Company Financial Indicators

To evaluate a firm’s operational efficiency and capital structure, start with the core financial ratios:

Earnings Per Share (EPS) and Earnings Yield

EPS measures profitability on a per-share basis:

$$\text{EPS}=\frac{\text{Net Income}-\text{Preferred Dividends}}{\text{Weighted Average Outstanding Shares}}$$

The earnings yield is the inverse of the P/E ratio ($\text{EPS}∕\text{Price}$), providing a direct, intuitive yield that can be compared against risk-free Treasury yields.

Price-to-earnings Ratio (P/E)

The ratio of the current share price to EPS:

$$\text{P/E}=\frac{\text{Price per Share}}{\text{EPS}}$$

Trailing p/e uses the past 12 months of actual earnings, while forward P/E uses consensus analyst forecasts for the next 12 months. Tech and biotech firms often trade at high P/E ratios (30–50+) reflecting expected future growth, while capital-intensive utilities or consumer staples trade at lower P/E ratios (12–20) due to stable, slow-growing cash flows.

Return on Invested Capital (ROIC) and Return on Equity (ROE)

ROE measures profitability relative to book equity:

$$\text{ROE}=\frac{\text{Net Income}}{\text{Shareholder’s Equity}}$$

ROIC is a superior measure of corporate quality because it is capital-structure neutral, evaluating how efficiently a company allocates all capital (debt and equity) at its disposal:

$$\text{ROIC}=\frac{\text{Net Operating Profit After Tax (NOPAT)}}{\text{Debt}+\text{Equity}-\text{Cash}}$$

A persistent spread between ROIC and the Weighted Average Cost of Capital (WACC) indicates a structural competitive advantage, or “moat.”

Debt-to-equity Ratio (D/E) and Interest Coverage

Ratios assessing leverage and financial solvency:

$$\text{D/E}=\frac{\text{Total Liabilities}}{\text{Shareholder’s Equity}}$$

The interest coverage ratio ($\text{EBIT}∕\text{Interest Expense}$) measures how easily a firm can service its debt obligations from operating cash flow. Rough benchmarks, since every neighboring metric here gets one: coverage below 2–3$\times$ signals stress and below 1.5$\times$ is a going-concern question; D/E norms are sector-dependent — near zero for asset-light software, 1–2 for industrials, structurally higher for banks and utilities — so compare against the sector median instead of an absolute line.

Free Cash Flow (FCF) Yield

FCF is operating cash flow minus capital expenditures:

$$\text{FCF}=\text{Operating Cash Flow}-\text{CapEx}$$

The FCF yield ($\text{FCF}∕\text{Market Cap}$) measures the actual cash available to pay dividends, repurchase shares, or reduce debt, acting as a reliable filter against accounting manipulation.

Market Capitalization

Share price times shares outstanding; the size tiers and their risk profiles are covered in section “Market Capitalization Tiers”.

Price-to-Book (P/B) and Book-to-Market (B/M) Ratios

$$\text{P/B}=\frac{\text{Price per Share}}{\text{Book Value per Share}}$$

The B/M ratio is the inverse ($\text{Book Value}∕\text{Price}$). P/B ratios near or below 1.0 indicate either a deep-value opportunity or a firm in severe structural distress.

Beta ($\beta$)

A measure of systematic, non-diversifiable volatility relative to a broad market index (where the market beta is defined as 1.0):

$$\beta =\frac{\text{Covariance}(\text{Asset Return, Market Return})}{\text{Variance}(\text{Market Return})}$$

Low-beta equities ($0.5$ to $0.9$) are less sensitive to macro market drawdowns, whereas high-beta equities ($1.2$ to $2.0+$) amplify market swings.

Current Ratio

measures a company’s ability to pay short-term obligations with its current assets. A ratio above 1 indicates that the company can cover its short-term liabilities.

$$\text{Current Ratio}=\frac{\text{Current Assets}}{\text{Current Liabilities}}$$

Dividend Yield and Payout Ratio

Defined and interpreted in section “Dividends and Tax Drag”, together with the tax drag that makes a high yield less attractive than it looks in a taxable account.

Approximate Compound Yield (ACY)

approximates the annualized total return of a long-term holding without a financial calculator. It is a midpoint approximation: the numerator is your average annual gain (the average dividend plus the price change spread evenly over the years), the denominator is the average capital invested — the midpoint of the current and projected prices, which is where the 2 comes from:

$$\mathit{ACY}=2\times \frac{\text{average annual dividend}+\frac{\text{projected price of stock}-\text{current price of stock}}{\text{number of years projected}}}{\text{projected price of stock}+\text{current price of stock}}$$

Worked: a $50 stock projected to reach $80 in five years while paying an average $1.50 dividend gives an annual gain of $1.50+30∕5=\$7.50$ on average capital of $(50+80)∕2=\$65$, so $\mathit{ACY}=7.50∕65\approx 11.5\%$ — against an exact dividend-reinvested CAGR (section “Compound Annual Growth Rate (CAGR)”) of about 12% on the same assumptions. Use the shortcut for quick screening, the exact form for anything you act on. And notice which input does all the work: the projected price. The output is your own assumption handed back to you with a percent sign attached, which is worth remembering whenever a screener or a broker presentation quotes one.