Originally Published: Feb 07, 2023 Last Updated: Jul 24, 2023 4 min read

Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.

Advertising Disclosure
This article was made possible through advertising relationships with one or more of the advertisers listed on this page whose products and services we think our readers will find valuable. This article was written by our Ads team and doesn't necessarily reflect the views of Money's editorial team. Learn more about how we make money.
Getty Images

Investing in the stock market could be a great way to build wealth over time, but picking the right stocks is essential.

Finding the best companies to invest in can be daunting. That said, a few key metrics may help you compare business performance and make well-informed decisions that diversify your portfolio. That’s not to say these metrics are all you need to know, but they may serve as a good starting point to help you understand the potential of a stock.

Here are 5 metrics to consider when picking a stock:

Price-to-Earnings Ratio (P/E Ratio)

The Price-to-Earnings Ratio is one of the most important metrics when selecting a stock. To calculate the P/E Ratio, divide the company's stock price by its earnings per share. A higher P/E ratio indicates the stock could be overvalued, while a lower P/E ratio indicates it could be undervalued.

Return on Equity (ROE)

Return on Equity measures a company's profitability in relation to its shareholders' equity. It is calculated by dividing the company’s net income by its average shareholder’s equity. The result is expressed as a percentage. A higher ROE indicates that the company is more efficient in using resources to generate returns for shareholders.

Debt-to-Equity Ratio

Debt-to-equity ratio is a measure of how much debt a company has compared to its equity. This ratio is calculated by dividing the company’s total liabilities by its equity. A higher debt-to-equity ratio indicates that the company is more leveraged and may be at risk of financial distress.

Free Cash Flow

Free Cash Flow measures a company's available cash after accounting for all its expenses. Calculate the Free Cash Flow by subtracting the company’s total operating costs from its cash flow. This metric can help determine whether a company is generating enough cash to fund its operations.

PEG Ratio

The PEG ratio is a modified P/E ratio that also considers an estimate of the anticipated earnings growth. The growth rate is typically estimated by looking at the stock’s forward-looking growth rate or historical performance.

A stock with a PEG ratio of less than 1 is sometimes regarded as being undervalued. In contrast, a PEG ratio higher than 1 can be regarded as overvalued as it might imply that the stock price is higher than the company's anticipated earnings growth. By considering both the predicted growth rate and the existing earnings, the PEG ratio could offer a more thorough analysis.

Bottom line

These are just a few metrics to consider when evaluating a stock. It's important to remember that no single metric can tell you whether a stock is a good investment or not. However, comparing companies based on these metrics can help inform your investing decisions. Additionally, factors such as the overall market conditions and industry trends, among others, should be taken into account to make an informed decision.

Dig in with Public Premium

If you like diving into company insights, Public Premium could help you know the ins and outs of the companies you care about. Track metrics like subscriber growth, deliveries per quarter, and other relevant stats. Explore advanced stock and ETF insights, and receive guidance from expert analysts. Click here to create your account and start investing with Public.



The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.
*Offer valid for U.S. residents 18+ and subject to account approval. There may be other fees associated with trading. See Public.com/disclosures. Securities through Open to the Public Investing, Inc. Crypto through Apex Crypto LLC. Alts through Dalmore LLC.