Businesses can use certain tools and strategies to understand why their stocks, bonds, commodities, sales, or products are moving in a positive or negative direction. By analyzing the movement of a security and interpreting the data, businesses can make smarter decisions when investing.
One of these business tools that can aid in recognizing and understanding monetary trends is r-squared. R-squared, also known as the coefficient of determination, can help give companies an idea of how much your stock will fluctuate based on the value of another variable.
What does r-squared tell you?
In statistics, r-squared aids in visualizing a scatter plot to see which dots are above and below the median line. In business, r-squared tells you how much of your finance resource movement can be explained by another variable, with r-square typically shown as a positive percentage between 0 and 100%.
Three different ranges can be used for r-squared interpreting the value of your company’s finance resource values. The first range is the low r-squared, which is between 1 and 40%. This number means there is a very weak correlation between your investment and your business’s return.
A medium r-squared is between 40 and 70%, indicating an average correlation causing some finance resource movement.
If your r-squared value is between 70 and 100%, this generally shows a high correlation between the variable and the majority of your financial resource returns.
R-squared vs. adjusted R-squared
R-squared and adjusted r-squared are similar to each other, but contain one key difference that sets them apart. Both models tell businesses how much of their financial resource can be determined and explain any other variable, expressed between 0 and 100 in terms of a percentage. The main difference between these two methods is the adjusted r-squared can use several variables within the equation without changing the preset r-squared value.
How does r-squared help with each finance resource?
We know by now that r-squared measures how closely your company’s returns align with a specified benchmark, analyzing how well your business has done in the past. An r-squared value can be used to accurately measure your finance resources to see your company’s performance in the past days, weeks, or months.
Finance resources include all financial funds within a business, ranging from assets to attributes. Finance resources are usually split into three categories:
- Business funds – cash, deposits, and cash equivalents (checks)
- Corporate capital – all of the money invested in the organization’s assets (equity capital and liability)
- Other financial resource values – a combination of funds and corporate capital
Using the r-squared method can help businesses track the movement of their individual finance resource, such as the upswing or downswing of their cash, deposits, capital, liability, or funds against a benchmark number.
Determining the r-squared equation can help you compare your company’s past performance against a benchmark number, letting you analyze how well certain aspects of your business have been performing. Using an r-squared, you can track each finance resource within your organization to see if it is trending upward or downward in recent months.