如何使用基础财务指标，判断公司是否具备投资价值

• How to assess a company's value by interpreting basic financial indicators.
• Learn to filter out unworthy companies effectively.
• Understand the importance of growth, asset, and efficiency metrics.
• Financial knowledge provides high cost-effectiveness.
• Evaluating revenue and cash flow can expose potential fraud.
• Focus on intrinsic value for better investment decisions.

How to assess a company's value by interpreting basic financial indicators
This episode is quite practical.
After mastering it, we can filter out 80% of unworthy, junk companies.

Previously, we discussed how companies operate.
Continuing from last episode's content, now that we understand the company's operations, how do we evaluate the performance of a company?
How can we determine that?
This requires interpreting financial data.

We can categorize financial metrics into three main groups.
These are growth metrics,
asset metrics, and efficiency metrics.

Today, I've filtered the financial metrics based on difficulty.
I'll only cover the foundational aspects of financial metrics, and the most crucial parts.
We need to take care of friends with no financial background.
Don’t think that basics are useless, everyone.
Actually, learning basic financial knowledge has the highest cost-effectiveness.
It’s like we only put in 20% of the effort, and we can solve 80% of the problems.
For beginners, that’s pretty much enough.

In the following chapters, I’ll also cover financial statement analysis, but that will be a bit more challenging.
It requires a certain financial foundation and familiarity with the company's operations to understand it.
It will be a bit more hardcore, but today's session will be simpler.
I'll ensure that even those with no financial background can immediately apply what they learn after listening.

Let's start with growth metrics, which mainly include the company's revenue and profit.
Revenue is the most crucial financial indicator for a company.
None other.

When listed companies release their financial reports, the first line of the summary usually states the company's revenue and how much it has grown compared to the previous year.
We can also shift our perspective to the company's operational view.
Imagine for a moment, if you were the CEO or a major shareholder of the company, wouldn't your primary concern be the company's performance and scale?

Profit comes second.
Starting a company is all about making money.
First, expand the scale.
Then boost the profits.
It’s that simple.

So when we invest in stocks, we’re essentially buying into public companies.
Evaluating a company’s value, the first thing to look at is its revenue.
Looking at revenue for a single financial period isn’t very meaningful.
We should look at the company's performance over a continuous period.
This allows us to clearly assess the company's growth potential.

There happens to be a fresh case we can discuss.
It's the Oriental Group, which has been involved in financial fraud.
Someone asked me about this recently.
How do we avoid companies like the Oriental Group that engage in financial fraud?
How do we identify and avoid such issues?

I wasn't familiar with this company before, so I opened the information system to check it out.
I took a look and pulled up the data for this company, then I examined the revenue trend chart of this company.
When I saw it, I was full of questions.
Was this performance trend due to financial fraud?
If it’s financial fraud, what’s the point?
This kind of performance trend clearly indicates a worthless company.

A company like this, even with financial fraud, the performance figures are so poor there's no point in delving deeper into it.
A company like this has no investment value; you don't even need to look at it.
You naturally won't fall for it.

Based on my past experience most companies that engage in financial fraud are the ones with terrible business operations.
Because it's only when your business is doing poorly that you’re the one with the motive to fake it.
To cover up an excellent company, the motive to fake is actually quite small.

If we just raise our standards for companies a bit, we naturally avoid those fraud-prone trash.
Let’s look at another case.
This is also something a friend recently asked me about.
He asked me about Seven Wolves, the company, whether it’s worth investing in.

Then I countered with a question.
Seven Wolves had the same scale of performance as San She Yi 78 years ago.
And it's still at the same performance level of 31 now.
A company’s performance hasn’t grown in 78 years. What’s the point of it?

Seven Wolves is considered a minor brand, after all.
They sell clothes for middle-aged men.
I’m not saying the company is bad, mind you.
But from an investment perspective, the domestic market, the A-share and Hong Kong markets combined have over 7,000 companies.
When there are clearly better options, why would we choose a company that’s just treading water?

