Part 1 -Fundamentals Aren’t Just Numbers: They’re the Keys to Winning the Stock Game
A Look at the Metrics That Drive Company Share Prices Up (or Down)
A warm hello to all new readers! I’m glad you are on board.
New here? I’m Michael and the founder of TheValueVantage.com and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream.
How it all started.
Every stock tells a story, but the truth lies in the numbers.
Ignore them, and you’re gambling.
Understand them, and you’re playing to win.
In my last article, I put ChatGPT to the test to see if it could beat my Liberty Lift strategy. Spoiler: it didn’t.
Over a 12-month period, my algorithm didn’t just beat ChatGPT—it also outperformed the S&P 500 and the Dow Jones, delivering a 45.4% portfolio return.
Why did we win?
Stock picking is more than just running data through an AI. Liberty Lift is laser-focused and gives me a detailed picture of a company’s financial health, growth potential, and risks. It’s not flawless—no system is—but these metrics help me make decisions based on data that I trust, not guesses or trends.
In this article, we’re looking under the hood of these metrics, starting with the balance sheet. Think of each metric like a piano key (85 of them): play them in the right order, and they create harmony; hit the wrong notes, and it’s just crapy noise.
Balance Sheet Metrics Every Investor Should Know And Understand
1. Shares Outstanding
Shares Outstanding is the total number of shares a company has given to investors—everyone from institutional players to everyday folks like you. These shares represent ownership in the company and are the foundation for key ratios like Earnings Per Share (EPS) and Market Capitalization.
Why it matters? The more shares a company issues, the thinner the ownership gets for existing shareholders. Think of it like splitting a pizza: the more slices you cut, the less pizza each person gets. Fewer outstanding shares mean each slice (or share) holds more value. That’s why stock buybacks are so sexy.
2. PP&E
PP&E stands for Property, Plant, and Equipment—fancy words for a company’s physical assets like factories, buildings, and machinery. These assets are crucial for companies that rely on infrastructure-heavy operations, like automakers or energy companies.
Why it matters? High PP&E shows a company is investing heavily in its future, but it’s a double-edged sword. If the company’s products flop (like a car model no one buys), those assets can become dead weight in the ocean. On the other hand, it can act as a moat, keeping competitors at bay.
3. Current Investments
Current Investments are short-term assets that a company can quickly turn into cash—things like bonds, marketable securities, or other liquid assets.
Why it matters? It shows how agile a company is with its finances. If a company has enough quick cash on hand, it’s better equipped to handle emergencies or jump on new opportunities without taking on more debt. Think of it as the “personal emergency fund” in a company’s bank account.
4. Tax Liabilities
Tax Liabilities are exactly what they sound like: the taxes a company owes but hasn’t paid yet. These can include income taxes, deferred taxes, and other obligations to local or federal governments.
Why it matters? High tax liabilities could signal upcoming cash drains, which might strain short-term liquidity. On the flip side, companies can sometimes use clever tax strategies (or “creative accounting”) to delay payments, making their financials look better than they really are. In other words, tax liabilities are like makeup—they can enhance appearances but don’t change the real personality underneath.
5. Other Assets (Non-Current Assets)
Think of Other Assets, or Non-Current Assets, as the company’s long-term investments—the things it can’t easily sell for cash tomorrow. These include “soft” assets like patents, trademarks, or goodwill, as well as investments or property the company plans to hold onto for more than a year.
Why it matters? Non-Current Assets show where the company is placing long-term bets. Intellectual property or unique technology can give a company an edge over its competitors. But here’s the thing: these assets are often hard to value. They’re like foam—easily shaped into something impressive on paper, but tricky to pin down in reality. A company might claim billions in intangible assets, but what happens if they need quick cash or the “value” of that foam pops? For me, this is one of the hardest metrics to trust, as it often relies more on guesses than facts.
6. Tax Assets
Tax Assets are like credits in the company’s future “tax wallet.” They represent benefits the company expects to cash in on later, like overpaid taxes, deductions, or losses it can carry forward to offset future taxable income.
Why it matters? Tax Assets can make a big difference to a company’s cash flow. They’re like finding a forgotten Amazon gift card in your wallet when the bill comes due—it reduces the burden. Companies with significant tax assets often have extra financial breathing room, which can be a good sign for flexibility. But, these are only useful if the company is earning enough taxable income to use them.
7. Current Debt
Current Debt is what it sounds like: the debt a company has to pay off within the next year. This includes short-term loans, lines of credit, or portions of long-term debt coming due soon.
