Back to the Basics: 8 Simple Metrics That Beginner Investors Should Know

What It Covers

Andrew Sather and Dave Ahern break down eight fundamental financial metrics for beginning stock investors, covering market capitalization, earnings per share, price-to-earnings ratio, ten-year CAGR, position sizing, current ratio, free cash flow, and return on equity with practical examples and calculation methods for evaluating companies.

Key Questions Answered

• •Market Capitalization Categories: Small caps are companies under $2 billion market value, mid caps range from $2-100 billion, large caps span $100-200 billion, and mega caps exceed $200 billion. These definitions evolve as trillion-dollar companies like Apple and Nvidia push boundaries higher. Market cap equals share price multiplied by total shares outstanding, representing what investors collectively value the entire business at today.
• •Price-to-Earnings Ratio Ranges: PE ratios under 15 signal cheap valuations, 15-25 represents fair value, 25-35 enters expensive territory, and anything above 50 indicates extreme overvaluation. Warren Buffett historically targeted companies under PE of 15. Calculate by dividing share price by earnings per share. Flip the ratio to get earnings yield—a PE of 10 equals 10% potential annual return on investment.
• •Ten-Year CAGR Advantage: Compound annual growth rate converts large percentage returns into understandable annual figures. A 657% ten-year return sounds abstract, but expressing it as 11% CAGR makes comparison easy. Investors should track both revenue CAGR and earnings per share CAGR over ten years to measure actual wealth generation versus one-time spikes from borrowing or share issuance.
• •Position Sizing Impact: A 20% portfolio position affects returns ten times more than a 2% position—if the larger holding moves 5%, it equals the smaller position moving 50%. Most investors hold 15-20 stocks with 3-5% positions for full conviction, 1% for starter positions, and 5-10% for high-conviction bets. Poor position sizing ruins even excellent stock picking when best ideas get 1% and worst ideas get 20%.
• •Free Cash Flow Calculation: Subtract capital expenditures from operating cash flow to find money available for dividends, buybacks, debt repayment, or acquisitions. This metric represents actual dollars in the bank account versus earnings which involve accounting opinions. Growing free cash flow indicates genuine business health and expansion capability, making it more reliable than borrowed money inflating checking account balances.