Investing in companies doesn’t come with many restrictions.
There are no strict rules.
There’s no list of companies you can’t invest in, right?
There’s no rule that says you have to be a CPA to invest in banks.
And there’s no rule saying you need a bachelor’s degree to invest in Kweichow Moutai.

There are no barriers at all.
As long as you have the money, you can buy it.
Then why don't we choose a better company?
There's no need to follow a performance—a company that hasn't seen much growth since 1978.
Let's take a look at companies with better performance, shall we?
And see how its long-term market value has performed.

Let's look at the American Empire Group.
Most people have used products from leading home appliance companies.
Their products are widely recognized.
It’s a household name in the industry.

Midea’s performance trend is very clear and reassuring.
Although there was a period of slower growth for a year or two, the long-term performance growth has been excellent.
Pay attention to Midea’s market capitalization trend, folks.
There was a sudden surge followed by a significant drop later on.

If you experienced the market conditions around 2020, I'm sure everyone is aware of this.
Back then, there was an extreme market situation with high-quality stocks.
After the bubble burst, we saw a valuation correction and a certain degree of overselling.

However, if we extend the timeline a bit, we can observe that the company's market value generally aligns with the trend of its performance growth.
When it comes to investing, choosing companies with strong performance provides a higher margin of safety.
Even if you buy at a slightly higher price in the short term, you can still digest its high valuation over time.
This is a fairly certain conclusion.

A company's good performance doesn't necessarily mean its stock price will be good due to the issue of short-term overvaluation.
But if a company's performance is poor, its stock performance will definitely be poor.
We can look at this through the revenue data; this can help eliminate a lot of junk companies.

Here’s a crucial and practical tip I want to emphasize:
It’s about looking at the company’s financial data.
You shouldn’t just focus on revenue alone.
The truly important figure is the cash received from selling goods or providing services.
This can be referred to as the core business cash flow.

This metric is typically found in the first line of the cash flow statement.
Aren't people worried about companies falsifying their financial reports?
A company's revenue is relatively easy to manipulate.

As long as there's a contract, and a bit of the subject matter is created, whether the money can be recovered later is another story.
They can list it as accounts receivable first, creating the illusion of high revenue growth for the company.
But in reality, the contracts might be worthless, and the money is unlikely to be collected.

If you only look at revenue, it can easily lead to misjudgment, but the cash flow from primary operations is harder to fake.
I'm not saying it's impossible, but the cost of faking it is very high because fabricating revenue data just requires a contract and some assets to back it up.
You can get a friendly company to help with that, but you can't do that with cash flow.

Because cash flow requires actual funds to be transferred.
If the contract amount is large, who would dare to casually do that for you?
So, how to judge the scale of a company's business?

We shouldn't just look at how much the contract is worth.
We should straightforwardly look at their main business and how much cash they have collected.
For example, when I look at the growth of a company's scale, I do data analysis.
I like to put operating revenue and cash flow from primary operations on the same chart for a clearer view.

For example, let's look at the case of Wuliangye.
We'll plot operating revenue and cash flow from primary operations on the same coordinate system.
In this performance chart of Wuliangye, the red line represents cash flow from primary operations, and the blue line represents operating revenue.

We'll notice that the company's cash inflow turns out to be more than the amount stated in the contract signed by the company.
What's the reason for this?
Actually, it's quite simple.

The company's products are in high demand.
The marketing department can request that the channels or customers pay the money upfront, and then we'll ship the goods.
Only after the goods are shipped will the customers receive them.
And the acceptance of this payment is what counts as the company's operating revenue.

However, the payment for goods has actually been made in advance.
This leads to a situation in the company's financial data where, at the same point in time, the main business cash flow is higher than the operating revenue.
If a company exhibits this financial characteristic, it indicates that the company's products are highly competitive in the market.
The company holds a strong position in the industry's supply chain.

Of course, this can also be viewed from the opposite angle.
Companies with operating cash flow lower than their operating revenue are more common.
This is the case for most small and medium-sized companies.

Let's look at a case together.
Rongbai Technology supplies cathode materials for batteries to Contemporary Amperex Technology (CATL).
This company's operating cash flow has consistently been lower than its operating revenue.

