Familiarize yourself with a study of the below metrics. Follow that up with a review of the Financial Statements. A combined understanding of both of those principles should provide reasonable insight into fundamental analysis.
Income Statement Metrics
Top Line and Margin are the two main Income Statement Metrics financial analyst’s review during company earnings announcements. These metrics are of importance because they give clues about the company’s performance. The first entry (Top Line) represents all (100%) of the company’s income from sales over the period of interest (quarter, year, etc.). As the list descends, deductions are taken away from the Top Line. These deductions include costs for raw materials, wages, utilities, interest on loans, taxes paid, etc. Finally, after all the deductions have been completed, the Bottom Line reflects the remaining free and clear income.
Margin represents profitability as a percentage of the Top Line. Typically, the Bottom Line is significantly less than the original 100% represented by the Top Line. As a matter of fact, each entry (or metric) below the Top Line is less than the original 100% of sales income. For example, the Gross Margin may be 75%, Operating Margin could be 59%, and Net Income might result in a 58% Profit Margin. Below is the sequential order found in many Income Statements (select any link for detailed information).
INCOME STATEMENT SEQUENCE:
- Revenue or Sales – TOP LINE
- Gross Margin
- EBITDA Margin
- Operating Margin (EBIT)
- Pre-Tax Margin (EBT)
- Net Income/Profit Margin BOTTOM LINE
Valuation Ratios
Valuation Ratios are determined using a variety of financial statements along with the
daily stock price reported. These metrics provide a gage for determining if a stock is a good bargain buy. When using Valuation Ratios, ask yourself if the company is undervalued or overvalued.
Because a company may be undervalued due to poor performance, be careful to use other metrics along with the Valuation Ratios.
Liquidity Ratios
Liquidity Ratios are determined using Balance Sheet Metrics. These metrics let you know if a company is able to pay its debt. A good question to ask concerning any company is, can the company pay its bills?
Liquidity & Efficiency Ratios
Liquidity and Efficiency Ratios are determined using Balance Sheet & Income Statement
Metrics. Efficiency shows how effective a company is with its assets.
Operating Efficiency Ratios
Operating Efficiency (or Profitability) Ratios are determined using Balance Sheet & Income Statement Metrics. The more efficiently a company uses its resources, the more profitable that company is. A good question to ask is: “Does the company have too many assets?”
- Operating Income ROI (in %)
- Operating Profit Margin (in %)
- Total Assets Turnover
- Fixed Asset Turnover
Leverage Ratios
Leverage Ratios are determined using Balance Sheet & Income Statement Metrics. These ratios gage the risk a company takes in using debt capital to finance asset purchases.
Equity Ratios
Equity Ratios are determined using Balance Sheet & Income Statement Metrics. They provide a measure of the profit generated resulting from the efficient use of stockholder funds.