Essential Metrics Every New Investor Should Understand Before Buying Stocks
Investing in public companies can feel overwhelming, especially if you don’t come from a finance background. With endless jargon and data thrown your way, it’s hard to know what actually matters. At Smartfin, we believe smart investing starts with clarity, not complexity. Whether you're just getting started or want a refresher, this guide breaks down the core metrics every beginner should know before making their first investment.
1. Revenue
Revenue, also known as the “top line,” is the total amount of money a company earns from its core business activities. This includes sales of products, services, or any other income generated through operations. It is called the top line because it appears at the very top of the income statement, before any costs or expenses are deducted.
For new investors, revenue is one of the most straightforward ways to measure whether a business is attracting customers and generating interest in the market. A growing revenue trend over several quarters or years can signal that a company is expanding its reach, gaining market share, or successfully launching new products.
However, it is important to remember that revenue does not tell the whole story. A company might have high revenue but still operate at a loss if its expenses are too large. That is why revenue should be used in combination with other financial metrics, such as net income or profit margins, to evaluate overall business performance.
On the Smartfin platform, users can explore revenue data across more than thirty years, with clean visualizations that make it easy to spot trends and patterns. You can quickly compare annual or quarterly performance and get a clearer sense of how stable or volatile a company’s income streams really are. Understanding revenue is the first step in learning how to analyze stocks with confidence.
2. Net Income
Net income is often referred to as the “bottom line” because it appears at the bottom of a company’s income statement. It shows how much profit a company has made after subtracting all its costs. This includes expenses like salaries, rent, raw materials, taxes, interest on debt, and any other operational or financial costs. In simple terms, net income tells you how much money the company actually keeps.
Understanding net income is essential because it reflects a company’s ability to manage its operations efficiently. A company might generate a lot of revenue, but if its costs are too high, the net income can be very low or even negative. That is why investors often look at net income to assess whether a business is financially healthy and sustainable in the long term.
Consistent net income growth over time is a strong indicator of solid management and business performance. It shows that the company is not just selling its products or services, but doing so in a way that produces real profit. On the other hand, declining or unstable net income can be a red flag and may suggest underlying problems such as rising costs, poor pricing strategies, or weakening demand.
At Smartfin, we help you track net income trends over time with intuitive charts and performance insights. You can compare a company’s bottom line performance year-over-year or quarter-over-quarter and see how it fits into the bigger picture of value, growth, and financial health. When making investment decisions, net income is one of the most important numbers to understand.
3. Earnings Per Share (EPS)
Earnings Per Share (EPS) is a key metric that tells you how much profit a company generates for each individual share of its stock. It is calculated by dividing the company’s net income by the number of outstanding shares. This simple formula packs a powerful insight, especially for stock investors, because it helps you understand how much value the company is creating on a per-share basis.
EPS is important because it allows investors to compare companies more easily, even if they are different sizes. For example, two companies might have similar net incomes, but if one has fewer shares, it will have a higher EPS, indicating more profit allocated to each shareholder. This can make that company more attractive from an investment point of view.
There are two common types of EPS to be aware of: basic and diluted. Basic EPS uses the current number of outstanding shares, while diluted EPS accounts for the possibility of additional shares being issued through options, convertible bonds, or other instruments. Investors usually focus on diluted EPS for a more conservative and realistic view of earnings potential.
Rising EPS over time is generally a good sign, showing that a company is growing its profits and rewarding shareholders. Falling EPS might indicate declining profitability or an increase in the number of shares, which dilutes earnings. At Smartfin, we make it easy to visualize EPS trends over time and compare them with other key metrics like net income and revenue. When evaluating a public company, EPS gives you a direct lens into how your share of the company is performing financially.
4. Price-to-Earnings Ratio (P/E)
The Price-to-Earnings Ratio (P/E) is a key valuation metric that shows how much investors are willing to pay today for one dollar of a company’s earnings. It is calculated by dividing a company’s current stock price by its Earnings Per Share (EPS). The result is a number that helps you assess whether a stock is expensive, cheap, or fairly valued compared to its actual profit.
There are two common versions of the P/E ratio: trailing P/E and forward P/E. Trailing P/E uses actual earnings from the past 12 months, while forward P/E uses forecasted earnings for the upcoming year. For beginner investors, trailing P/E is more reliable since it is based on reported results, not predictions.
When calculating the P/E ratio yourself or analyzing it on a platform like Smartfin, it is important to use annual EPS, not quarterly. A single quarter of earnings does not tell the full story and can misrepresent a company’s long-term earning power. For example, a strong holiday season or one-time gain could temporarily inflate EPS, making the stock look undervalued when it is not. Using annual EPS helps smooth out these short-term fluctuations and gives you a more accurate view of the stock’s valuation.
A high P/E ratio often signals that investors expect strong future growth and are willing to pay a premium today. A low P/E might indicate a potential bargain, or it might mean the market sees risk or slower growth ahead. That is why P/E should always be evaluated in context, such as comparing it to industry peers or the company’s own historical average.
On Smartfin, you can easily view a company’s P/E ratio alongside its long-term EPS trends, valuation score, and growth metrics. This makes it easier to spot whether a stock is truly priced for its potential, or just riding the wave of market hype.
5. Return on Equity (ROE)
Return on Equity (ROE) is a profitability metric that shows how effectively a company uses shareholders’ money to generate profit. It is calculated by dividing net income by shareholder equity. In simple terms, ROE answers the question: How much profit does the company generate for every dollar of equity invested by its shareholders?
