Investing Isn't Luck, It's Calculated

After working in finance over 6 years and hosting 5,000+ hours of Spaces...

I've found there are consistently 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 an average company great.

Strong management looks like this:

• 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?

• What sales strategies are used?

• Will they stay in the same market?

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.

4) Outside Impact

What factors outside of the company’s control can impact it?

Think:

• Lawsuits

• Govt policy

• Competition

• The economy

Understand the impact they have 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 are more versatile and adaptive.

This makes them attractive investments.

6) Moat

Aka competitive advantage.

Here are some to consider:

• Size

• Patents and IP

• Barriers to entry

• Production costs

• Customer loyalty

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.

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.

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.

10) Net Profit Margin

This shows you how much money a company makes for every $1 in sales.

In other words... 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 from industry to industry.

So the best way to find a good ROA is to compare it with 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

13) P/E Ratio

It shows how much a company is 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

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

There you have it!

The 15 metrics I consistently review before investing in a particular stock.