Company Financial Indicators

To evaluate a firm’s operational efficiency and capital structure, you must master 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.

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 highly reliable filter against accounting manipulation.

Market Capitalization

Market capitalization reflects the total market value of a company’s outstanding shares, calculated by multiplying the current share price by the total number of shares.

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

shows how much a company pays out in dividends each year relative to its stock price. High dividend yields can be attractive for income-focused investors.

$$\text{Dividend Yield}=\frac{\text{Annual Dividends per Share}}{\text{Price per Share}}$$

Approximate Compound Yield (ACY)

measures the annualized compound growth of a long-term investment. You can determine this value using the following equation:

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

This calculation requires the use of the average annual dividend rather than specific projected dividends.