency. Because accounting conventions differ among nations, reported earnings (and P/E ratios) might not be comparable across national boundaries. Price/cash-flow attempts to provide an internationally standard measure of a firm's stock price relative to its financial performance.

Benefits

The price/cash flow ratio can tell investors approximately how much they're paying for a dollar of cash flow. Because of differences in accounting standards across the globe, price/earnings ratios are not always reasonable for comparing companies from different countries. Price/Cash Flow attempts to provide a consistent standard of comparison.

In the event you are in need of assistance with financial terminology, go to Yahoo!'s financial glossary.