Understand the numbers behind a business
Financial ratios are shortcuts, not conclusions. A useful metric connects a company’s financial statements to a specific investing question: Is the business profitable? Does it reinvest well? Is the balance sheet resilient? What expectations are reflected in the valuation?
Start with the question you want to answer. Each guide explains the calculation, its limitations, and what to check in a company’s filings.
Which financial metric should you use?
- Why does profit differ from cash generation? Start with Free Cash Flow vs. Net Income to reconcile earnings, working capital, non-cash charges, and capital expenditure.
- Does a high return reflect business quality or financial leverage? Compare ROIC with ROE before interpreting a headline return ratio.
- Which assumptions drive estimated value? Follow the worked DCF valuation example, then test your own assumptions in the free DCF Calculator.
Interactive valuation tools
DCF Calculator: turn FCFF growth, WACC, terminal growth, cash, debt, and diluted shares into a transparent value-per-share estimate and sensitivity table.
Reverse DCF Calculator: estimate the constant FCFF growth rate implied by the current share price.
FCF Yield Calculator: calculate free cash flow yield, P/FCF, FCF per share, and optional FCF margin from normalized annual figures.
Business quality and returns
ROIC and ROE
Read ROIC Explained first, then follow the calculation guide and the ROE and WACC comparisons below.
- Return on invested capital (ROIC): evaluates operating returns generated from the capital committed to the business.
- Return on equity (ROE): evaluates accounting profit relative to shareholders’ equity.
- Calculation guide: ROIC: Formula, Calculation, and Interpretation
- Comparison guide: ROIC vs ROE: Which Better Measures Business Quality?
- Value-creation guide: ROIC vs. WACC: How to Measure Value Creation
Future guides: operating margin, incremental ROIC, asset turnover, and return on tangible capital.
Cash flow
Free cash flow and free cash flow yield
- Free cash flow (FCF): cash generated after operating needs and capital expenditures, subject to important definition choices.
- FCF yield: compares free cash flow with equity value or enterprise value.
- Calculation guide: Free Cash Flow: Formula and How to Analyze It
- Valuation guide: Free Cash Flow Yield: Formula, Interpretation, and Traps
- Comparison guide: FCF Yield vs. Earnings Yield
- Earnings-quality guide: Free Cash Flow vs. Net Income: How to Read the Gap
Future guides: cash conversion, owner earnings, maintenance capital expenditure, and stock-based compensation.
Valuation
Enterprise-value multiples
- EV/EBITDA: compares the value of the operating business with earnings before interest, taxes, depreciation, and amortization.
- Enterprise value guide: Enterprise Value: Formula and Why It Matters
- Multiple guide: EV/EBITDA Explained: When It Works and When It Misleads
- Comparison guide: EV/EBITDA vs. P/E: Which Valuation Multiple Should You Use?
Intrinsic-value guide: DCF Valuation: Formula, Steps, and Worked Example
Future guides: P/E, PEG, price-to-book, EV/sales, and normalized earnings.
Balance-sheet strength
Key questions include whether debt is supported by durable cash flow, whether liquidity is adequate, and whether reported leverage hides leases, pensions, guarantees, or financing subsidiaries.
Start here: Net Debt to EBITDA: Formula, Interpretation, and Limits
Future guides: interest coverage, current ratio, and debt maturity analysis.
Growth and per-share value
Revenue or earnings growth does not automatically create shareholder value. Investors should also examine reinvestment requirements, acquisition spending, stock-based compensation, dilution, and changes in share count.
Future guides: revenue CAGR, organic growth, EPS quality, dilution, and share-based compensation.
How to use a metric responsibly
- Define the numerator and denominator precisely.
- Reconcile inputs to the company’s filings.
- Compare several years, not one period.
- Separate recurring economics from unusual items.
- Compare companies with similar business models and accounting.
- Combine profitability, balance-sheet, cash-flow, and valuation measures.
- State the date and source of every time-sensitive figure.
Continue your research
- How to Analyze a Stock: A Practical Fundamental Research Framework
- How to Read a 10-K
- Browse company analyses
Important note
Stock Metric Lab provides general educational research. Metric definitions vary across data providers and may require judgment or adjustments. Nothing on this page is personalized investment advice or a recommendation to buy or sell a security.