You have already picked your first ETF or stock. You learned how to think about business quality with 7 Powers, spotting competitive moats and durability. Now comes the next step: checking the numbers to make sure the story matches reality.
(Source: Zorroh – How To Pick Your First ETF Or A Stock)
Here’s the truth: great stories can hide weak numbers. Before you buy any stock, ask yourself this one simple rule:
Think in percentages, not dollars.
The Power of Thinking in Percentages
Most people read numbers in dollars, and that leads straight to confusion.
“Company A grew revenue by $1 billion!” sounds huge. But if that company started with $100 billion in sales, that’s only 1% growth- not impressive at all.
“Company B grew revenue by $500 million.” Sounds smaller, right? But if Company B had only $1 billion in sales to start, that’s 50% growth- that’s a rocket ship.
Percentages tell you the real story. Dollars just tell you the size.
From here on, whenever you look at a company’s numbers, ask yourself: is this change big relative to the baseline? That’s how you spot real growth, real profit, and real problems.
The 7 Numbers You Should Check:
1: Revenue and Revenue Growth
What it is:
The company’s sales (top line) over time- reported yearly and quarterly. The percentage change year-over-year is what you focus on, not the absolute dollar figure.
Why it matters:
Revenue growth tells you if the business is actually expanding or if it’s treading water. A company with flat or shrinking revenue needs a very strong moat to be worth your money.
What to look for:
- 3 to 5 year trend: is revenue growing, flat, or falling?
- Focus on % growth, not total dollars.
- Rough ranges: negative growth (red flag), low single digit (mature), double digit (strong), or very high (hyper-growth but riskier).
Where to find it:
- Company investor relations site → “Annual Report” or “10-K” → Income Statement (shows “Revenue” or “Net Sales”).
- Free sites:
- Yahoo Finance: search “TICKER” → “Financials” tab → “Income Statement”.
- Google: search “TICKER revenue” → often shows growth in the first result.
- TradingView or TIKR: “Financials” → revenue chart over time.
2: Profitability (Margins)
What it is:
Three layers showing how much of each sales dollar the company keeps:
- Gross margin: (sales minus direct costs) ÷ sales. “What’s left after buying/making the product?”
- Operating margin: (operating profit) ÷ sales. “What’s left after paying salaries, rent, marketing, etc?”
- Net margin: (net income) ÷ sales. “What’s left after everything: interest, taxes, one-off charges?”
Why it matters:
Margins tell you how much the business actually profits. They’re where 7 Powers show up: strong brand and pricing power = higher, stable margins. Weak competitive position = margins get squeezed by rivals.
What to look for:
- Are margins positive or negative? (Negative is a red flag.)
- Are they stable over 3–5 years, or collapsing?
- Compare to peers in the same industry (software vs software, not software vs restaurants).
Where to find it:
- Yahoo Finance: search “TICKER” → “Statistics” or “Analysis” tab (often shows percentages directly).
- Company annual report: “Income Statement” and “Management Discussion & Analysis” sections.
- Most broker apps (E-Trade, Charles Schwab, Webull) show margins in the stock overview.
3: Balance Sheet Strength (Net Debt)
What it is:
Total debt minus cash. Simple: is the company in net debt or net cash? A company with more debt than cash faces higher risk.
Why it matters:
Weak balance sheets break when the economy slows or interest rates rise. Strong ones give companies room to invest, pay dividends, and survive downturns.
What to look for:
- Is total debt reasonable relative to yearly profit or cash flow?
- For risky or cyclical industries (airlines, commodities, startups), high debt is a bigger red flag.
- Rough ratio to watch: debt should be less than 3 times yearly operating profit.
Where to find it:
- Company annual report: “Balance Sheet” or “Statement of Financial Position”.
- Yahoo Finance: search “TICKER” → “Financials” → “Balance Sheet”.
- Most brokerage apps show “Total debt” and “Cash” in a snapshot view.
4: Cash Flow (Free Cash Flow)
What it is:
Cash generated by the business after necessary capital spending. Shown as “Free Cash Flow” or “FCF.”
Why it matters:
Accounting profit can be noisy; cash flow shows real money. Free cash flow is what pays down debt, funds buybacks, and supports dividends.
What to look for:
- Is operating cash flow consistently positive over multiple years?
- Over a few years, does free cash flow roughly track net income (not constantly far below it)?
- For heavy capex businesses (capital-intensive like utilities or manufacturers), check if big investments eventually translate to higher cash flow.
Where to find it:
- Company annual report: “Cash Flow Statement”.
