Revenue Analysis

The first metric to examine is revenue—this tells you if the company is growing.

What to look for:

• Up and to the right trend: You want to see consistent revenue growth
• Understanding divots: If you see any dips, investigate the cause
• Year-over-year growth rate: Compare recent growth to historical trends

Example from the video:

• UnitedHealthcare: ~9.8% year-over-year revenue growth

Key Insight: Always click on the revenue visualization to see the trend over time. A company that's continually growing revenues is showing market demand.

Free Cash Flow (FCF)

Free cash flow is essentially the company's true profitability—the cash available after all expenses.

What to look for:

• $1 billion and above: This is the baseline for strong FCF
• Consistently positive: You want to see positive FCF quarter after quarter
• TTM (Trailing 12 Months): Focus on the past 12 months performance

Why it matters: Free cash flow confirms the company is actually profitable, not just showing paper profits. It's the cash the company can use for dividends, buybacks, or growth initiatives.

Return on Assets (ROA)

Measures how efficiently a company uses its assets to generate profit.

Benchmark:

• 5% and above: Minimum threshold
• Higher is better: More efficient asset utilization

Example:

• UnitedHealthcare: 7.41% ROA ✓

Return on Equity (ROE)

Shows how well the company generates returns for shareholders.

Benchmark:

• 10% and above: Minimum threshold
• Higher indicates better performance

Example:

• UnitedHealthcare: 23.8% ROE ✓ (Excellent!)

Return on Capital Employed (ROCE)

Measures profitability relative to the capital used in the business.

Benchmark:

• 10% and above: Minimum threshold
• Higher shows efficient capital use

Example:

• UnitedHealthcare: 16.53% ROCE ✓

Gross Margin

Indicates the pricing power and competitive moat of the company.

What it tells you:

• High gross margins = Strong pricing power
• Shows how much the company can mark up products
• Objective measure of a company's economic moat

Remember: Companies with wide moats are very hard for competitors to disrupt. High gross margins are a key indicator of this advantage.

Net Margin

The percentage of revenue that becomes actual profit.

Benchmark:

• 8% and above: Target range
• Increasing trend: Even more important than the absolute number

What to watch for: An increasing net margin shows the company is becoming more efficient and profitable over time—a very positive sign.

The P/E ratio is the primary valuation metric for determining if a stock is fairly valued.

Understanding P/E

What it means: The P/E ratio tells you how much investors are willing to pay for every $1 of company earnings.

Example:

• P/E of 20 = Investors pay $20 for every $1 of earnings
• P/E of 40 = Investors pay $40 for every $1 of earnings (more expensive)

My P/E Framework

Target range:

• 10 to 30: Ideal range for most investments
• Below 10: Potentially undervalued (investigate why)
• Above 30: Trading at a premium (not necessarily overvalued, but more expensive)

Three-Part Comparison

When evaluating P/E ratios, always compare:

1. Current P/E vs. Historical average (5-year median)

   • Lower than 5-year median = Trading cheaper than usual ✓
   • Higher than 5-year median = Trading more expensive than usual

2. Company P/E vs. Sector/Industry P/E

   • Compare to competitors in the same sector
   • Understand relative valuation

3. Context matters

   • Why is it trading higher or lower?
   • Are there company-specific or sector-wide factors?

Practical Example

UnitedHealthcare analysis:

• Current P/E: 23.84
• 5-year median: Lower than current
• Comparison: Also examined Molina Healthcare (MOH)
  • MOH P/E: 10.13
  • MOH 5-year median: 20
  • Insight: Healthcare sector experiencing headwinds

The Value Investor Approach

Ideal scenario: Buy when the stock is trading at or below its 5-year median P/E

Why this matters:

• You're getting the stock at a historically fair or cheap price
• More margin of safety
• Better risk/reward ratio

Important note: Trading above the 5-year median doesn't mean "don't buy"—it just means you're paying a premium. You need stronger conviction when paying above historical averages.

Use this checklist when analyzing any company:

1. Revenue Health

• Check revenue trend (up and to the right?)
• Verify year-over-year growth rate
• Investigate any revenue dips

2. Cash Flow Strength

• Free cash flow > $1 billion
• Consistently positive FCF
• Compare FCF to net income

3. Profitability Ratios

• ROA ≥ 5%
• ROE ≥ 10%
• ROCE ≥ 10%
• Check if ratios are improving

4. Margin Analysis

• High gross margin (competitive moat)
• Net margin ≥ 8%
• Margins stable or increasing

5. Valuation Assessment

• P/E ratio between 10-30
• Compare to 5-year median
• Compare to sector peers
• Understand valuation context

1. Revenue growth matters—Look for consistent upward trends without major dips
2. Free cash flow is king—It's the real measure of profitability ($1B+ consistently)
3. Profitability metrics show efficiency—ROA ≥5%, ROE ≥10%, ROCE ≥10%
4. Margins reveal competitive strength—High gross margins indicate strong moats
5. P/E ratio is your valuation compass—Target 10-30, compare to 5-year median and sector
6. Context is everything—Always compare to historical averages and competitors

• Always visualize the data: Click on metrics to see charts and trends
• Look for improving trends: Sometimes the direction matters more than the absolute number
• Sector comparisons are crucial: A "high" P/E in one sector might be normal
• Use multiple metrics: Never make decisions based on one metric alone
• Lower P/E than 5-year median = better entry point: You're buying at a discount

Remember: Financial analysis is about building a complete picture of a company's health. No single metric tells the whole story—use all of them together to make informed investment decisions.