In this business scenario, they receive a small deposit upfront and then deliver the goods to the customer.
After that, they struggle to get paid by the client.
The client took several months to slowly settle the payment.

Although some time has passed, the industry is growing rapidly.
The company has a large shipment volume, but the money is always hard to collect.
Such a company has weak product competitiveness.
The company is relatively weak in the supply chain.

Naturally, the investment value of such a company is much lower.
And once the industry growth slows down overall, such companies are prone to bad debts and over-supply.
This can lead to a significant drop in profits.

The company's market value will also plummet.
Just by comparing revenue and cash flow, you can tell without even looking that the company's accounts receivable must be particularly high.
After all, goods are shipped but the money isn't collected.
You can see this just by glancing at the financial statements.

In real work, being the service provider is really tough.
Going through the motions day after day to please the client, and then investing in stocks, you even buy shares in a service provider company; aren’t you just making things harder for yourself?
Making things unpleasant?

Generally, B2B companies are those that do business between enterprises, you know.
The gap between operating revenue and primary business cash flow is usually larger because the transaction process between companies is more complex.
From contract signing to delivery and payment, it takes quite a while.

Which means that at the same time, there will be discrepancies between the two sets of data.
To put it simply, a good company can get paid before shipping; a poor company can only ship first and then get paid.
This business is actually quite easy to understand.

If we are making investment choices, I would definitely prefer a company that collects payment before shipping.
If you're running your own business, don't you think this approach feels more satisfying?
Is there a difference between operating revenue and main business revenue?
Can cash flow data be the same?

Let's take a moment to think about this.
What kind of business scenario could lead to this outcome?
Could it be that the time gap between product delivery and payment collection is extremely small?
What kind of company can we think of that has this business characteristic?

An ophthalmic hospital, right?
This ophthalmic company provides its products and services directly to consumers.
We analyze the revenue data and main business cash flow data of the ophthalmic hospital and find that they are almost identical.
Have you noticed the connection between financial data and a company's operations?

It can be mutually corroborative.
If we are very familiar with the company's business and have a good grasp of financial knowledge, the analysis can actually be quite straightforward.
Now, let me talk about a special settlement model case.

It's about real estate companies.
To evaluate the growth of real estate companies, we can't just look at revenue.
Because real estate companies primarily sell properties on a forward basis, we pay for the property upfront when we buy it.
Then it takes one or two years before the house is delivered.

According to the policy, only when the house is handed over to the client can it be counted as your company’s performance.
Therefore, the financial reports of real estate companies reflect performance data that is lagged.
They show the sales conditions from the previous two years.

Moreover, this revenue data can be adjusted.
For example, as the fourth quarter approaches, the company may want the revenue figures for this fiscal year to look better.
You can request all the branch companies to rush and deliver a batch of houses by the end of the year.
If this is done, the delivery volume in the fourth quarter will increase, and this year’s performance will look better.

Actually, when we evaluate a real estate company’s performance, we look at how well the current houses are selling.
When we buy a presale property, we need to pay in advance.
This money will then be sent to the main business cash flow; it's then reflected in the contract liabilities on the balance sheet.

Let's dive into a case study for a better understanding.
Take a look at Poly Real Estate, one of the leading companies in the real estate sector.
If you focus on the blue line, it shows Poly's delivery status.

Given that Poly operates on a larger scale, they have better control over the delivery pace.
This allows them to present a very attractive trend in performance growth.
But we all know the reality is different.
Since 2022, new homes have been hard to sell.
Real estate developers have faced significant pressure in new home sales.

So if we look at Poly's main business cash flow, it has been on a downward trend since 2022.
If we previously held stocks in real estate companies and understood this data, we could have sold the company's stocks at the beginning of 2022.
This is through analyzing performance trends to determine whether a company is worth investing in.

One specific method is to look at revenue data, which can reveal many details about a company's operations.
To assess a company's growth, looking at revenue trends alone is not enough.
It's also necessary to consider the company's profit information.

