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Financial Health is an advanced ranking system that considers over 100 factors to help you understand any stock's strengths and weaknesses. Each stock is benchmarked relative to its sector and economic region on valuation, growth, profitability, cash flow, and price momentum so that you can find healthy companies and avoid value traps. As always, all of our financial health calculations are transparently outlined for you to review. You can browse the various metrics used in each health scorecard. For example, to compute the Profit Health scorecard, we rank critical metrics like Return on Assets (ROA), Return on Equity (ROE), and more. Based on the sector ranking, we then assign a score between 0-5. For example, if a company ranks in the 90% percentile for ROA, we assign a score of 4.5. The point is that when you are picking stocks, the Financial Health Score gives you a shortcut to seeing which companies are fundamentally in better shape amongst the crowd. It gives you a better chance of picking winners.

What is the Financial Health Score? How is it computed?

The Financial Health Score is an advanced stock ranking system that considers over 100 metrics pertaining to the company's growth, cash flow, profitability, and valuation. We rank the company's performance on each metric against other companies in the same sector and economic region. Companies outperforming their sector/region benchmarks are assigned higher health scores, while underperforming companies are assigned lower health scores. 

How did you select the metrics used to compute the Financial Health Score?

We use a wide range of metrics to compute the Financial Health Score. Investors of all types use metrics like price-to-book and gross profit margin, making those easy candidates for inclusion in the Financial Health Score. Investing.com's financial analysts also leveraged their decades of industry experience to include metrics like Interest Coverage Ratio and PB ROE Ratio in the analysis. While these metrics are lesser-known, they're highly predictive and relied upon extensively by financial advisors, hedge funds, and investment banks to allocate billions of dollars each day.

How did you backtest the Financial Health Score?

Backtesting can be an excellent way to analyze the merits of a trading strategy using historical data. We used our internal backtesting tools to test various strategies using our historical Financial Health Scores. The strategy's performance outlined above not only delivered strong price performance, but it did so in a manner that the average investor can reasonably execute. Unlike trading strategies that require hundreds or even thousands of trades per day, the strategy above requires only quarterly rebalancing. While backtesting has well-documented shortcomings caused by biases like survivorship bias and hindsight bias, it can help optimize and validate thoughtfully composed investment principles. To limit the pitfalls of these biases and data mining, we constructed InvestingPro's Financial Health Score first and foremost using well-understood fundamental analysis principles and later validated the score using hypothesis-driven backtesting.

Does the strategy beat the market every quarter?

No, unfortunately, the strategy doesn't. For example, the backtested strategy underperformed the SPY ETF in the 3rd quarter of 2017 (6.8% vs. 6.2%), the second quarter of 2018 (7.7% vs. 5.6%), the third quarter of 2018 (-13.5% vs. -15.8%), etc. While we strive to be great, no investment strategy can predict the future perfectly. The Financial Health Score strategy uses good fundamental analysis to minimize poor investment decisions. 

Since 2016, the top-rated S&P 500 stocks on InvestingPro's financial health score would have outperformed the overall S&P 500 by a wide margin - 233% returns vs. 101% over those 6+ years (through Q3 2022). That's a 20.3% annualized return vs. 11.4% for the S&P 500. Please note that past performance does not guarantee future results.

How can I view the Financial Health Score for a company?