Stocks Evaluation: What Is a Market Maker?

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The New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) are the largest stock exchanges in the United States. The fundamental similarity between them lies in the trade organization model — both NYSE and Nasdaq use market makers to maintain a fair and orderly market (Hayes, 2022). A market maker is usually a large financial institution that ensures liquidity by buying and selling securities (Cautero, 2019). However, the differences between the two stock exchanges are more apparent. In particular, Nasdaq tends to list more volatile stocks of technological companies. In contrast, the NYSE lists industry leaders that stay operational for generations (Hayes, 2022). In this regard, the NYSE offers a relatively stable investment option, whereas the Nasdaq provides a chance to make more profit at a higher risk.

Therefore, an investor must evaluate the company’s financial ratios to make the right decision. The free cash flow metric is particularly important since it serves as a reliable benchmark by showing the cash generated by the company (Corporate Finance Institute [CFI], 2022). In particular, the free cash flow indicator allows investors to see how much cash is left after the company purchases assets (CFI, 2022). As such, the company’s free cash flow should be evaluated before investing in its stocks.

Free Cash Flow Evaluation 2019-2020: Boeing (NYSE) and Nvidia (Nasdaq)

This section contains an example of how the free cash flow evaluation provides an insight into the company’s attractiveness to investors. Boeing, the famous aerospace giant listed on the NYSE, had a -$4.4 billion free cash flow in 2019 and a -$19.7 billion in the 2020 financial year (Yahoo!Finance2022a). In comparison, Nvidia, one of the world’s biggest graphic processing unit manufacturers listed on Nasdaq, had a $3.1 billion free cash flow in 2019 and $4.27 billion in 2020 (Yahoo!Finance2022b). From this data, a potential investor can see that Boeing currently struggles with cash generation, which makes Nvidia a more lucrative choice.

Financial Ratios Application

Despite the importance of the free cash flow metric, an investor should also pay attention to liquidity, asset management, and profitability ratios in order to make an informed decision. These indicators supplement the picture by showing whether a company can pay off its debt obligations or how efficiently it operates. Consequently, these ratios serve as an argument for or against investing in a particular stock.

Boeing Liquidity Ratios

Current ratio: 1.05 (2019), 1.39 (2020) (Macrotrends, 2022a);
Quick ratio: 0.26 (2019), 0.46 (2019) (Macrotrends, 2022b);

Boeing Asset Management Ratios

Net fixed asset turnover: 6.12 (2019), 4.92 (2020) (Stock Analysis on Net, 2022a);
Total asset turnover: 0.57 (2019), 0.38 (2020) (Stock Analysis on Net, 2022a);

Boeing Profitability Ratios

Gross profit: $4.46 billion (2019), -$5.68 billion (2020) (Yahoo!Finance, 2022a);
Operating income: -$2.66 billion (2019), -$12.9 billion (2020); (Yahoo!Finance, 2022a);

While looking at these ratios, one can see how Boeing struggled in 2019 and 2020. The low current and quick liquidity ratios mean that Boeing did not have the liquidity to pay off its debts. The asset management ratios pointed to relatively inefficient day-to-day operations. Finally, the profitability ratios clearly show that Boeing generated significant losses. Overall, these factors should be considered weaknesses that may lower stock prices and incur losses for investors.

Nvidia Liquidity Ratios

Current ratio: 7.94 (2019), 7.67 (2020) (Macrotrends, 2022c);
Quick ratio: 7.71 (2019), 3.52 (2020) (Macrotrends, 2022d);

Nvidia Asset Management Ratios

Net fixed asset turnover: 8.34 (2019), 6.52 (2020) (Stock Analysis on Net, 2022b);
Total asset turnover: 0.88 (2019), 0.63 (2020) (Stock Analysis on Net, 2022b);

Nvidia Profitability Ratios

Gross profit: $7.17 billion (2019), $6.76 billion (2020) (Yahoo!Finance, 2022b);
Operating income: $3.8 billion (2019), $2.4 billion (2020); (Yahoo!Finance, 2022b);

One can see that Nvidia has also experienced a performance decrease during the 2019-2020 period. However, the liquidity, asset management, and profitability ratios were significantly better than Boeing’s. In this regard, a potential investor could conclude that Nvidia stocks are a better investment option. Despite the global COVID-19 crisis, Nvidia remained profitable and retained a healthy liquidity reserve, which made it a better investment choice.