DAY6 Education : The 4 Most Important Financial Metrics

Hey, tigers!

Today is our sixth day of "Learn US financial statements".

In this article, I mainly introduce: The 4 most important financial metrics.

The previous article have prepared you well for reading financial statements. Starting from now, we will officially begin to apply what you've learned to investing.

When you think about it, just what is it that concerns us most when evaluating a company for investment?I

guess you'd say, "Whether the company makes money and will continue to make money, whether it has smart management, and whether the company has ample cash or is deep in debt," right?

We can address those concerns using 4 metrics: profitability, growth, operational capability, and solvency.

The first metric: profitability

Profitability simply indicates a company's ability to make a profit. This is generally expressed as the amount of profit over a certain period of time. Simply put, profitability shows whether a company is good at making money or not!How exactly do we go about assessing the profitability of a company? I've classified the relevant metrics, which we have already learned, into two sub-groups.One sub-group focuses on operating profit; that is, the percentage of the company's revenue that can be turned into profit.This metric is mainly to see

gross margin; Gross margin can see the competitiveness of enterprise products.Another sub-group of profitability focuses on assets; that is, how much profit can be generated on the investment of shareholders.

In this section, we'll focus on ROE(Return on Equity) and ROA(Return on Assets).

The second metric: growth

We can classify growth into two sub-groups: revenue and assets.The revenue sub-group focuses on revenue growth, operating profit growth, and net income growth.

The asset sub-group focuses on total asset growth and net asset growth.

The third metric: operational capability

Operational capability is a measure of how many times a company can do business over a period of time; Operational capability mainly looks at four metrics: total assets turnover, accounts receivable turnover, inventory turnover, fixed assets turnover;

You can find the four turnover ratios in the Tiger Trade app, I won't go into detail here.

The fourth metric: solvency

“Solvency” refers to a company's ability to repay debt when it is due. If it can't, it's a red flag. So, how can we know in advance the level of a company's solvency?

We generally assess solvency using three ratios: the current ratio, the quick ratio, and short-term solvency.

First, let's look at the current ratio. Just keep in mind that a current ratio above 2 is considered excellent, while a current ratio below 1 is terrible, probably indicating short-term financial distress in repaying debts.

A quick ratio of 1 is generally considered normal, indicating that there is USD 1 in current assets available to repay every USD 1 in current liabilities; in other words, solid short-term solvency.

A quick ratio below 1 indicates short-term solvency risk, while a quick ratio far above 1 indicates weak cash management.Short-term solvency assesses the relationship between the current assets and current liabilities of a company.

If current assets can cover current liabilities, then the company is strongly solvent.Short-term solvency = net cash flow from operating activitiess ÷ current liabilities. Generally speaking, this ratio should be maintained at 1.

Well, I'm confident that you now understand the magic of these 4 metrics. Now, whenever you read a financial statement, just use this chart as a reference in your analysis.

If you base your analysis on these four indicators, it will help you assess many metrics and it can save you a lot of time.

😜Review: US Stock Financial Statements for Beginners