In the last lesson, we talked about Moats — the defenses that protect a business from competition.
Now it’s time to dig deeper and figure out if the business itself is actually strong.
This is where Metrics come in — the third M of the Four M’s.
📏 Why Metrics Matter
Anyone can tell a great story about a company.
But numbers?
Numbers don’t lie.
Metrics show you if the business is actually walking the talk.
And the good news is, you don’t need to memorize 50 different numbers.
You just need a handful of key ones that tell you what’s really going on.
📚 What Metrics Should You Care About?
Think of metrics like a health check-up for a company.
You don’t need to know everything — just a few important signs:
- Is the business growing steadily?
- Is it efficient with its money?
- Is it managing its debt wisely?
- Is management treating shareholders fairly?
If those things check out, you’re looking at a strong business.
🧠 Going Deeper: Beyond the Big Five
We already talked about the Big Five in the last lesson — sales growth, EPS growth, book value growth, free cash flow growth, and ROIC.
If a company passes those, that’s a great start.
But if you want to be really confident, it’s worth looking a little deeper.
Here’s what you check next:
🚀 Return on Equity (ROE)
| What It Measures | How good the company is at turning shareholders’ money into profits |
|---|---|
| What’s Good? | 15% or higher over time |
If a company consistently earns a high ROE, that’s a great sign.
🧠 Watch out:
If ROE looks super high but ROIC is low, it could mean the company is using a lot of debt.
That’s not real strength — it’s just leverage.
🏦 How Much Debt Is Too Much?
Even a great company can be crushed if it piles on too much debt.
Here are a few simple debt checks:
| Metric | Healthy Range | Why It Matters |
|---|---|---|
| Debt / EBITDA | Under 3x | Company can pay off debts with profits in about 3 years. |
| Debt / Free Cash Flow | Under 5x | Real cash could wipe out debt in under 5 years. |
| Interest Expense / Operating Cash Flow | Under 15% | Interest payments aren’t choking cash flow. |
⚡ Bottom line:
If debt is high, the company’s risk goes way up — even if everything else looks good.
💸 Is Management Working for You?
Not all management teams are created equal.
Some grow the company and reward shareholders.
Others grow the company… mainly to reward themselves.
Here’s what to look for:
| What to Check | Good Sign | Red Flag |
|---|---|---|
| Share Buybacks | Total shares going down over time | Shares going up despite “buybacks” |
| Stock-Based Compensation (SBC) | Reasonable compared to profits | Huge SBC that cancels out buybacks |
Important:
It’s normal for companies to give employees some stock.
But if it gets out of control, shareholders (like you) end up paying the price.
🔥 How to Read the Full Story
When you put it all together:
| If you see… | It usually means… |
|---|---|
| High ROIC + High ROE + Low Debt | This business is truly excellent. |
| High ROIC + High Debt | Good business, but risky if the economy turns. |
| Buybacks + Falling Share Count | Management rewarding shareholders. |
| Buybacks + Rising Share Count | Management mainly rewarding themselves. |
📊 Your Two-Layer Metrics Checklist
Here’s how you build a full picture:
First Layer: Growth and Efficiency (Big Five)
| Metric | What It Shows | What’s Healthy |
|---|---|---|
| ROIC | Efficiency of capital | 10%+ consistently |
| Sales Growth | Rising demand | 5–10%+ per year |
| EPS Growth | Rising profits | 5–15% per year |
| Book Value Growth | Growing shareholder equity | 5–10% per year |
| Free Cash Flow Growth | Real cash generation | 5–10% per year |
👨🏫 Tip:
No company has a perfect year every year.
Focus on steady progress over 5–10 years, not one-off bumps.
Second Layer: Strength and Shareholder Friendliness
| Metric | What It Shows | What’s Healthy |
|---|---|---|
| ROE | Profitability for shareholders | 10–20% (without high debt) |
| Debt / EBITDA | Debt load manageable? | Under 3x |
| Debt / Free Cash Flow | Can pay debt with real cash? | Under 5x |
| Interest Expense / Op Cash Flow | Easy to cover interest? | Under 15% |
| Share Buybacks | Shares shrinking? | Yes |
| SBC | Reasonable dilution? | Preferably <5% of revenue |
🧠 Final Reminders
- High ROIC always wins. It’s one of your best signals of greatness.
- Steady beats flashy. Look for consistency, not hype.
- Debt sneaks up fast. Keep an eye on it.
- Management matters. You want leadership that treats you like a true partner.
✅ Strong Big Five
✅ Healthy ROE
✅ Manageable debt
✅ Real buybacks, not fake ones
= A company worth owning for the long term.
🎯 Quick 1-Minute Summary
Always double-check debt and dilution.
Big Five first (growth + efficiency).
Second Layer next (debt + shareholder alignment).
High ROIC + Low Debt + True Buybacks = Gold.
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