First, look at the trend of profit growth.
In theory, a company's size and profits should grow in proportion or the difference in ratios won't be too significant.
If a company's performance grows, but profits remain stagnant over the long term, then you should be more cautious.

Because companies have a method to adjust the settlement model with channel partners to boost the company's performance.
Let me give you an example.
For instance, I have a product.
I sell it to the distributors at a purchase price of 100,000 yuan.
Then my revenue will be calculated as 100,000 yuan.

After the distributors buy from me, they can sell it at the market price of 250,000 yuan.
However, I can adjust the settlement relationship between the company and the distributors.
I can have the distributor's customers pay me directly the 250,000 yuan.
Then I transfer 150,000 yuan to the distributors as marketing expenses.

In this way, my performance shot up to 250,000, which is more than double the 100,000 and even more.
At the same time, the company's marketing expenses have significantly increased, but the profit margin remains unchanged.
The company can use this method to boost performance growth.

There might be multiple product lines within the company, and they can settle a few of them using this approach.
This could lead to a sudden surge in the company's performance.
The financials of listed companies are all handled by top-notch accounting experts.
They do this by making the company’s performance curve look very appealing.

If we don’t understand the financial details, we can easily be at a disadvantage.
However, the company’s actual profits haven’t grown in tandem.
The performance is just an illusion created by accounting techniques.

In such a situation, we can analyze the company’s profit growth trend.
Let's proceed with the identification.
As for the rationality of the profit itself, this analysis is more complex.
It requires breaking down the company's business, which is quite challenging.
I'll cover this in the following sections.

After discussing the growth metrics, we'll move on to the asset metrics.
The asset metrics primarily come from the balance sheets published by listed companies.
A full interpretation of the balance sheet will be covered later.
I'll discuss it separately.

Today, I'll only cover the basics.
The most practical indicators are cash and liabilities.
Cash data for some companies is recorded at the beginning of the asset statement.
It's also quite easy to find.

Let's look at this case, shall we?
We can just pick any company's financial report.
The format is the same for all of them.
We can consider cash and trading financial assets as the company's cash, which is quite similar to our personal financial situation.

How much cash we have on hand is not necessarily the current account balance on our bank cards; it also includes products like Yu'e Bao.
Such money market funds and short-term investments of a few months can actually be treated as cash.
When we assess a company's financial strength, the simplest and most straightforward method is to check the company's account to see how much cash it has.

The core value of a company is to make money, but if you don’t have any cash in your pocket, how can I believe in your ability to make money?
However, looking at just one cash figure isn’t easy to analyze.
We need to find benchmarks to compare against to reach clearer conclusions.

One is to compare cash and performance, which involves dividing cash data by the current period's operating revenue, resulting in a coefficient.
This coefficient is primarily used for comparing companies within the same industry.
This is a more empirical analysis, requiring frequent review of the financial status of various companies.

Only with extensive observation can a more accurate conclusion be reached.
Another method is more practical, which looks at the company from the perspective of its current usage.
Let's take a look at the company's cash.

Can it cover the company's short-term debts?
The logic is pretty straightforward.
For example, if you have 20,000 yuan in your pocket, and you have no debts, you feel pretty relaxed, right?
You can spend that 20,000 yuan on whatever you like.

But if you have 20,000 yuan in your pocket, even so, but you have a mortgage of 20,000 and a car loan of 10,000 due next month, to pay off, and there are essential living expenses as well, don’t you feel overwhelmed?
Let's put ourselves in that situation.
It's quite easy to understand.

So, how do we compare cash and debt specifically?
I'll go into detail on how to actually do it.
We can just pick a company's financial statement at random.
This format is universally applicable.

Open the balance sheet.
Locate these items, including short-term loans, accounts payable, as well as other payables, and also advance payments received and contract liabilities, along with non-current liabilities due within one year.
What we need to do is to get the cash data.

Compare the data with these debt items.
It's just a matter of comparing the numbers, especially short-term loans, accounts payable, and non-current liabilities due within one year.
These are likely to be payments that need to be made in cash soon.

