I worked at Goldman Sachs and helped manage $5.5 billion.
There are 15 metrics I consider for each stock I invest in.
Here’s a breakdown of them in plain English:
There are 15 metrics I consider for each stock I invest in.
Here’s a breakdown of them in plain English:
1. Strong Management
Poor management can destroy great businesses.
And strong management can make a poor company great.
Strong management looks like:
- CEOs w/ decades of experience
- Compensation aligning with the industry
- Management personally invests in company stock
Poor management can destroy great businesses.
And strong management can make a poor company great.
Strong management looks like:
- CEOs w/ decades of experience
- Compensation aligning with the industry
- Management personally invests in company stock
2. Growth prospects
Figure out a company’s growth prospects by asking:
- New industry?
- Declining industry?
- How’s customer sentiment?
- How’s customer acquisition?
- Will they stay in the same market?
- What sales strategies are used?
Growth potential = Potential returns.
Figure out a company’s growth prospects by asking:
- New industry?
- Declining industry?
- How’s customer sentiment?
- How’s customer acquisition?
- Will they stay in the same market?
- What sales strategies are used?
Growth potential = Potential returns.
3. Customers
Do they have a diversified customer base?
This:
- Hedges against competition
- Allows company to reinvest
- Helps meet debt obligations
A business with multiple customers is safer than one that’s exposed to an unreliable market.
Do they have a diversified customer base?
This:
- Hedges against competition
- Allows company to reinvest
- Helps meet debt obligations
A business with multiple customers is safer than one that’s exposed to an unreliable market.
4. Outside impact
What factors outside of the company’s control can impact it?
Think:
- Lawsuits
- Govt policy
- Competition
- The economy
Understand their impact to understand a company’s future.
What factors outside of the company’s control can impact it?
Think:
- Lawsuits
- Govt policy
- Competition
- The economy
Understand their impact to understand a company’s future.
5. Innovation
Businesses should improve with technology.
If it doesn’t, it loses market share to a competitor.
Companies that leverage new tech re more versatile and adaptive.
This makes them attractive investments.
Businesses should improve with technology.
If it doesn’t, it loses market share to a competitor.
Companies that leverage new tech re more versatile and adaptive.
This makes them attractive investments.
6. Moat
Aka competitive advantage.
Here are some to consider:
- Size
- Barriers to entry
- Production costs
- Customer loyalty
- Patents and IP
A sustainable advantage increases your chances of profiting.
Aka competitive advantage.
Here are some to consider:
- Size
- Barriers to entry
- Production costs
- Customer loyalty
- Patents and IP
A sustainable advantage increases your chances of profiting.
7. Stable market
Volatile markets make it difficult to exit a position.
It’s hard to time it right.
And when it’s hard to time an exit you risk compromising on your return.
That’s why I prefer stable industries over cyclical ones.
Volatile markets make it difficult to exit a position.
It’s hard to time it right.
And when it’s hard to time an exit you risk compromising on your return.
That’s why I prefer stable industries over cyclical ones.
8. Cash flow
When evaluating cash flow, ask:
- Are they subject to economic cycles?
- Can the cash flow cover debts?
- Does the company have a subscription service and/or a low churn rate?
Questions like this will help you determine a company’s profitability.
When evaluating cash flow, ask:
- Are they subject to economic cycles?
- Can the cash flow cover debts?
- Does the company have a subscription service and/or a low churn rate?
Questions like this will help you determine a company’s profitability.
9. Quick ratio
This will tell you if a business has enough assets to pay upcoming debts.
Equation:
Current assets ÷ Current liabilities = Quick ratio
A quick ratio of 1 is normal.
But in general, you want a quick ratio above 1.
This will tell you if a business has enough assets to pay upcoming debts.
Equation:
Current assets ÷ Current liabilities = Quick ratio
A quick ratio of 1 is normal.
But in general, you want a quick ratio above 1.
10. Net profit margin
This shows you how much money a company makes for every $1 in sales.
Basically profit.
This helps you determine whether there are healthy profits and if operating costs are reasonable.
Equation:
Net income ÷ Revenue = Net profit margin
This shows you how much money a company makes for every $1 in sales.
Basically profit.
This helps you determine whether there are healthy profits and if operating costs are reasonable.
Equation:
Net income ÷ Revenue = Net profit margin
11. Return on Assets
ROA shows you how efficiently a company uses its resources to generate profits.
But it varies industry to industry.
So the best way to find a good ROA is to compare it within companies in the same industry.
Equation:
Net income ÷ Total assets = ROA
ROA shows you how efficiently a company uses its resources to generate profits.
But it varies industry to industry.
So the best way to find a good ROA is to compare it within companies in the same industry.
Equation:
Net income ÷ Total assets = ROA
12. Earnings per share
This shows how much money a company makes per share of stock.
The higher the EPS the more valuable the company.
Equation:
Profit ÷ Outstanding shares = Earnings per share
This shows how much money a company makes per share of stock.
The higher the EPS the more valuable the company.
Equation:
Profit ÷ Outstanding shares = Earnings per share
13. P/E Ratio
Shows how much a company's worth & how much investors are willing to pay for each $1 of earnings.
High P/E ratio = stock is overbought or investors are bullish.
Low P/E ratio = stock is oversold or investors are bearish.
Equation:
Share price ÷ EPS = P/E ratio
Shows how much a company's worth & how much investors are willing to pay for each $1 of earnings.
High P/E ratio = stock is overbought or investors are bullish.
Low P/E ratio = stock is oversold or investors are bearish.
Equation:
Share price ÷ EPS = P/E ratio
14. Price to sales ratio
Applies mostly to growth stocks with no profits.
The lower the price to sales ratio, the more attractive the investment is.
Equation:
Market cap ÷ Annual sales = price to sales ratio
Applies mostly to growth stocks with no profits.
The lower the price to sales ratio, the more attractive the investment is.
Equation:
Market cap ÷ Annual sales = price to sales ratio
15. Enterprise multiple
Shows how a company would be viewed before a potential acquisition.
A good or bad multiple varies from industry to industry.
So compare it with other companies in the same industry.
Equation:
Enterprise value ÷ EBITDA = Enterprise multiple
Shows how a company would be viewed before a potential acquisition.
A good or bad multiple varies from industry to industry.
So compare it with other companies in the same industry.
Equation:
Enterprise value ÷ EBITDA = Enterprise multiple
Thank you for reading!
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