29 October 2006

The Four Gauges on Our Dashboard

In earlier posts (here, here, here, here, and here), we have described the key financial statements and identified enough ratios drawn from the figures on these statements to make any analyst's head spin.  Each ratio, to one extent or another, helps us understand a corporation's financial strength or the value of its shares.  However, to make the results easier to grasp (i.e., avoid data overload), we concentrate on a subset of the ratios and we organize them in way that tells us how the company is doing in the various facets of its business.

We have done this by constructing a dashboard; but, first, we will relate an analogy.  In (American) football, a dashboard showing a team's performance might have gauges for offense, defense, and special teams. The dashboard might have a separate gauge showing the value of the franchise.  Each of these gauges would show a number, or score, that is based on multiple statistics.

Our financial dashboard has four gauges, one for each of the following categories:
  1. Cash Management
  2. Growth
  3. Profitability
  4. Value.

Each gauge score is based on a handful of the ratios and related metrics presented earlier.

We also combine the score of the four category gauges into an Overall score.

Let's be frank: some financial ratios are more important that others.  In addition, the four gauge categories listed above are not equally important to investors. To deal with these differences, we weight individual metrics based on their significance, and we weight the gauges themselves when computing the Overall score.

Later, we will explain that the weights reflect how closely we believe the metrics correlate with future stock price performance.

This post was last updated on 27 June 2009.

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