Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Metric====== A metric is essentially a report card for a business, presented in numbers. It's a quantifiable measure, usually derived from a company’s [[Financial Statements]]—like its [[Income Statement]], [[Balance Sheet]], or [[Cash Flow Statement]]—that helps investors gauge its performance, financial health, and value. For a [[Value Investing]] practitioner, metrics are the detective's essential tools. They're not just random numbers; they are vital clues that, when pieced together, reveal the true story of a business. Are its profits genuine and growing? Is it drowning in debt? Is its stock price a bargain or a fantasy? By analyzing key metrics, you can move beyond market noise and media hype to make decisions based on solid evidence. Think of them as the vital signs a doctor checks: one number might not tell you everything, but a combination gives you a clear picture of the patient’s overall health. ===== Why Metrics Matter in Value Investing ===== Value investors like [[Warren Buffett]] don't use metrics to predict the stock market's wild swings. Instead, they use them to do something far more important: **understand the business**. The goal of value investing is to buy a stake in a wonderful company at a fair price. Metrics are the language we use to define "wonderful" and "fair." They help us answer fundamental questions: * **Quality:** How profitable and stable is this company? Does it have a durable [[Competitive Moat]]? * **Safety:** How likely is the company to get into financial trouble? * **Price:** Is the current stock price a reasonable reflection of the business's value, or is it wildly overpriced? By focusing on the business's underlying performance through metrics, you anchor your decisions in reality, not speculation. ===== Key Categories of Metrics ===== While there are hundreds of metrics, they generally fall into a few key categories. A smart investor looks at a combination from each group to get a well-rounded view. ==== Valuation Metrics ==== These metrics help you gauge whether a stock is cheap or expensive relative to its own earnings, assets, or sales. They put the 'price' in "fair price." * **[[Price-to-Earnings Ratio (P/E)]]:** The most famous valuation metric. It tells you how many dollars you are paying for every dollar of the company's annual profit. * **[[Price-to-Book Ratio (P/B)]]:** Compares the company's market price to its [[Book Value]]. A P/B below 1.0 //could// suggest the stock is undervalued. * **[[Price-to-Sales Ratio (P/S)]]:** Useful for companies that aren't yet profitable, this metric compares the stock price to the company's annual revenue. ==== Profitability Metrics ==== These reveal how effective a company is at turning revenue into actual profit. A consistently profitable company is often a high-quality one. * **[[Return on Equity (ROE)]]:** Measures how much profit a company generates with the money shareholders have invested. Consistently high ROE (e.g., above 15%) is often a sign of a superior business. * **[[Return on Invested Capital (ROIC)]]:** Arguably a superior metric to ROE, it shows how well a company is using //all// its capital (both equity and debt) to generate profits. * **[[Net Profit Margin]]:** Shows what percentage of revenue is left after all expenses, including taxes and interest, have been paid. ==== Financial Health Metrics ==== These are like a financial check-up, assessing a company's ability to survive tough times and pay its bills. * **[[Debt-to-Equity Ratio]]:** Compares a company's total debt to its shareholder equity. A high ratio can be a red flag, indicating high risk. * **[[Current Ratio]]:** Measures a company's ability to pay its short-term bills. A ratio above 1.0 is generally considered healthy. ===== Beyond the Numbers: The Art of Using Metrics ===== Remember, metrics are the beginning of your analysis, not the end. A successful investor knows that context is everything. - **Look for trends.** Is the ROE improving or declining over the past five years? A single number is a snapshot; a trend is a movie. - **Compare with peers.** A P/E of 25 might be high for a utility company but low for a fast-growing software firm. Always compare metrics against direct competitors and the industry average. - **Understand the "why."** If a company's profit margin is widening, your job is to figure out why. Is it because of a strong brand, a new patent, or a temporary fluke? Ultimately, metrics are quantitative clues that help you build a qualitative story about the business. They help you form a reasonable estimate of a company's [[Intrinsic Value]]. By using them wisely, you can identify great businesses and buy them with a comfortable [[Margin of Safety]], which is the true heart of value investing.