Investing isn't Luck, It's Calculated.

Here are the exact 15 metrics I review before I invest

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I've found there are consistently 15 metrics I consider for each stock I invest in.

Hereโ€™s a breakdown of them in plain English:

๐Ÿญ) ๐—ฆ๐˜๐—ฟ๐—ผ๐—ป๐—ด ๐— ๐—ฎ๐—ป๐—ฎ๐—ด๐—ฒ๐—บ๐—ฒ๐—ป๐˜

Poor management can destroy great businesses.

And strong management can make an average company great.

Strong management looks like this:

โ€ข CEOs w/ decades of experience

โ€ข Compensation aligning with the industry

โ€ข Management personally invests in company stock

๐Ÿฎ) ๐—š๐—ฟ๐—ผ๐˜„๐˜๐—ต ๐—ฝ๐—ฟ๐—ผ๐˜€๐—ฝ๐—ฒ๐—ฐ๐˜๐˜€

Figure out a companyโ€™s growth prospects by asking:

โ€ข New industry?

โ€ข Declining industry?

โ€ข Howโ€™s customer sentiment?

โ€ข Howโ€™s customer acquisition?

โ€ข What sales strategies are used?

โ€ข Will they stay in the same market?

Growth potential = Potential returns.

๐Ÿฏ) ๐—–๐˜‚๐˜€๐˜๐—ผ๐—บ๐—ฒ๐—ฟ๐˜€

Do they have a diversified customer base?

This:

โ€ข Hedges against competition

โ€ข Allows company to reinvest

โ€ข Helps meet debt obligations

A business with multiple customers is safer than one thatโ€™s exposed to an unreliable market.

๐Ÿฐ) ๐—ข๐˜‚๐˜๐˜€๐—ถ๐—ฑ๐—ฒ ๐—ถ๐—บ๐—ฝ๐—ฎ๐—ฐ๐˜

What factors outside of the companyโ€™s control can impact it?

Think:

โ€ข Lawsuits

โ€ข Govt policy

โ€ข Competition

โ€ข The economy

Understand the impact they have to understand a companyโ€™s future.

๐Ÿฑ) ๐—œ๐—ป๐—ป๐—ผ๐˜ƒ๐—ฎ๐˜๐—ถ๐—ผ๐—ป

Businesses should improve with technology.

If it doesnโ€™t, it loses market share to a competitor.

Companies that leverage new tech are more versatile and adaptive.

This makes them attractive investments.

๐Ÿฒ) ๐— ๐—ผ๐—ฎ๐˜

Aka competitive advantage.

Here are some to consider:

โ€ข Size

โ€ข Patents and IP

โ€ข Barriers to entry

โ€ข Production costs

โ€ข Customer loyalty

A sustainable advantage increases your chances of profiting.

๐Ÿณ) ๐—ฆ๐˜๐—ฎ๐—ฏ๐—น๐—ฒ ๐—บ๐—ฎ๐—ฟ๐—ธ๐—ฒ๐˜

Volatile markets make it difficult to exit a position.

Itโ€™s hard to time it right.

And when itโ€™s hard to time an exit you risk compromising on your return.

Thatโ€™s why I prefer stable industries over cyclical ones.

๐Ÿด) ๐—–๐—ฎ๐˜€๐—ต ๐—ณ๐—น๐—ผ๐˜„

When evaluating cash flow, ask:

โ€ข Are they subject to economic cycles?

โ€ข Can the cash flow cover debts?

โ€ข Does the company have a subscription service and/or a low churn rate?

Questions like this will help you determine a companyโ€™s profitability.

๐Ÿต) ๐—ค๐˜‚๐—ถ๐—ฐ๐—ธ ๐—ฟ๐—ฎ๐˜๐—ถ๐—ผ

This will tell you if a business has enough assets to pay upcoming debts.

Equation:

Current assets รท Current liabilities = Quick ratio

A quick ratio of 1 is normal.

But in general, you want a quick ratio above 1.

๐Ÿญ๐Ÿฌ) ๐—ก๐—ฒ๐˜ ๐—ฝ๐—ฟ๐—ผ๐—ณ๐—ถ๐˜ ๐—บ๐—ฎ๐—ฟ๐—ด๐—ถ๐—ป

This shows you how much money a company makes for every $1 in sales.

In other words... profit.

This helps you determine whether there are healthy profits and if operating costs are reasonable.

Equation:

Net income รท Revenue = Net profit margin

๐Ÿญ๐Ÿญ) ๐—ฅ๐—ฒ๐˜๐˜‚๐—ฟ๐—ป ๐—ผ๐—ป ๐—”๐˜€๐˜€๐—ฒ๐˜๐˜€

ROA shows you how efficiently a company uses its resources to generate profits.

But it varies from industry to industry.

So the best way to find a good ROA is to compare it with companies in the same industry.

Equation:

Net income รท Total assets = ROA

๐Ÿญ๐Ÿฎ) ๐—˜๐—ฎ๐—ฟ๐—ป๐—ถ๐—ป๐—ด๐˜€ ๐—ฝ๐—ฒ๐—ฟ ๐˜€๐—ต๐—ฎ๐—ฟ๐—ฒ

This shows how much money a company makes per share of stock.

The higher the EPS the more valuable the company.

Equation:

Profit รท Outstanding shares = Earnings per share

๐Ÿญ๐Ÿฏ) ๐—ฃ/๐—˜ ๐—ฅ๐—ฎ๐˜๐—ถ๐—ผ

It shows how much a company is worth & how much investors are willing to pay for each $1 of earnings.

High P/E ratio = stock is overbought or investors are bullish.

Low P/E ratio = stock is oversold or investors are bearish.

Equation:

Share price รท EPS = P/E ratio

๐Ÿญ๐Ÿฐ) ๐—ฃ๐—ฟ๐—ถ๐—ฐ๐—ฒ ๐˜๐—ผ ๐˜€๐—ฎ๐—น๐—ฒ๐˜€ ๐—ฟ๐—ฎ๐˜๐—ถ๐—ผ

Applies mostly to growth stocks with no profits.

The lower the price to sales ratio, the more attractive the investment is.

Equation:

Market cap รท Annual sales = price to sales ratio

๐Ÿญ๐Ÿฑ) ๐—˜๐—ป๐˜๐—ฒ๐—ฟ๐—ฝ๐—ฟ๐—ถ๐˜€๐—ฒ ๐— ๐˜‚๐—น๐˜๐—ถ๐—ฝ๐—น๐—ฒ

Shows how a company would be viewed before a potential acquisition.

A good or bad multiple varies from industry to industry.

So compare it with other companies in the same industry.

Equation:

Enterprise value รท EBITDA = Enterprise Multiple

๐—ง๐—ต๐—ฒ๐—ฟ๐—ฒ ๐˜†๐—ผ๐˜‚ ๐—ต๐—ฎ๐˜ƒ๐—ฒ ๐—ถ๐˜!

The 15 metrics I consistently review before investing in a particular stock.

If you enjoy this newsletter, here are some of my favorites Iโ€™d recommend you read each week:

Ace in the HoleYour Secret Weapon to Beat The Market
Finance VisualizedMaking the market easy to understand through exciting graphics.

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