I worked at Goldman Sachs and helped manage $5.5 billion. There are 15 metrics I consider for each stock I invest in. Here’s a breakdown of them in plain English:
1. Strong Management Poor management can destroy great businesses. And strong management can make a poor company great. Strong management looks like: - CEOs w/ decades of experience - Compensation aligning with the industry - Management personally invests in company stock
2. Growth prospects Figure out a company’s growth prospects by asking: - New industry? - Declining industry? - How’s customer sentiment? - How’s customer acquisition? - Will they stay in the same market? - What sales strategies are used? Growth potential = Potential returns.
3. Customers Do they have a diversified customer base? This: - Hedges against competition - Allows company to reinvest - Helps meet debt obligations A business with multiple customers is safer than one that’s exposed to an unreliable market.
4. Outside impact What factors outside of the company’s control can impact it? Think: - Lawsuits - Govt policy - Competition - The economy Understand their impact to understand a company’s future.
5. Innovation Businesses should improve with technology. If it doesn’t, it loses market share to a competitor. Companies that leverage new tech re more versatile and adaptive. This makes them attractive investments.
6. Moat Aka competitive advantage. Here are some to consider: - Size - Barriers to entry - Production costs - Customer loyalty - Patents and IP A sustainable advantage increases your chances of profiting.
7. Stable market Volatile markets make it difficult to exit a position. It’s hard to time it right. And when it’s hard to time an exit you risk compromising on your return. That’s why I prefer stable industries over cyclical ones.
8. Cash flow When evaluating cash flow, ask: - Are they subject to economic cycles? - Can the cash flow cover debts? - Does the company have a subscription service and/or a low churn rate? Questions like this will help you determine a company’s profitability.
9. Quick ratio This will tell you if a business has enough assets to pay upcoming debts. Equation: Current assets ÷ Current liabilities = Quick ratio A quick ratio of 1 is normal. But in general, you want a quick ratio above 1.
10. Net profit margin This shows you how much money a company makes for every $1 in sales. Basically profit. This helps you determine whether there are healthy profits and if operating costs are reasonable. Equation: Net income ÷ Revenue = Net profit margin
11. Return on Assets ROA shows you how efficiently a company uses its resources to generate profits. But it varies industry to industry. So the best way to find a good ROA is to compare it within companies in the same industry. Equation: Net income ÷ Total assets = ROA
12. Earnings per share This shows how much money a company makes per share of stock. The higher the EPS the more valuable the company. Equation: Profit ÷ Outstanding shares = Earnings per share
13. P/E Ratio Shows how much a company's worth & how much investors are willing to pay for each $1 of earnings. High P/E ratio = stock is overbought or investors are bullish. Low P/E ratio = stock is oversold or investors are bearish. Equation: Share price ÷ EPS = P/E ratio
14. Price to sales ratio Applies mostly to growth stocks with no profits. The lower the price to sales ratio, the more attractive the investment is. Equation: Market cap ÷ Annual sales = price to sales ratio
15. Enterprise multiple Shows how a company would be viewed before a potential acquisition. A good or bad multiple varies from industry to industry. So compare it with other companies in the same industry. Equation: Enterprise value ÷ EBITDA = Enterprise multiple