- Yahoo Finance: search “TICKER” → “Financials” → “Cash Flow”.
- Some platforms (Morningstar, TIKR, Koyfin) show FCF directly in “Statistics” or “Valuation” tabs.
5: Capital Efficiency (ROE / ROIC)
What it is:
- Return on Equity (ROE): How much profit is generated per dollar of shareholder equity.
- Return on Invested Capital (ROIC): Profit versus all capital (equity + debt) used in the business.
Why it matters:
Good businesses generate more profit from each dollar invested. High, stable returns often signal strong competitive position and pricing power.
What to look for:
- Rough ranges: low single digits (weak), mid-teens (decent), 20%+ (strong).
- Is it stable over multiple years or volatile?
- Companies with strong 7 Powers (brand, switching costs, scale) tend to have high ROIC.
Where to find it:
- Yahoo Finance: search “TICKER” → “Statistics” (ROE percentage).
- Morningstar, TIKR, Koyfin: “Returns” or “Profitability” tabs.
- Company investor presentations often highlight ROIC.
6: Per-Share Reality (EPS and Share Count)
What it is:
- Earnings Per Share (EPS): Net profit divided by shares outstanding.
- Share count: Total number of shares the company has issued.
Why it matters:
Growth must show up per share, not just in total profit. If a company doubles profit but doubles shares, your piece of the pie stayed the same.
What to look for:
- Is EPS trending up over 3–5 years?
- Is share count flat, shrinking (buybacks = good), or rising (dilution = bad)?
Where to find it:
- EPS: Yahoo Finance → “Summary” or “Analysis” tabs; most broker apps.
- Share count: Yahoo Finance → “Statistics” → “Shares Outstanding”; or company annual report.
7: Valuation Snapshot (P/E Ratio)
What it is:
Price-to-Earnings (P/E) ratio: current stock price divided by EPS. It’s a simple ratio, not a full valuation model- just a starting point.
Why it matters:
Even a great business can be a terrible investment if you pay too much. Very high or very low P/E both need an explanation.
What to look for:
- Compare the current P/E to the company’s own history (5–10 years).
- Compare to peers in the same sector.
- Very high P/E? You’re betting on strong future growth.
- Very low P/E? Could be cheap, or could be a value trap (cheap for a reason).
Where to find it:
- Google: search “TICKER P/E” → first line usually shows it.
- Yahoo Finance: “Summary” → “Valuation measures”.
- Most broker apps show P/E in the stock overview.
Putting It Together: Apple, Lululemon, McDonald’s By The Numbers
Let’s take the three companies from our 7 Powers post and run them through these 7 metrics. This is not advice- just practice.
Apple: The Ecosystem & Switching Cost Story
1. Revenue & Growth
- Fiscal 2024: $391 billion in revenue.
- Growth: +2% year-over-year (in % terms- slow but mature).
- What it tells you: Apple is large and mature. Growth is modest, but that’s normal for a $390B+ company.
(Source: Visual Capitalist – Apple Revenue Breakdown; Bullfincher – Apple Revenue 2015-2024)
2. Margins
- Gross margin: approximately 46% (estimated from hardware + services mix).
- Operating margin: approximately 30% (estimated).
- What it tells you: These are very healthy margins. That’s the brand and ecosystem power showing up.
3. Services Growth
- Services revenue (App Store, iCloud, Apple Music, etc.) grew 13% year-over-year to $96 billion in fiscal 2024.
- What it tells you: While hardware is flat, the recurring, high-margin services business is growing fast- exactly what switching costs protect.
(Source: Bullfincher – Apple Revenue by Segment)
Balance sheet & cash flow: Very strong cash generation and minimal debt. Apple can fund its own growth and return cash to shareholders.
Bottom line: The numbers match the “ecosystem moat” story. Healthy margins, growing services, and strong cash flow all support the idea that once you’re in Apple’s ecosystem, you stay.
Lululemon: The Premium Brand Story
1. Revenue & Growth
- Full-year 2024: $10.6 billion in revenue.
- Growth: +8% year-over-year (in % terms- solid growth for the size).
- What it tells you: Lululemon is growing faster than mature tech or retail peers. That suggests brand strength is helping it win market share.
(Source: Yahoo Finance – Lululemon Q4 2024 Earnings)
2. Margins
- Q4 2024 gross margin: 60.4% (up 100 basis points from prior year).
- Full-year 2024 gross margin: 58.3% (expanded by 530 basis points over multi-year period).
- Operating margin: Rising (around 27–29% in recent quarters).
