Lesson 1: Introduction To Factor Investing

Before you learn factor investing, let’s get familiar with some key terms.

Value Ratios:

• Price-to-Earnings (P/E) Ratio: This measures a company's current share price relative to its per-share earnings. It helps assess whether a stock is over or undervalued.

• Price-to-Sales (P/S) Ratio: This ratio compares a company’s stock price to its revenues, indicating how much investors are willing to pay per dollar of sales.

• Price-to-Cash Flow (P/CF) Ratio: This compares a company's market value to its cash flow from operations, providing insight into the value relative to cash flow generation.

• Price-to-Book (P/B) Ratio: This ratio compares a company’s market value to its book value, indicating whether the stock is undervalued or overvalued based on its net assets.

• Growth Ratios:

• Historical and Forward Sales/Earnings Growth Rates: These measure how much a company's sales or earnings have grown in the past and are expected to grow in the future.

• Asset Growth: This indicates the increase in a company’s total assets over a period, showing its expansion rate.

• Quality Ratios:

• Net Margin: This measures how much profit a company makes for every dollar of revenue, indicating operational efficiency.

• Return on Assets (ROA): This ratio shows how efficiently a company uses its assets to generate profit.

• Return on Equity (ROE): This indicates how well a company uses shareholders' equity to generate profits.

• Return on Total Capital (ROTC): This measures the return generated by all capital used in the business.

• Asset Turnover: This ratio shows how efficiently a company uses its assets to generate sales.

• Debt-to-Equity Ratio: This measures a company's financial leverage by comparing its total liabilities to its shareholder equity.