If the cash on hand can't cover these expenses, the company will be in a very tough spot.
Just think about the situation I just described.
Now you know how bad it feels.

You only have two dollars in your account, but you have to pay a 20,000 mortgage and a 10,000 car loan soon.
What are you going to do?
There’s a detail to pay attention to here.

Unearned revenue and contract liabilities, though they are categorized under liabilities, aren’t actually true debts.
We refer to these two accounts as operating liabilities.
Perhaps in the future, we won't need to pay with cash.

Let me give you an example.
For instance, Xiaomi's car has been quite popular recently, right?
After we place our order, we need to pay a deposit of 5,000 yuan to Mr. Lei.
But we won't be able to get the car right away.

We might have to wait six months to a year before we can get the car.
Before we actually get the car, this 5,000 yuan actually doesn't belong to Mr. Lei.
If the car can't be delivered in the end, this 5,000 yuan will be refunded.

So this 5,000 yuan, in accounting terms, will be recorded as a company's advance payment or contract liability.
In the relevant account, it's a debt of the company, since it hasn't truly become the company's asset yet, after all, the goods haven't been delivered.
If a company wants to eliminate this debt in the future, it typically doesn't need to pay it off with cash; just by delivering the goods, it's settled.

So it's not always better to have less debt.
Having more operating liabilities actually indicates that the company's products are in high demand, supply can't keep up with demand.
Let's look at a real-world example to understand this better.

We can start with an Excel spreadsheet.
Let's transform the asset data into a bar chart.
This way, we can easily compare them horizontally.
Let's first look at a company with a relatively good financial status.

We'll take the Bull Group as an example.
The Bull Group's annual revenue is approximately 16 billion.
And they have 13.5 billion in cash on their books, which is quite substantial.
Their short-term loans amount to only 600 million.

And their accounts payable are 3.2 billion.
The company's cash reserves, even the loose change, can basically cover the short-term debt.
This indicates that the company's financial condition is very good.
It also indirectly shows that the company is quite solid.

So, it seems this is an excellent company.
Now, let's take a look at a company with tighter financial conditions.
Let's use the example mentioned earlier.

Rongbai Technology was briefly introduced just now.
This company is in the manufacturing sector.
It's on the side of Contemporary Amperex Technology Co., Limited (CATL).
We can see that the company's cash and investments on hand only amount to 5.3 billion.

However, the company has short-term loans totaling 1.6 billion.
Accounts payable are also quite high, reaching 6.5 billion.
Long-term debts aren't pressing for repayment, but they are also substantial, amounting to 5.7 billion.

The cash on the company's books is only 5.3 billion.
What needs to be paid now is short-term loans and accounts payable.
Together, they amount to nearly 8 billion.

Let's not consider the long-term loans for now.
Just looking at the immediate situation, the cash on the company's books is not quite enough.
You might feel that the company is under significant financial pressure.

Now, let's consider the company's long-term profitability.
We'll find that there's still 5.7 billion in long-term loans to repay.
The company's performance scale is roughly around 15 billion annually.
So it would take ages to pay off the long-term loans.

So we just need to analyze the company’s asset information.
You don’t need to look at everything; just understand the company’s cash and debt.
This is basically enough to judge the quality of a company.

Finally, let's discuss the efficiency metrics.
It's the same as before.
For efficiency metrics, I'll share the simplest and most effective one.
The content in this episode is still at a beginner level.

Let's start with the most cost-effective knowledge.
There are actually many efficiency indicators.
For example, inventory turnover ratio, total asset turnover ratio, and so on.
But all the data ultimately point to one outcome, which is the return on equity.

If you're interested, you can start by learning about the DuPont analysis.
It's a method for analyzing a company from a financial perspective.
This content is a bit more technical, though.
We can cover it in a later session.

The top-level metric in the DuPont analysis is Return on Equity (ROE).
The calculation is actually quite simple.
It’s the company’s net profit divided by its shareholders' equity.
It’s just an index that you get from this calculation.

Let me give you an example.
To make it easier to understand, let's assume there are two people, A and B.
Both of them earned 200,000 in 2024.
On the surface, they both earned 200,000.

