Introduction: What the Numbers Really Mean
Is a stock cheap or overpriced? Is the company growing fast, or just burning through cash? To answer those questions, you don’t need a hunch. You need metrics. Financial metrics are the key to seeing past the headlines and into the numbers that drive performance. In this lesson, you’ll learn:
The Importance of Metrics in Stock Picking
Every company has a story. But when you’re investing, you want the version told in numbers. To make sense of a company’s numbers, you need the right tools, and that is what financial metrics provide. They: Why Metrics are So Powerful:
Core Metrics and What They Tell You
Let’s break down the essential financial ratios every investor should know, and the importance of each one. Earnings Per Share (EPS) Price-to-Earnings Ratio (P/E) Return on Equity (ROE) Debt-to-Equity Ratio (D/E) Current Ratio
How to Use Metrics in Real Life
Knowing the formulas is one thing. Knowing what to do with them is what makes you a smarter investor. Here’s how to actually apply these numbers when analyzing a stock: Compare Companies in the Same Industry Metrics like P/E or ROE vary by industry. A good P/E for a tech stock might be high for a utility company. Always compare apples to apples. Look at Trends Over Time One strong quarter doesn’t mean much. But improving metrics over several years is a sign of real progress. Look for consistency, not just a one-time spike. Use Multiple Metrics Together No single number tells the whole story. The best insights come from seeing the full picture.
Quiz
What does a high P/E Ratio typically suggest?
a) Investors expect strong future growth
b) The company is underperforming
c) The company is paying high dividends
Which ratio helps measure a company’s ability to pay short-term obligations?
a) Return on Equity
b) Price-to-Earnings Ratio
c) Current Ratio
See the answers at the bottom
Exercise: Analyze a Real Stock
Pick any company you're interested in (or use a stock from a list).
Look up the following 3 metrics:
- EPS
- P/E ratio
- Debt-to-Equity ratio
Write down:
- What each number is
- Whether it looks strong, weak, or needs more context
- How it compares to a competitor in the same industry
Summary and Key Takeaways
- Financial metrics turn raw data into insights. They help you understand a company’s performance, value, and risk.
- Don’t rely on just one ratio. Use a combination to see the full picture.
- Compare wisely. Look at industry peers and trends over time - not just one-off numbers.
- Practice makes you confident. The more you use these metrics, the easier it gets to spot strong (or weak) investments.
Smarter investing is about reading between the lines and making decisions based on real evidence.
Answers to the Quiz and Exercise Questions
Quiz Answers:
1) What does a high P/E ratio typically suggest?
Answer: a) Investors expect strong future growth
2) Which ratio helps measure a company’s ability to pay short-term obligations?
Answer: c) Current Ratio
Additional resources
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