- What it tells you: These are exceptional margins for an apparel brand. Generic sportswear might have 30–40% gross margin; Lululemon’s 58%+ is textbook brand power.
(Source: Ainvest – Lululemon Gross Margin)
3. Per-Share Performance
- Full-year 2024 adjusted EPS: up 15% year-over-year.
- Share repurchases: $1.6 billion in 2024 (buybacks reduce share count, benefiting remaining shareholders).
- What it tells you: Earnings per share is outpacing revenue growth- thanks to margin expansion and buybacks.
Bottom line: The numbers prove the brand story. Lululemon’s ability to charge premium prices shows up in margins far above peers. Growth is solid, and per-share earnings are accelerating. That’s textbook branding power.
McDonald’s: The Scale & Process Story
1. Revenue & Growth
- Full-year 2024: $25.9 billion in revenue.
- Growth: +2% year-over-year (mature and steady).
- Systemwide sales (franchised + company-owned): $130.7 billion (1% growth).
- What it tells you: McDonald’s is a mature, slow-growth business. But don’t mistake slow growth for weakness.
(Source: McDonald’s – Q4 & Full Year 2024 Results)
2. Margins
- Gross margin: 56.75% (for a restaurant franchise model, exceptional).
- Operating margin: 45.19% (for comparison, most restaurants operate at 5–15%).
- Net margin: 31.72%.
- What it tells you: These margins are mind-bogglingly high for a restaurant business. That’s the result of franchising model, scale economies, and process power. McDonald’s doesn’t own the buildings or cook all the food- franchisees do that risk. McDonald’s gets the profit.
(Source: MLQ – McDonald’s Profit Margins)
3. Cash Flow & Capital Allocation
- Operating cash flow: $9.4 billion in 2024 (down 2% YoY, still robust).
- Free cash flow: $6.7 billion (down 8% YoY, due to higher capex).
- Returned to shareholders: $7.7 billion via dividends and buybacks.
- What it tells you: McDonald’s generates massive, consistent cash and returns nearly all of it to shareholders. It doesn’t need to grow fast to be valuable.
(Source: Captide – McDonald’s Q4 2024 Earnings)
Bottom line: The numbers show why McDonald’s is a “moat” story, not a growth story. Scale and process power allow it to extract profits that a small burger shop never could. Slow growth? Yes. Excellent capital allocation? Absolutely.
How These Numbers Connect Back to 7 Powers
Notice the pattern:
- Apple: 7 Powers (ecosystem, switching costs, brand) → high, stable margins → strong cash flow.
- Lululemon: 7 Powers (brand, vertical control) → exceptional gross margins → EPS growth outpacing revenue growth.
- McDonald’s: 7 Powers (scale, process, franchising model) → extreme operating margins → steady, massive cash returns.
The numbers don’t lie. When a company has real competitive power, it shows up as:
- Higher, more stable margins than peers.
- Consistent cash flow generation.
- Efficient use of capital (high ROE / ROIC).
- Per-share earnings that grow faster than revenues (through buybacks or multiple expansion).
If you see the story of a strong “moat” but the numbers show low margins, weak cash flow, or poor capital efficiency, something is wrong. Pass.
Your Simple Checklist
Before buying any individual stock, create a simple one-page checklist:
- Does it have a 7 Powers moat? (From the last post.)
- Revenue growth (in %): Is it growing in a way that makes sense for the industry?
- Margins: Are they higher and more stable than peers?
- Balance sheet: Is debt manageable?
- Cash flow: Is it positive and growing?
- ROE / ROIC: Is the business generating good returns on capital?
- Per-share performance: Is EPS growing? Is share count shrinking (via buybacks)?
- Valuation (P/E): Is it reasonable vs. the company’s history and peers?
If you can answer “yes” to most of these and the numbers are in line with the 7 Powers story, you’ve found a business worth considering.
(Source: Zorroh – Investing 101; Capital Group – Time Not Timing)
What’s Next?
If these 7 numbers feel manageable and the story checks out, the next step is to go deeper. In the next post, we’ll walk through a real company’s annual report, line by line through the income statement, balance sheet, and cash flow statement. You’ll see where each of these 7 numbers lives, and how to read the full financial statements like a pro.
For now, just remember: great businesses show up in the numbers. If the story is strong but the numbers are weak, something is wrong.
Disclaimer:
This post is educational only and is not investment advice. The examples of Apple, Lululemon, and McDonald’s are for learning purposes only. Always do your own research, consult a qualified financial advisor, and never invest money you cannot afford to lose. Past performance does not guarantee future results. Stock prices and company metrics change constantly.