The numbers are the same, right?
But the process of earning might have differences.
A's initial capital was 1 million; A used 1 million to earn 200,000.
This is A's money-making ability.

While B's capital is 5 million.
B used 5 million to buy a bank financial product and made 200 thousand.
We can only say that B's 200 thousand was earned more easily.
But A's money-making ability is clearly stronger than B's.

If A were like B and also used 5 million in capital to do business, A might make 1 million, not 200,000.
So if we're going to invest in these two individuals, should we choose A or B?
We would definitely go with A, right?
Because A has a higher return on assets.

That's how this metric is used.
The same logic applies when evaluating listed companies.
When we look at a company, a company with a higher ROE would be more attractive for investment.
Especially when comparing two companies in the same industry, we tend to favor the one with a higher ROE.

I can share my personal habit with you.
I usually only look at companies with an ROE above 15.
If it's below this threshold, I would only consider it if the company’s valuation is particularly low; otherwise, I generally wouldn’t consider it.

So now it's time to wrap up.
Let's briefly review what we covered today.

The first segment discusses growth metrics.
Let's start by looking at the trend in revenue.
If a company's performance is on a downward slope, it's most likely a poor company.
There's no point in wasting time on it.

It's also best to avoid companies with long-term stagnant performance, those that are just treading water.
We should aim to select companies that can sustain consistent growth.
Only by choosing such quality companies can our investment performance be excellent.

Next, we discussed methods for analyzing a company's revenue.
It's about identifying the key metric of primary business cash flow and comparing it with revenue data.
Based on the analysis of revenue and primary business cash flow, we can further identify the operational details of a company.

This allows us to screen out some underperforming companies.
We can also examine the trend in profits to see if the data aligns with normal performance.
As for the rationality of the profit itself, the analysis is quite complex.

It requires a detailed breakdown of the company's operations, which can be challenging.
I'll cover that in a later section.
After discussing growth metrics, we'll look at asset-related indicators.

First, we'll see if the company has enough cash on its books.
A company with a lot of cash is not necessarily a good company, but if a company is poor, it's likely a bad company.
Regarding cash, we'll compare it to the company's operating scale and determine if it can cover short-term debts.

If the cash can't even cover short-term debts, then it's not worth looking at the company.
Finally, we'll discuss the return on equity (ROE).
This metric is one of the most important efficiency indicators for a company.

From my personal experience, unless the valuation is exceptionally low, when selecting a company, we should aim for those with an ROE of 15% or higher.
By learning the content of this chapter, you will understand the most important basic financial metrics of a company.
This will help you eliminate over 80% of bad companies.

Friends who have patiently listened this far are likely loyal and dedicated followers.
I'll add a few more words here.
Some might ask, we’ve already covered nearly a quarter of the course, but why haven't we discussed anything related to stock trading?

I want to tell you that market trading is not that important.
The most crucial step in investing in a company is to identify high-quality companies first.
If you get this step right, you're already 80% successful.

As for whether to buy shares of a company, that depends on the market price and the company's valuation.
That's an issue regarding the market quote and company valuation.
If you don't understand the company's business, you won't be able to assess its intrinsic value.

You have no way to assess the company's intrinsic value.
Without intrinsic value as a benchmark, the likely outcome is that you'll buy in blindly, and then the company's stock price will plummet.
Leading you to cut your losses at a low point.

If the company's stock price surges, you might sell for a small profit, missing out on much higher returns.
The end result is likely to be a loss.
99% of retail investors lose money for this reason.

They don't understand the company's value, and they buy stocks recklessly.
Even if you choose to chase trends or trade short-term, to increase your chances of success, you still need to understand the true value of the company.
The essence of short-term trading is to gauge market preferences, and understanding the company's value is your trump card.

If you don't know your trump card, you're bound to lose in the game.
So don't rush into market trading.
Build a solid foundation first, and understand the core concepts.

Once you have the intrinsic value of the company as a benchmark, trading becomes a much simpler task.
Just a few more words before we wrap up; the next session will cover company equity and IPOs.