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?
Use this hub to move from a formula to its economic meaning, understand where the metric can fail, and see how it fits into a complete company analysis.
Business quality and returns
ROIC and ROE
- 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
- 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?
Future guides: P/E, PEG, price-to-book, EV/sales, normalized earnings, and discounted cash flow.
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: net debt to EBITDA, 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.