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Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

  • Writer's pictureSummit Puri

Investing Metrics: Key Metrics Continued

This week, we continue our journey of navigating financial metrics. Some believe there is a secret sauce to investing, or better yet, they have it. The reality is that investing is a calculated risk. Equipped with the proper knowledge, you can transform from a bewildered wanderer to a confident navigator of the financial markets.

 

You will be equipped with these financial metrics in your toolbelt on this journey. This set of metrics focuses on using a quantitative approach to the company’s financial health, performance, and future growth opportunities. Our team of financial advisors (or financial teachers) Whitaker-Myers Wealth Managers are ready to join your quest and provide additional guidance and tools on your journey.

 

The Metrics Toolbelt

Four broad ratios must be reviewed when analyzing a company's or investment's health and outlook. These include profitability ratios, liquidity ratios, solvency ratios, and valuation ratios. 

 

Profitability Ratios

Profitability ratios look at whether a company is capable of generating a profit and revenue growth. This is one of the most important sets of ratios to look at when analyzing a company. If the organization is not growing (revenue) or profits are down significantly, the stock will likely reflect. Key metrics that focus on profitability are gross profit margin, net profit margin, and return on equity (ROE).

 

Gross Profit Margin

Measured by calculated net sales minus the cost of goods sold. This is reported as a percentage of net sales. “Gross profit margin shows the amount of profit made before deducting selling, general, and administrative costs, which is the net profit margin” (Investopedia.com).

 

Net Profit Margin

As mentioned in the quote above, the net profit margin considers all expenses. A higher net margin signifies greater profitability.

 

Return on Equity (ROE)

This is a measure of how efficient a company is in generating profits. Calculated by dividing a company’s net income by shareholder’s equity. When determining if the ROE is good/bad, evaluate other stocks in the same sector. If the calculated average amongst the selected group is lower than the ROE of the stock you’re looking at, you’re in good shape!

 

Liquidity Ratios

“Liquidity is the ability to convert assets into cash quickly and cheaply” (Investopedia.com).

 

Liquidity ratios measure a company’s ability to meet its short-term debt obligations without raising additional capital. These ratios are specifically looking at short-term obligations. Here, we’ll discuss two liquidity ratios: the current ratio and the quick ratio.

Quick note: anytime you hear ‘current’ in a financial discussion (current ratio, current asset, current liability…), think of the short term, less than one year.

 

Current Ratio

The current ratio measures current assets (cash, accounts receivable, and inventory) divided by current liabilities (any short-term debt obligations). A current ratio of 1 or greater is a good sign. This means the company has enough assets to cover its short-term obligations over the next year. On the other hand, a value of less than 1 would suggest that the company is in a riskier position and may not have all the assets to cover its liabilities over the next year.


Quick Ratio

The quick ratio has a much more complicated formula. However, the simplest way of understanding the quick ratio is that it excludes inventory from current assets (unlike the current ratio). This ratio measures immediate liquidity by focusing only on available cash and accounts receivables.  A healthy quick ratio is typically above 0.5.

 

Solvency Ratios

Unlike current ratios, solvency ratios measure a company’s long-term capability to handle its debt. Organizations with higher solvency ratios tend to be the stronger investments for investors. Prospective lenders also widely use solvency ratios when determining a company’s creditworthiness. Within the category of solvency ratios, we’ll focus on 2 in this article: Debt-to-Equity and Interest coverage.

 

Debt-to-Equity Ratio

This compares a company's debt to its shareholder equity. A lower ratio indicates a healthier balance sheet with less reliance on debt. It is measured by dividing total outstanding debt by equity.

 

Interest Coverage Ratio

This ratio calculates the company’s ability to meet debt interest obligations in the specified period. This ratio is calculated by dividing EBIT (earnings before interest and tax) by Interest expenses. A ratio greater than 1 signifies sufficient cash flow to cover interest expense.

 

Valuation Ratios 

Valuation ratios are another category of metrics to keep in your tool belt. These key metrics are widely used to estimate the company’s intrinsic value and future growth opportunities. Commonly, they are also used to evaluate current stock prices. Two of the most common valuation ratios are the Price to Earnings (P/E) and Price-to-book (P/B) ratios.

 

Price-to-Earnings Ratio (P/E Ratio)

This metric is calculated by measuring the price of a stock divided by the company earnings. A lower P/E ratio generally indicates undervaluation and opportunity to grow.

 

Price-to-Book Ratio (P/B Ratio)

This metric is calculated by measuring the price of a company’s stock divided by the book value per share (BVPS). The book value per share measures all company assets minus liabilities. A lower P/B ratio might imply a bargain buy; values <1 are good to track.

 

Toolbelt Filled, Now What?

Remember, when you look at financial metrics, it’s never about one metric or one data point. A complete analysis must be conducted to understand if the investment is right for you.

 

I’ve mentioned this in previous posts, but when discussing any metric, remember that a benchmark also requires a like-to-like measurement. Measuring one valuation metric of a company in the Tech sector vs. a company's valuation in the manufacturing sector is not a good comparison measurement. At the end of the day, financial metrics only tell you a picture at that given moment.

 

Always consider them in context alongside qualitative factors like the company's industry, competitive landscape, and management team. Conduct thorough research, diversify your portfolio, and consult with one of our financial advisors at Whitaker-Myers Wealth Managers for personalized guidance.

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Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

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