Key Stock Metrics: What Each One Measures and Hides

You do not need forty metrics. Twelve cover most of what matters, and knowing what each one omits is more useful than knowing the formula.

This guide groups them by the question they answer, and flags how each can be dressed up.

Valuation: what are you paying?

P/E ratio = price ÷ earnings per share. What you pay for a dollar of current profit.

Its weakness is the denominator. Earnings sit at the end of a long chain of accounting choices, so the multiple inherits every one of them. A low P/E most often means the market expects earnings to fall, and it is frequently right.

Forward P/E uses estimated future earnings. More relevant in principle, and dependent on analyst estimates that are systematically optimistic.

EV/EBITDA = enterprise value ÷ earnings before interest, tax, depreciation and amortisation. Better than P/E for comparing companies with different debt loads, because enterprise value includes debt. Work it out with the market cap calculator.

P/B ratio = price ÷ book value. Useful for banks and asset-heavy businesses, close to meaningless for software companies whose main assets never appear on the balance sheet.

PEG ratio = P/E ÷ earnings growth rate. An attempt to price growth, sensitive to which growth rate you pick and trivially gamed by choosing a flattering period.

Profitability: is the business any good?

Gross margin = (revenue − cost of goods) ÷ revenue. Pricing power. Watch the trend: a margin falling two points a year is a competitive position eroding, whatever the level.

Operating margin = operating income ÷ revenue. Profitability after running the business, before financing and tax. The cleanest single measure of operating efficiency.

ROIC = net operating profit after tax ÷ invested capital. The best summary of business quality there is, because it tells you what growth is worth.

A company earning 20% on invested capital creates value every time it reinvests a dollar. One earning 4% against an 8% cost of capital destroys value by growing. At that company, growth is bad news.

ROIC	Reading
Above 20%	Strong competitive position; growth compounds value
10–20%	Solid
5–10%	Marginal once cost of capital is deducted
Below cost of capital	Growth destroys value

Cash: is the profit real?

Operating cash flow is the cash generated by the business before capital spending.

Free cash flow = operating cash flow − capital expenditure. Cash genuinely available to pay dividends, buy back shares, cut debt or reinvest.

This is the number to trust. Earnings can be shaped by judgement; cash arriving in a bank account largely cannot.

The most useful check in fundamental analysis is to compare net income to operating cash flow across three to five years. They should track roughly together. When profits rise while operating cash flow stagnates, something in the accounting is doing work the business is not: aggressive revenue recognition, ballooning receivables, or inventory piling up unsold.

Balance sheet: can it survive a bad year?

Debt-to-EBITDA. Under 3× is generally comfortable; above 4× leaves little room when earnings fall or rates rise.

Interest coverage = EBIT ÷ interest expense. Below 3× means a modest earnings decline threatens the ability to service debt.

Current ratio = current assets ÷ current liabilities. Near-term liquidity; below 1.0 deserves investigation.

Debt is what turns a difficult year into a terminal one. A business with no debt survives almost any downturn. The same business at 5× leverage may not survive a mild one.

Per-share figures, and why buybacks flatter them

EPS = net income ÷ shares outstanding. The most quoted number in markets, and among the easiest to move without improving anything.

Buy back 10% of the shares and EPS rises roughly 11% on flat net income. That is the same profit divided among fewer slices. Always check whether net income grew, not just EPS.

The mirror problem is dilution. A company issuing shares to fund itself or pay employees raises the count, so EPS can fall while the business improves.

A ten-minute screen

1. Free cash flow positive and tracking net income across five years
2. ROIC above 10%, ideally stable or rising
3. Gross margin stable or improving, since falling margins signal erosion
4. Debt/EBITDA below 3×
5. Share count flat or falling, with net income growth explaining the EPS growth
6. Valuation in context against its own history and its peers

A company passing all six is not automatically a buy, and one failing a single test is not automatically a pass. The screen’s job is to surface the questions worth asking.

Next: value traps and falling knives for what happens when cheap keeps getting cheaper, and insider buying vs selling for the one disclosure with genuine predictive content.