How to Read ROE, P/E, Free Cash Flow, and Debt Ratios
A plain-English glossary of the four metrics every beginner should understand before buying a stock.
Four numbers will take a beginner most of the way. Here is what each one means and why it matters.
Return on Equity (ROE)
ROE measures how much profit a company makes on shareholders' money. A consistently high ROE (say above 15–20%) signals an efficient, high-quality business — but check that it is not driven purely by heavy debt.
Price-to-Earnings (P/E)
P/E compares the share price to earnings per share. A high P/E means investors expect strong growth; a low P/E can mean a bargain or a struggling business. Always compare P/E to the company's own history and its peers.
Free Cash Flow (FCF)
FCF is the cash left after a company pays to run and grow itself. It is harder to manipulate than reported earnings, and it funds dividends and buybacks. Free-cash-flow yield (FCF divided by market cap) helps you compare across companies.
Debt Ratios
Debt-to-equity and net-debt-to-EBITDA show how much leverage a company carries. Lower is safer. Lower leverage generally means more financial resilience during downturns.
Master these four and most company filings will start to make sense.