Summary of Key Points
This news article highlights five quantitative financial indicators that can help ordinary investors identify high-quality companies. Each indicator comes with a simple criterion for evaluation (e.g., “the smaller the better” or “the larger the better”), and these criteria have been validated through a seven-year historical backtest: using these indicators to select stocks has resulted in significant excess returns (with some stocks increasing in value by up to eight times). These indicators assess various aspects such as profitability efficiency, growth quality, supply chain position, and financial health, enabling non-professionals to quickly identify companies with potential.
Detailed Explanation of Each Indicator
1. Cash Expense Profit Margin: Which company earns more for the same cost?
This indicator is similar to measuring the profitability efficiency of a bubble tea shop. For example, if two shops both spend $1,000 on ingredients and labor, Shop A makes a profit of $500 while Shop B makes only $300; Shop A has a smaller cash expense profit margin (meaning it earns more for the same cost). The smaller this indicator, the stronger the company’s profitability—i.e., the more profit it generates per dollar spent. Backtesting shows that stocks with lower cash expense profit margins have increased in value by eight times over a seven-year period.
2. Profit Growth Rate Difference: Is profit growing faster than revenue?
This indicator examines the quality of growth. For instance, if a company’s revenue increases by 10% this year and its profit increases by 15%, the growth rate difference is 5%. A higher value indicates that the company not only sells more but also manages to increase profits beyond revenue growth by controlling costs or raising prices (e.g., if the bubble tea shop raises prices and revenue grows by 10% while profit grows by 20%). Using this indicator to select stocks has led to a seven-fold increase in investment returns.
3. Inventory to Other Payables Ratio: Companies with more inventory but fewer liabilities are favored
Inventory represents goods held in the company’s warehouses, while other payables represent money owed to suppliers. The higher this ratio, the better—e.g., Company A has $1 million in inventory and owes $200,000 to suppliers (ratio of 5), while Company B also has $1 million in inventory but owes $500,000 (ratio of 2). A higher ratio suggests that either the company sells its products quickly (good inventory turnover) or it holds a strong position in the supply chain (owing less to suppliers), which generally results in a higher valuation from the market.
4. Operating Cash Margin: Does the money from sales actually remain in the company’s hands?
This indicator measures the actual cash generated by business activities. For example, if a company earns $100 from sales and spends $60 on rent, wages, and materials, its operating cash margin is 40%. A high operating cash margin indicates that the company has solid financial health and generates real profits, rather than merely “paper profits” (e.g., money owed by customers that may not be collected).
5. Accounts Receivable to Other Payables Ratio: Is it better if customers owe more?
Contrary to intuition, this indicator shows that higher values are actually beneficial. This ratio indicates that the company has more bargaining power in its industry—customers are willing to purchase goods before paying, and the company owes less to suppliers. For example, if Company A’s customers owe $1 million and the company owes $500,000 (ratio of 2), it will have higher earnings compared to Company B, whose customers owe $500,000 and the company owes $1 million (ratio of 0.5).
These indicators do not require complex calculations; by simply remembering the evaluation criteria, ordinary investors can quickly filter out companies with potential and avoid those that appear profitable but are actually inefficient or overvalued.