Essential financial metrics and ratios every investor should understand
Stock Price ÷ Earnings per Share
How much investors pay for each dollar of earnings. Lower P/E often means better value, but context matters. Growth companies typically have higher P/E ratios.
Good range: 10-20 for mature companiesStock Price ÷ Book Value per Share
Compares stock price to company's book value (assets minus liabilities). Values below 1 might indicate undervaluation or business problems.
Good range: 1-3 for most industriesMarket Cap ÷ Annual Revenue
Useful for valuing companies with little or no profit. Lower ratios suggest better value, but high-growth companies may justify higher ratios.
Good range: 1-3 for most companiesEnterprise Value ÷ EBITDA
Enterprise Value is the value of all the shares of a company minus its debts. It is the total value of the company. EBITDA = Earnings before Interest, Taxes, Depreciation, Amortization.
Good range: 8-15 for most industriesP/E Ratio ÷ Earnings Growth Rate
Peter Lynch's favorite metric. Accounts for growth when evaluating P/E since growing companies typically have higher P/E. A PEG of 1 means you're paying fairly for growth.
Good range: 0.5-1.5 (lower is better)Free Cash Flow ÷ Market Cap
Shows how much cash a company generates relative to its value. Higher yields indicate better value and more cash available for investors.
Good range: 5%+ is attractiveNet Income ÷ Shareholders' Equity
Warren Buffett's favorite metric. Shows how efficiently a company uses shareholders' money to generate profits. Higher is better.
Good range: 15%+ is excellent(Revenue - Cost of Goods) ÷ Revenue
Shows pricing power and cost control. Higher margins indicate competitive advantages or "moats" that protect profitability.
Good range: 40%+ indicates strong pricing powerOperating Income ÷ Revenue
Profitability after operating expenses but before interest and taxes. Shows how well management controls costs and runs the business.
Good range: 15%+ is strongNet Income ÷ Revenue
Bottom-line profitability after all expenses, interest, and taxes. Shows the percentage of revenue that becomes profit.
Good range: 10%+ is solidNOPAT ÷ Invested Capital
Measures how efficiently a company allocates capital. NOPAT = Net Operating Profit After Tax. Higher ROIC indicates better capital allocation.
Good range: 12%+ shows efficient capital use(Current Revenue - Prior Revenue) ÷ Prior Revenue
Top-line growth shows if a company is gaining market share or expanding. Consistent growth is more valuable than erratic spikes.
Good range: 8%+ annually is solid(Current EPS - Prior EPS) ÷ Prior EPS
Bottom-line growth in earnings per share. More important than revenue growth since it shows improving profitability.
Good range: 10%+ annually is attractive(Current BVPS - Prior BVPS) ÷ Prior BVPS
Growth in book value per share shows how much a company's intrinsic value is increasing over time. Buffett loves this metric.
Good range: 5%+ shows building intrinsic value(Current FCF - Prior FCF) ÷ Prior FCF
Growth in cash generation. More reliable than earnings growth since cash flow is harder to manipulate with accounting tricks.
Good range: 15%+ is excellentTotal Debt ÷ Shareholders' Equity
Shows financial leverage. Lower ratios indicate less risk. Too much debt can be dangerous during economic downturns.
Good range: Below 0.5 is conservativeCurrent Assets ÷ Current Liabilities
Measures ability to pay short-term debts. Higher ratios indicate better liquidity and financial safety.
Good range: 1.5+ shows good liquidityEBIT ÷ Interest Expense
Shows how easily a company can pay interest on its debt. Higher ratios indicate safer debt levels and lower bankruptcy risk.
Good range: 4+ times coverage is safe(Current Assets - Inventory) ÷ Current Liabilities
More conservative than current ratio since inventory can be hard to sell quickly. Shows true liquidity position.
Good range: 1+ is solidCost of Goods Sold ÷ Average Inventory
How quickly a company sells its inventory. Higher turnover indicates better demand and inventory management.
Good range: 5+ times per yearAccounts Receivable ÷ (Revenue ÷ 365)
Average days to collect payment from customers. Lower DSO means faster cash collection and better cash flow.
Good range: Under 45 days is efficientRevenue ÷ Total Assets
How efficiently a company uses its assets to generate sales. Higher ratios indicate better asset utilization.
Good range: Varies by industryCurrent Assets - Current Liabilities
Cash available for day-to-day operations. Positive working capital indicates financial health and operational flexibility.
Good range: Positive and growingSMA = Simple Moving Average, EMA = Exponential Moving Average
Smoothed price trends over time periods (20, 50, 200 days). When price is above moving average, it indicates uptrend.
Key levels: 50-day and 200-day are most watchedMomentum oscillator (0-100)
Measures if a stock is overbought (>70) or oversold (<30). Helps identify potential reversal points.
Key levels: 30 (oversold), 70 (overbought)Moving Average Convergence Divergence
Shows relationship between two moving averages. MACD crossing above signal line can indicate bullish momentum.
Signal: Crossovers indicate momentum changesPrice channels based on standard deviation
Upper and lower bands around moving average. Prices often bounce between bands. Squeezing bands indicate potential breakout.
Signal: Price touching bands can indicate reversalFocus: Quality companies at reasonable prices
Key metrics: ROE >15%, low debt, consistent earnings, strong moats (competitive advantages). Buy wonderful businesses and hold forever.
Focus: Growth at a reasonable price (GARP)
Key metrics: PEG ratio <1, strong earnings growth, companies you understand. "Buy what you know" philosophy.
Focus: Deep value with margin of safety
Key metrics: Low P/E, low P/B, strong balance sheet. Father of value investing and Buffett's mentor.
Focus: Superior growth companies
Key metrics: Strong R&D, excellent management, sustainable growth. Quality growth over quantitative metrics.