Revenue

Revenue is the income generated before deducting any expenses, taxes, or other costs with running the business. This is typically considered the top line on the income statement and is a starting point for several financial metrics.

Profit Margin

Profit margin measures a company's profitability expressed as a percentage, accounting for all costs, expenses, and taxes. This shows how efficiently a company operates.

PE Ratio (Price-to-Earnings Ratio)

The price-to-earnings ratio measures the current share price to its earnings. The lower the price-to-earnings, the better.

Example: A PE ratio of 5 means it would take you 5 years to theoretically make back your initial investment with the company's current ongoing profits. If you had a PE ratio of 100, it would theoretically take you 100 years. Of course, you don't want that to happen, which is why you want a PE ratio that is low, and you want to compare that PE ratio to the company's historical averages.

Free Cash Flow

This is basically how much it costs to operate the company and how much of that money is left over. It's a reliable measurement of how efficient the company is at producing cash from its regular business activities, and it's an early indication of cash flow shortages, which is essentially debt, and whether or not the company could end up going broke.

You don't want a company that has poor or negative free cash flow and you end up buying into a company that ends up going bankrupt.

Debt

Lower levels of debt are considered less risky—pretty self-explanatory. If a stock is undervalued, it's crucial to ensure it's not due to excessive debt.

Think about the current interest rates posed by the federal government. They've been increasing the interest rates, and a lot of those growth companies that hold on to debt are going to be losing a lot more money and are at risk with their share price and overall the company potentially going bankrupt.

RSI measures the speed and change of a stock and can tell you if a stock is currently oversold or whether it's undervalued.

• RSI below 30: Considered oversold and potentially undervalued. These are the companies that I look at and where I want to be entering.
• RSI above 70: Considered overbought. I would not touch any of these stocks as you're chasing.

We're not going to be chasing those companies. We're going to be finding companies that are oversold.

Macroeconomics refers to the market as a whole—what is going on in the grand scheme of things in the world.

Key Questions to Ask Yourself:

• What financial policies are being implemented by the federal government?
• Is the government in a period of quantitative easing where they're pumping money, inflating the economy and overall the stock market?
• Or are they in a period of quantitative tightening where they're reducing their balance sheet, taking money away from the stock market, ultimately lowering share prices?

Important Metrics to Monitor:

• Inflation: A key metric that's been going on in the world. It also goes along with interest rates.
• Employment and unemployment rates: To overall see how the market is doing
• Consumer confidence: Overall market sentiment

Here's the tip: When evaluating companies, you want to compare a stock with its competitors and companies in that same industry.

Example: Alibaba (BABA) vs. Amazon

Ticker BABA, otherwise known as Alibaba, is considered the Amazon of China. What I'd want to do is compare the financial metrics of Alibaba to Amazon.

Here is an investment selection screening process that goes over all the metrics that I went over and classifies them in a more organized manner:

Alibaba vs. Amazon Comparison:

• Amazon's revenue: 4.3 times more than Alibaba
• Alibaba's market cap: 8.5 times less than Amazon

Macroeconomic Factors:

• China is printing billions of dollars into the economy
• Share buybacks: Stocks trade based on supply and demand, and when a company issues share buybacks, it ultimately reduces the number of shares from circulation, ultimately driving up the stock price

Revenue Growth Analysis:

• 2014 Alibaba revenue: $12.3 billion per year
• 2023 Alibaba revenue: $126 billion per year
• Result: A 10x increase in revenue but the same share price

This is pretty much what goes on in my mind when I'm evaluating companies and how you guys should be approaching the market as well.

That concludes day two. I want you guys to post inside of the Facebook group your biggest takeaway and ultimately hashtag day two for me.

In our next lesson, we'll dive into practical screening tools and platforms that will help you efficiently identify undervalued companies using these metrics. We'll also explore how to set up watchlists and alerts to monitor potential investment opportunities.

Remember: The key is not just knowing these metrics, but understanding how they work together to paint a complete picture of a company's true value.