For beginner investors, ROE is a valuable tool because it reveals how well a company’s leadership is managing resources. A high ROE means the business is making good use of its capital and creating strong returns for its owners. A low or declining ROE may suggest inefficiency, poor management decisions, or rising costs that are eating into profits.
As a general guideline, an ROE above 15 percent is considered strong for most industries, while anything below 10 percent may warrant a closer look. However, ROE should not be looked at in isolation. It is especially important to consider the level of debt a company carries. A very high ROE could be inflated by excessive borrowing, which increases risk. That is why combining ROE with other metrics like Debt-to-Equity Ratio gives you a more complete view of the company’s financial health.
On Smartfin, ROE is included as part of the profit scoring pillar, giving you a quick way to compare performance. You can view historical ROE trends to see whether a company’s efficiency is improving, staying stable, or falling behind its peers. For long-term investors, consistent and high ROE is often a sign of durable competitive advantage and skilled management.
6. Debt-to-Equity Ratio (D/E)
The Debt-to-Equity Ratio (D/E) is a key measure of a company’s financial structure. It compares a company’s total debt to its shareholder equity and shows how much the business is relying on borrowing to finance its operations and growth. The formula is simple: total liabilities divided by shareholder equity.
This ratio is important because it gives you insight into how risky a company might be from a financial standpoint. A higher D/E ratio means the company has taken on more debt relative to its equity, which can amplify both potential gains and potential losses. While some debt is normal — and even useful — too much can become a serious problem, especially during periods of economic slowdown or rising interest rates.
For many industries, a D/E ratio between 0.3 and 1.0 is considered healthy. However, what is acceptable can vary by sector. For example, utility companies often operate with higher D/E ratios due to predictable cash flow, while tech companies may have very little debt at all. That is why it is essential to compare a company’s D/E ratio with others in the same industry.
Debt itself is not always a red flag, but it does raise questions: Is the debt being used to fund productive investments, or just to cover losses? Can the company generate enough cash flow to pay it back? At Smartfin, we make these questions easier to answer. You can view a company’s debt trends over time, compare it with peers, and see how its capital structure affects its financial health score.
Understanding the D/E ratio helps you avoid investing in companies that may be growing quickly but are doing so unsustainably. It is one of the most important metrics for assessing risk, especially if you plan to hold a stock over the long term.
7. Free Cash Flow (FCF)
Free Cash Flow (FCF) measures how much cash a company generates after covering its operating expenses and capital expenditures. In other words, it is the money left over after the company pays its bills and reinvests in itself. The formula is simple: Operating Cash Flow minus Capital Expenditures.
FCF is important because it reflects the real, spendable cash a business has at its disposal. Unlike accounting profits, which can include non-cash items or one-time gains, free cash flow shows whether a company is actually generating liquidity. This cash can be used to pay dividends, reduce debt, buy back shares, or invest in growth opportunities. For long-term investors, FCF is often viewed as one of the purest indicators of a company’s financial strength.
A company with strong and growing free cash flow is generally in a good position to weather downturns, expand its operations, and reward shareholders. On the other hand, if free cash flow is negative or highly volatile, it may signal that the business is spending too much, facing cash shortages, or struggling to scale in a sustainable way.
It is also important to look at FCF trends over time rather than in isolation. One year of strong FCF might be due to cutting investments, which could hurt future growth. That is why Smartfin makes it easy to visualize multi-year FCF trends using interactive charts that reveal how cash generation is evolving.
With Smartfin’s tools, you can compare a company’s free cash flow with its revenue, profit, and debt to get a complete picture of its financial health. Understanding FCF helps you avoid companies that look good on paper but are quietly burning through cash — and instead focus on businesses that are truly built to last.
8. Growth Rates
Growth rates show how quickly a company is expanding over time. These rates can apply to several key financial indicators, such as revenue, earnings per share (EPS), or free cash flow. For investors, growth rates are essential because they reveal whether a company is gaining strength and scaling its business, or stagnating.
While many investors look at year-over-year (YoY) growth to track recent performance, that can be misleading when numbers fluctuate from quarter to quarter. A more accurate way to measure consistent performance is by using Compound Annual Growth Rate (CAGR).
One of the most valuable metrics to track is the 5-year revenue CAGR. This tells you the average rate at which a company’s revenue has grown each year over the past five years. It smooths out temporary spikes or dips and offers a clearer picture of long-term growth. For example, a company might grow revenue by 10 percent one year, 3 percent the next, and 15 percent after that. The 5-year CAGR captures the overall trend in a single, easy-to-understand number.
Consistent and healthy revenue CAGR is often a sign of a strong business model, growing market demand, and capable leadership. On the other hand, a flat or declining CAGR may suggest that a company is losing momentum, even if its recent earnings look strong on the surface.
At Smartfin, growth metrics like revenue CAGR are integrated into each company’s profile so you can instantly see how it compares to competitors and industry averages. When used alongside valuation and profitability indicators, growth rates help you decide whether a stock is truly built for long-term success.
Final Thoughts
Understanding these eight essential metrics is the first step toward becoming a more confident and capable investor. You do not need to master complex financial models or spend hours reading reports. You just need to focus on what truly matters. At Smartfin, our mission is to make investing easier, smarter, and more human. With clean data, powerful visualizations, and guidance built into every feature, we help you turn insight into action. Whether you are researching your first stock or refining your watchlist, the right metrics — and the right tools — make all the difference.