As an individual investor, you might feel that stock analysis is a difficult and daunting task. In reality, understanding financial metrics doesn’t have to be overwhelming. Let’s use an everyday analogy to help you easily grasp the basics of most financial indicators.
01. Why Are Financial Indicators So Important?
Imagine you want to buy a used car. What would you do?
- Check if the appearance is good
- Test drive to see how it feels
- Most importantly—inspect core components like the engine, transmission, and brake system
Stock investing follows the same principle:
- Stock price movements = Car appearance (surface phenomenon)
- Market sentiment = Test drive experience (short-term experience)
- Financial indicators = Core component inspection (essential value)
Where do financial indicators come from The "health check reports" that listed companies must publish quarterly:
- Quarterly Reports: Regular check-ups every 3 months
- Annual Reports: "Comprehensive check-ups" once a year
- Audit Institutions: Like doctors, ensuring data authenticity and reliability
This data is not whatever the company wants to write; it's constrained by strict accounting standards, and falsification carries legal responsibility.
To help everyone better view this data, many financial platforms display this information in chart form. For example, Yahoo Finance displays Nike's financial information like this:
Such reports are not very easy to understand for most users. There are mainly two reasons:
- First: Too many professional terms, such as "asset-liability ratio" and "accounts receivable turnover ratio." What these indicators actually mean and what impact they have on stock trading are not clearly reflected in these charts.
- Second: No reference standards—you don't know what counts as good or bad. For example, a P/E ratio of 30 is normal in technology companies but overvalued in the steel industry.
Today, we'll translate complex indicators into everyday language, tell you which ones to focus on, and provide specific benchmarks for evaluation.
02. Core Financial Indicator Classification
We classify these indicators by capability dimensions into several categories. I call these categories the "investment evaluation framework." Think of it like conducting due diligence—you would ask:
- How profitable is the company? — Corresponds to profitability
- What is the company's growth trajectory? What industry is it in, and what is its market position? — Corresponds to growth potential
- How financially stable is the company? What is its debt situation? What are the operational risks? — Corresponds to risk resistance
These indicators in company financial reports are organized as shown below. This diagram was also mentioned in the article How AI is Helping Stock Analysts.
[AlphaWiseWin] reports interpret data according to this method. Next, let's look at these indicators one by one.
03. Profitability Indicators
| Indicator |
Reasonable Range |
Meaning |
Example |
Investment Significance |
| Net Profit |
Higher is better |
The real money company earned |
Apple annual net profit $97B = earning $97B cash per year |
Companies with large and stable profit growth usually have stronger stock prices |
| EPS (Earnings Per Share) |
Higher is better |
How much profit per share |
Apple EPS=$6.16, buying 1 share theoretically gets $6.16 profit |
High EPS stocks have high "gold content", usually expensive |
| ROE (Return on Equity) |
>15% excellent |
Return rate for shareholders |
ROE=20%, invest $100K earn $20K per year |
Buffett's favorite! Long-term ROE>15% usually indicates good company |
| ROA (Return on Assets) |
>5% good |
Asset efficiency in making money |
$1M assets earn $50K, ROA=5% |
High ROA shows strong management capability and high asset utilization |
| Gross Margin |
Higher is better |
Product profit margin |
Apple iPhone gross margin 40%, grocery 10% |
High gross margin usually has "moat", strong pricing power |
04. Growth Potential Indicators
Among these, P/E ratio has obvious industry characteristics. We list approximate reference ranges below.
| Indicator |
Reasonable Range |
Meaning |
Example |
Investment Significance |
| Revenue Growth Rate |
>10% good |
Revenue growth speed |
Last year $10B, this year $12B, growth 20% |
Companies with sustained high growth usually have stronger stock price gains |
| Net Profit Growth Rate |
>15% excellent |
Profit growth speed |
Last year profit $1B, this year $1.5B, growth 50% |
More important than revenue growth, directly affects dividends |
| PE (Price-to-Earnings Ratio) |
Varies by industry |
How many years to break even |
Stock price $100 ÷ EPS $5 = PE 20x |
Lower PE is cheaper, but must consider industry and growth |
| PEG |
<1.5 reasonable |
Valuation-growth match |
PE 30x ÷ growth rate 20% = PEG 1.5 |
PEG<1 usually offers best value investment opportunity |
05. Safety Indicators (Risk Resistance)
| Indicator |
Reasonable Range |
Meaning |
Example |
Investment Significance |
| Debt-to-Asset Ratio |
30%-60% |
Company debt proportion |
Total assets $10M, debt $3M = 30% |
Too high is risky, too low may lack aggressiveness |
| Current Ratio |
>1.5 safe |
Short-term debt repayment ability |
Current assets $2M ÷ current liabilities $1M = 2 |
<1 be careful, company may have cash flow problems |
| Cash Flow |
Positive is good |
Real cash in/out |
Book profit $1B, actual cash received $800M |
Cash flow is more real than profit, harder to fake |
Risk resistance also has some auxiliary indicators, which we call operational efficiency indicators.
| Indicator |
Reasonable Range |
Meaning |
Example |
Investment Significance |
| Accounts Receivable Turnover Days |
Lower is better |
How long to collect payment after sale |
30 days vs 365 days |
Companies that collect money quickly have healthier cash flow |
| Inventory Turnover Days |
Lower is better |
Speed of selling goods |
Clothing 90 days, supermarket 15 days |
Fast turnover means goods sell well, high operational efficiency |
| Total Asset Turnover |
Higher is better |
Asset utilization efficiency |
$10M assets generate $20M revenue = 2x |
High turnover means assets are not idle or wasted |
06. Summary
In summary, when analyzing a stock, you should:
Develop Three Habits:
Check financial reports before buying → Understand the company's real situation
Regularly track indicator changes → Identify problems in time
Learn industry comparisons → Find relatively excellent companies
Avoid Three Mistakes:
Only look at stock prices, not fundamentals → Easy to chase highs and sell lows
Only look at single indicators → Easy to be misled by data
Don't do industry comparisons → Lack reference standards
Although financial indicators are very important, they represent only one part of the factors affecting stock performance. The stock market is also affected by sentiment, policies, sudden events, and more. In any case, we need to operate with as much comprehensive information as possible to improve the success rate.
If you observe many stock selection strategies, they all rely on financial indicator interpretation. For example, Buffett's value investment method, Peter Lynch's growth stock investment method, Graham's cigar butt method, etc. We will continue to share and introduce these in subsequent articles.
Finally, we wish everyone successful investments!
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