Soft Metrics

Categories: Metrics

Sometimes it’s easy to tell whether or not a startup company is going to survive. For example, we knew from the get-go that Cluckwear, an apparel company dedicated to making clothing out of chicken parts, wasn’t going to last very long. But let’s say we’re looking at a startup that doesn’t have a blatantly terrible business concept. How do we evaluate them? How do we know whether they’re going to be successful or not? It’s not like we can scour their financial statements or analyze their stock performance.

What we can do is look at their “soft metrics": the intangible stuff that can clue us in as to a startup’s potential for success. Soft metrics aren’t quantifiable like stock prices and financial statements are, but they can still give us a pretty good idea about how the company operates. Soft metrics can include stuff like leadership personalities: if we’ve got a CEO with a horrible temper, disastrous personal finances, and a penchant for illicit drugs and prostitutes, that might give us pause about her ability to lead a company. Or we might look at the buzz around the company: anyone with a brain could’ve told those geniuses over at Cluckwear that their products weren’t going to take off—pun intended—just based on the reaction and comments of would-be consumers on social media. No one wants chaps made of chicken skin, and no amount of hype or celebrity endorsement is going to change that.

These are two semi-obvious examples, but soft metrics can include a lot of less obvious stuff, too. Are important investors interested in getting involved with the company? Has their online traffic increased? Will the fact that their main would-be competitor is experiencing financial difficulties impact their profitability? Does the public already know and love the brand, the CEO, or some other aspect of the business? Will general economic conditions help or hurt this company’s prospects? These are all things that we might not be able to put real numbers to, but they can still help give us a feel for how our little startup might fare once it, like, starts up. And when it comes to brand-new companies, getting a feel can be better than getting nothing at all.

Related or Semi-related Video

Finance: What are Market Metrics?187 Views

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Finance- a la shmoop. what are market metrics? hmm well the number of radishes we sold

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on aisle four last week that's a market metric. the number of spills on aisle 12 [mop cleans up wine spill]

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last month well that's a market metric. the number of customers who came into

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the grocery store wearing clogs last year, that's a market metric. okay so

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that's a different market a grocery store but the concepts are the same. [produce shown]

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instead of shopping for discounted radishes, well investors are shopping

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for stocks that are either on sale or fulfill the need of that night's

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financial dinner. the key metrics well price to earnings ratio and there's

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a whole open Shmoop video on this one. but that's the price of the stock divided by [equation shown]

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its earnings. so let's think about coca-cola K.O. it's trading for 50 bucks

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a share and let's also say that they'll only earn 250 this year .only. so it's

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market metric of a price to earnings ratio 20 50 bucks - 50 share price

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divided by earnings is the price to earnings ratio. it's 20 all right another

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metric price to sales- that is how many times revenue is a given stock. for

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example Dow Chemical trades at three times revenues it also trades at about

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16 times earnings. but why would you care about a revenue multiple isn't the goal

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of companies to produce profits not revenue? like who really cares about [100 dollar bill]

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revenues? well yeah you actually do. here's why. profits

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change dramatically from year to year whereas revenues well they're relatively

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steady. that is in a good year revenues from Dow might grow fifteen percent, and [ chart shown]

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earnings might be up eighty. in a bad year revenues might decline 3% but

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earnings might be down a hundred percent or more. so if you're an investor you're

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gonna want some kind of anchor in your analysis that sets kind of a range at

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which Dow Chemicals should trade so that you're not getting violently whipped [an anchor sinks into the water]

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around by earnings numbers changing so dramatically in the course of a

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decade-long market or economic cycle .so those metrics price to earnings and

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price to sales revolve around the individual analysis of a single stock.

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there are other metrics investors look at like volume. no not that kind of [hand turns up volume know]

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volume .volume as. in the number of shares traded on a given

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day in a given market like Nasdaq or the NYC, or you know something like. that

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so this metric focuses on the number of shares traded in a given stock overall.

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so if whatever.com had 20% of its total shares outstanding trade in a given day [power point explanation]

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like it had 20 million shares outstanding in four million suddenly

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traded in that day versus its normal one percent of shares like on 20 million

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normal would be two hundred thousand something like that, so it's had 20 times

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the volume in a given day, well what does that mean ?well clearly something

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happened for there to be 20 times the normal volume of trading. is there a take [man speaks to camera]

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out rumor? Is Google buying it? did they do a secondary and insiders dumped? was

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there some good news? bad news? what happened ? what did the stock do? did they

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have a great quarter and tons of investors now believe this is

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sustainable and they all want in so they buy the stock and it goes up big that

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day? or did the company miss a quarter and then they all sell it down by 50% by

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the time the day is done, sell more to more sell like that? while stock moves on

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big volume usually imply something intrinsic about the stock. something

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really good has usually happened and the big volume means that the best analysts

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and investors on Wall Street are reviewing the data carefully. the market [man examines computer charts]

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metrics. and in whereas a stock might soften 5 ,10 even 20 percent on very low

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volume which means that do it's likely people are just ignoring it more or less,

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and that stock just fades downward until some analyst rings a bell that whatever.com [man walks away from frowning woman]

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has suddenly gotten really cheap and then everyone buys it bids it up to

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its proper price. and well that's what makes a market. so it doesn't matter if

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you're selling radishes or whatever product whatever.com happens to make

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this week, market metrics will help you determine if your company is an

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unbelievable success, or if, you know the most epic of fails. [man walks past with baskets of produce]

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