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R² (Coefficient of Determination)

Financial metric definition and guide.

R² (Coefficient of Determination)

How well does a linear trend explain the data?

Definition

R² measures the proportion of variance in the data explained by a linear regression model. It quantifies how "trendable" a metric is — a high R² means the data points lie close to the fitted line, a low R² means the data is noisy.

Formula

Where:

  • is the predicted value
  • is the mean of observed values

Interpretation

Range Assessment
> 70% Strong trend — the linear model fits well
40% – 70% Moderate trend — some noise present
< 40% Weak/no trend — data is mostly noise, slope is unreliable

Key insight: A high slope with low R² is dangerous — it suggests the trend direction may be real but the magnitude is uncertain. A moderate slope with high R² is more trustworthy.

In Finsco

Used in all audit commands as part of the summary statistics table, always paired with Slope. Also used as an advisory indicator in audit returns (ROIC Trend Reliability).

Command Advisory Use
audit returns ROIC Trend Reliability: R² > 70% = strong, 40-70% = moderate, < 40% = noisy
audit moat Revenue Growth R² in summary table
Others Summary statistics table only

Example

Two companies with the same ROIC slope of +2%/yr:

  • Company A: R² = 85% → consistent improvement, reliable trend
  • Company B: R² = 25% → volatile, the +2%/yr is driven by one outlier year

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