Why it matters? This is one of the most important metrics for assessing a company’s financial health in the short term. If a company has a lot of debt to pay soon but not enough assets or cash to cover it, that’s a red flag. On the other hand, a manageable level of current debt shows the company is staying on top of its obligations. Think of it like a test of management’s discipline: are they balancing their debts and assets responsibly, or are they constantly scrambling for cash?
8. Accumulated Retained Earnings or Deficit
This is the running total of the company’s profits (or losses) that haven’t been distributed to shareholders (you) as dividends. Instead, these earnings have been reinvested into the business. It’s part of shareholder equity and gives a sense of whether the company is building a strong foundation—or slowly digging a deep hole.
Why it matters? Retained Earnings are like a company’s savings account. A positive balance shows the company is consistently making money and reinvesting it in growth, like launching new products, expanding operations, or paying down debt. But if retained earnings are negative, it means the company has been burning through more cash than it’s made, which is a serious concern. Think of it like a personal budget: are they living within their means, or just piling up credit card debt?
9. Other Liabilities (Non-Current Liabilities)
Non-Current Liabilities are the debts and obligations the company doesn’t have to worry about right away—they’re due in more than a year. These include things like long-term loans, pension liabilities, and lease obligations.
Why it matters? Non-Current Liabilities give you a sense of how a company is planning for the long haul. Borrowing money to fund growth can be smart, but too much debt can turn into a huge weight if the company can’t generate enough cash to pay it off. For companies with stable and steady cash flow, many analysts don’t pay too much attention to these long-term liabilities. But if cash flow dries up? That’s when this metric really starts to matter.
10. Current Liabilities
Current Liabilities are all the bills and debts the company has to pay within the next year—things like accounts payable, short-term loans, and accrued expenses.
Why it matters? This is also a way to measure a company’s short-term financial stability. To really understand it, you have to lay it side by side to Current Assets (the stuff they could sell or use within a year). If liabilities are bigger than assets, the company might face a cash crunch that could make it tough to keep things running smoothly. It’s like running a household: if your monthly bills are higher than your income, you’re in trouble - fast.
Let’s wrap this up
So, there you have it—the first 10 metrics that help me decode a company’s balance sheet.
And you have to understand one thing. Stock picking is a numbers game. These numbers include - luck. Luck will always play a role, even if you go with an Index ETF (most “professionals” pretend it doesn’t). But when you base your decisions on fundamentals, you give yourself the best chance to tip the odds in your favor and get above-average returns. These numbers aren’t theory—they’re time-tested and tell the company’s full story. Not guesses or opinions—they’re the concrete walls we can measure, touch and feel.
Next time, we’ll cover 10 more. There’s a lot to learn if you know where to look.
Progress
I’ve made big changes to the landing page on TheValueVantage.com. After staring at it for way too long, I realized I was probably overwhelming visitors with too much information. So, I got ruthless and cut out all the fluff. Now it’s leaner, cleaner, and (hopefully) more inviting. Sometimes less really is more.
What’s On My Mind
Even though I spend most of my time with TheValueVantage, at heart, I’m still an engineer. Lately, I’ve started microcontroller programming, and honestly, I love it. There’s something about tinkering with tiny hardware and watching it come to life that just scratches an itch. It’s real and a reminder of why I became an engineer in the first place.
Nuggets
I just finished reading a fantastic book called Don’t Believe Everything You Think. It hit me hard in the best way possible. Like many out there, I still get caught in thought loops—replaying the past or thinking about the future—and this book helped me see something clearly: those loops are the root cause of suffering. And. Thought and thinking are two different things.
Joseph Nguyen introduces a simple and powerful framework to break free from this trap. The beauty of the book isn’t just the ideas, but how easy it is to actually remember and use them at the moment.
Here’s the gist:
The Pause Concept / Routine
1. Pause
When negative thoughts show up, stop for a moment.
2. Ask Yourself:
- Does this thought actually help me?
- Does it make me feel better?
3. Understand Your Choice:
You always have the option to let the thought go.
4. Say It Out Loud (or in your head):
Thinking is the root cause of suffering.
5. Feel Without Judgment:
Instead of overthinking, just allow yourself to feel the emotions without attaching stories and therefore judgment to them. Only the stories we tell ourselves give meaning to our thinking.
The trigger
Negative thoughts should be your trigger to activate this routine. That’s the part I’ve been working on: remembering to remember.
It’s one thing to read a concept in a book and think, “Wow, this is life-changing,” but it’s a whole other thing to actually apply it. The book doesn’t just talk about the framework; it gives you strategies to apply it in your daily life.
If you’ve ever found yourself stuck in a thought loop, I can’t recommend this book enough. There are so many useless books out there, this one has the real potential to help.
Shoot out Section
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Take care,
Michael
Hit the heart to make the world a better place!
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.
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