The 5 Essential Metrics to Analyze a Company Before Investing
TL;DR
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Not all financial metrics are equal — some reveal much more than the stock price itself.
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The five key metrics are Earnings Per Share (EPS), Net Margin, Return on Equity (ROE), Price-to-Earnings Ratio (P/E), and Free Cash Flow (FCF).
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Understanding them helps you distinguish between an expensive company and a truly valuable one.
Introduction
Investing without understanding financial metrics is like buying a house without looking at the floor plan.
Before deciding where to put your money, it's essential to know how to read the numbers that show a company's real health.
These five metrics form the foundation of any sound fundamental analysis — and they're the same ones professionals rely on every day.
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1️⃣ Earnings Per Share (EPS)
Earnings Per Share measures how much net profit a company earns for each outstanding share.
It's simple but powerful: it shows the company's ability to generate profit per share.
Formula: Net Income ÷ Shares Outstanding
💡 Tip: Consistently growing EPS over several years is a strong sign of sustainable profitability.
2️⃣ Net Margin
Net Margin shows how much of the company's revenue turns into profit after all expenses — including costs, interest, and taxes.
It's crucial for understanding how efficient the business model really is.
Formula: Net Income ÷ Total Revenue × 100
💬 Example: A 20% net margin means that for every $1 in revenue, the company keeps $0.20 as profit.
3️⃣ Return on Equity (ROE)
ROE measures the profitability relative to shareholders' equity.
It reflects management efficiency — how effectively the company uses investor capital to generate profit.
Formula: Net Income ÷ Shareholders' Equity × 100
📈 Rule of thumb: An ROE above 15% is generally a sign of strong management and healthy returns.
4️⃣ Price-to-Earnings Ratio (P/E)
The P/E Ratio compares a stock's price to the company's earnings, helping you gauge whether a stock is overvalued or undervalued.
Formula: Share Price ÷ Earnings Per Share (EPS)
⚖️ Interpretation:
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High P/E → investors expect future growth.
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Low P/E → may indicate undervaluation (or business issues).
📊 On Discover, this metric appears alongside fair value, making comparisons much easier.
5️⃣ Free Cash Flow (FCF)
Free Cash Flow represents the cash left after all operational expenses and capital investments — the lifeblood of any business.
It fuels dividends, share buybacks, and growth.
Formula: Operating Cash Flow − Capital Expenditures (CAPEX)
💰 Tip: Companies with positive and growing FCF tend to be more resilient during downturns.
Q&A
Which metric is the most important?
It depends on the company, but Free Cash Flow (FCF) is often considered the most reliable long-term indicator.
Do these metrics apply to all industries?
Yes, but always interpret them within context — margins and P/E vary widely between tech and retail, for example.
Frequently Asked Questions
How do I know if a stock is expensive or cheap?
Compare its P/E and FCF to industry averages and fair value — Discover does this automatically for you.
Does negative EPS mean a bad company?
Not necessarily. Growth companies may have negative earnings temporarily due to heavy reinvestment.
Can ROE be misleading?
Yes — high debt can inflate ROE, so always check leverage ratios as well.
Are these five metrics enough to invest?
They're an excellent starting point, but always complement with qualitative analysis and risk management.
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Use YourGPT Finance tool to get detailed analysis, DCF valuations and AI insights for over 10,000 stocks.
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