Fundamental analysis provides critical insights into a company's financial health. Here are 10 key metrics that reveal operational efficiency, profitability, and growth potential:
1. Total Revenue (Top-Line Growth)
The sum of all income generated from core business operations before expenses. Quarterly reports show 3-month performance, while annual reports reveal yearly trends. Example: A beverage shop selling 3,000 cups at $30 each generates $90,000 revenue.
2. Gross Margin (Profitability Indicator)
Calculated as:
Gross Margin % = (Revenue - COGS) ÷ Revenue
Shows production efficiency. A 40% margin means $40 profit per $100 sale after $60 production costs. Compare within industries - tech (Apple) and consumer goods (Coca-Cola) have different benchmark margins.
3. Net Income (Bottom-Line Profit)
The true profit after deducting:
- Operating costs (materials, labor)
- Operating expenses (R&D, salaries)
- Non-operational costs (loan interest)
- Taxes
Using our beverage shop example: After $50,000 in total expenses, net income becomes $40,000.
4. Earnings Per Share (EPS) (Shareholder Value)
EPS = Net Income ÷ Outstanding Shares
Higher EPS indicates stronger profitability. Track quarterly/yearly EPS growth to identify trends.
5. Dividend (Shareholder Returns)
Optional cash distributions from profits. Growth companies often reinvest instead of paying dividends. Example: Berkshire Hathaway retains earnings for expansion despite being profitable.
6. Payout Ratio (Dividend Sustainability)
Payout Ratio = Dividend Per Share ÷ EPS
A 50% ratio with $2 EPS means $1 dividend per share. High ratios may limit growth capital.
7. Operating Cash Flow (OCF) (Business Health)
Shows cash generated from core operations. Consistently positive OCF indicates sustainable business models. Negative OCF may signal financial distress.
8. Free Cash Flow (FCF) (Financial Flexibility)
FCF = OCF - Capital Expenditures
The cash available for dividends, debt repayment, or expansion. Strong FCF enables strategic investments.
9. Return on Equity (ROE) (Efficiency Metric)
ROE = Net Income ÷ Shareholders' Equity
Measures profit generation per equity dollar. Higher ROE suggests effective capital utilization.
10. Capital Expenditures (CapEx) (Growth Signals)
Investments in long-term assets (factories, equipment, patents). Rising CapEx often precedes production capacity increases.
The 3 Essential Financial Statements
| Statement | Purpose | Key Metrics |
|---|---|---|
| Income Statement | Profitability analysis | Revenue, EPS, Net Income |
| Balance Sheet | Financial position | Assets, Liabilities, Equity |
| Cash Flow Statement | Liquidity tracking | OCF, FCF, Investing/Financing Activities |
👉 Master these financial statements to make informed investment decisions
FAQ: Fundamental Analysis Explained
Q: Why study financial statements as an investor?
A: Stocks represent real businesses. Understanding financials helps assess if companies can sustain operations, grow profits, and deliver shareholder value long-term.
Q: How often should I check these metrics?
A: Review quarterly reports for trends, but focus on annual reports for comprehensive analysis. Significant changes warrant deeper investigation.
Q: What's more important - high dividends or EPS growth?
A: Depends on goals. Income investors prefer dividends, while growth investors favor reinvestment. Evaluate the company's lifecycle stage.
Q: Can a company have positive net income but negative cash flow?
A: Yes, through accounting practices like accrued revenue. Always cross-check income statements with cash flow statements.
Q: Which single metric matters most?
A: No universal answer, but ROE combines profitability and efficient capital use. Use it alongside other metrics for balanced analysis.
👉 Discover advanced fundamental analysis techniques for stock investing
Mastering these 10 metrics equips you to evaluate companies like professional analysts. Consistent revenue growth, healthy margins, strong cash flows, and efficient capital use typically indicate quality investments worth considering for your portfolio.