Financial metrics, explained
27 financial metrics explained for U.S. investors: what each one measures, how to calculate it, how to read it, common pitfalls, and where to find it in a 10-K. Written for U.S. GAAP filings and U.S. exchange rules, not translated.
Profitability
Return on Equity (ROE)
How many dollars of net income a company earns in a year for every $100 of shareholders' equity. The most widely used gauge of how efficiently a business makes money for its owners.
How to calculate and read it → ProfitabilityGross Margin
How much is left from every $100 of sales after paying the direct cost of producing what was sold. It reflects pricing power and production cost, and it is the first line of defense on the income statement.
How to calculate and read it → ProfitabilityNet Profit Margin
How much of every $100 of sales is left as net income after all costs, interest and taxes.
How to calculate and read it → ProfitabilityGAAP vs. Non-GAAP Earnings (Adjusted Earnings)
GAAP net income is the official, audited profit. Non-GAAP or adjusted earnings are figures companies calculate themselves by removing items they consider unusual or non-cash. The gap between the two is one of the first things to check in an earnings release.
How to calculate and read it →Growth
Earnings quality
Cash Conversion (Operating Cash Flow ÷ Net Income)
How much of each dollar of reported net income actually came in as cash. It tests whether profits are real cash or only accounting entries.
How to calculate and read it → Earnings qualityFree Cash Flow (FCF)
The cash a company generates from operations after paying for the investment needed to maintain and grow the business. It is the money actually available for dividends, buybacks and debt repayment.
How to calculate and read it → Earnings qualityGoodwill
When a company buys another business, the amount it pays above the fair value of the identifiable net assets acquired is recorded as goodwill on the balance sheet. If the acquired business underperforms, goodwill is written down and the loss hits earnings.
How to calculate and read it → Earnings qualityDays Sales Outstanding (DSO)
How many days, on average, it takes a company to collect payment after making a sale. A rising number means customers are paying more slowly.
How to calculate and read it → Earnings qualityDays Inventory Outstanding (DIO)
How many days, on average, inventory sits with the company before it is sold. A rising number means goods are selling more slowly.
How to calculate and read it →Debt and liquidity
Debt Ratio (Liabilities to Assets) and Debt to Equity
How much of a company's assets are funded by liabilities rather than by shareholders. The higher the ratio, the more leverage and the less room to absorb shocks.
How to calculate and read it → Debt and liquidityCash to Short-Term Debt
Whether the cash on hand covers the interest-bearing debt due within a year. It is the most direct check on whether a company could face a funding squeeze soon.
How to calculate and read it → Debt and liquidityCurrent Ratio and Quick Ratio
How many times assets that can turn into cash within a year cover liabilities due within a year. The quick ratio removes inventory, which is harder to sell quickly.
How to calculate and read it → Debt and liquidityInterest Coverage Ratio
How many times a company's operating earnings cover its interest expense. The lower the multiple, the closer profit comes to falling short of the interest bill.
How to calculate and read it →Dividends and buybacks
Dividend Yield
The annual cash dividend per share as a percentage of the current share price: the return from dividends alone if you buy at today's price.
How to calculate and read it → Dividends and buybacksDividend Payout Ratio
The share of a year's net income that a company pays out to shareholders as dividends.
How to calculate and read it →Per share and valuation
Earnings per Share (EPS)
A company's net income for the year divided by its shares outstanding. It is the basis of the P/E ratio and the number most earnings headlines quote.
How to calculate and read it → Per share and valuationBook Value per Share (BVPS)
Shareholders' equity divided by shares outstanding: the accounting value of each share. It is the basis of the price-to-book ratio.
How to calculate and read it → Per share and valuationPrice-to-Earnings Ratio (P/E)
How many dollars investors are paying for each dollar of annual earnings, or how many years of today's earnings it would take to earn back the price. The most widely used valuation multiple.
How to calculate and read it → Per share and valuationPrice-to-Book Ratio (P/B)
The market value of a company as a multiple of its accounting book value.
How to calculate and read it →Composite scores
Piotroski F-Score
Nine yes-or-no tests of a company's financial health, scored 0 to 9. It compares the latest two annual reports to see whether profitability, leverage and efficiency are improving or deteriorating.
How to calculate and read it → Composite scoresAltman Z-Score
A score built from several financial ratios that estimates how likely a company is to fall into financial distress. The lower the score, the more fragile the company.
How to calculate and read it → Composite scoresBeneish M-Score
A score built from eight year-over-year financial ratios that estimates the likelihood that a company's earnings have been manipulated. The higher the score, the more red flags.
How to calculate and read it →Banks
Nonperforming Loans and Allowance Coverage (Banks)
The nonperforming loan ratio is the share of a bank's loans that are not being repaid as agreed. The allowance for credit losses is the reserve the bank has set aside for losses it expects.
How to calculate and read it → BanksNet Interest Margin and Capital Ratios (Banks)
Net interest margin is what a bank earns on loans and securities minus what it pays depositors and lenders, as a percentage of earning assets. Capital ratios show whether the bank's own capital is thick enough for the risks it carries.
How to calculate and read it →Listing and audit
Delisting Rules: Nasdaq and NYSE Continued Listing Standards
U.S. exchanges set minimum standards that listed companies must keep meeting, from share price to equity and timely filing. A company that falls short receives a deficiency notice, gets a limited time to fix it, and can be delisted if it does not.
How to calculate and read it → Listing and auditAudit Opinion
The independent auditor's conclusion on whether the financial statements are fairly presented. An unqualified (clean) opinion means the auditor found no material problem it needed to flag.
How to calculate and read it →Want to see how these metrics feed into valuation? Browse the valuation models.
This page explains general financial concepts for educational purposes. It does not refer to any specific security and is not investment advice. Accounting standards and exchange rules change; check the latest filings, standards and rulebooks.