What are important investment metrics?


Important investment metrics, as discussed by Brian Feroldi on the podcast ChooseFI, include:

  1. Price-to-Earnings (PE) Ratio: This is a common metric used to assess if a stock is overvalued or undervalued compared to its historical performance or relative to other companies in the industry. It can provide a snapshot of a company’s relative value and is typically higher for companies expected to grow significantly 1.

  2. Price-to-Sales Ratio: This metric measures the price of a business against its revenue per share. It's particularly useful for understanding the valuation in scenarios where earnings are not stable because revenue tends to be a more consistent figure. It provides insight devoid of the one-time effects that might swing earnings dramatically 2.

  3. Price-to-Book Ratio: This is especially critical when analyzing the value of companies like insurers, where the book value (total assets minus liabilities) plays a major role. It helps investors understand what the company's assets are worth collectively, and is used to evaluate both overvalued and undervalued stocks 3.

    Understanding PE Ratios

    Brian explains the importance of PE ratios in judging a company's relative value and how it can be used to determine if a stock is overvalued or undervalued. He also emphasizes the need to consider other factors such as growth potential and industry trends when analyzing a company's PE ratio.


    200 | Stock Fundamentals with Brian Feroldi
  4. Free Cash Flow and EBITDA: These metrics are important for assessing the financial health and profitability of a company. They are particularly useful for growth companies that might not yet be profitable. EBITDA, or earnings before interest, taxes, depreciation, and amortization, gives an idea about the operational profitability excluding these non-operating expenses 3.

These metrics are essential for determining the financial health and potential growth of investments in various industries. Each metric serves a unique purpose and must be considered in context with each other and the specific industry of the company being analyzed.