What Investors Want to See in Financial Statements
KPI stands for key performance indicators. These indicators are the essential information you want to analyze as an investor in any company. The data is usually available in the companies quarterly report listed on their website.
Note, a business’s financial statements is like a school report card in that it tells investors how well the company is working. These categories within a financial report are the areas investors should care about most.
Is There a Personal Investment?
A positive sign for an investor is that the owner has a financial equity investment into the company. If you see that the founders have money at stake, you’ll know that the team will do what it takes to protect their investment and create a profit.
For example, if we look at Facebook and check to see what FB insider trading is, we will find that the employees and directors believe in the stability of the company because they have invested interests in it.
The net profit is the money that the business has left over after paying operating costs, salaries, taxes, etc. It is the amount left over after paying for the expenses of running the business. As an investor, it is essential to know if the company is making money, and this is where you will find that information.
Analyze this information because unsustainable profits can be bad for an investor, and losses can be good if caused by the company’s scaling up.
What Are the Sales
Even if a company has a great idea and a great product, you need to know if they are selling. Look for the information on sales that tell you whether people are willing to buy the product.
As an investor, you don’t want to risk not knowing this answer. It would help if you cared about sales growth and an upward trend in sales or whether the excitement started to fizzle out.
What Are the Margins
Sales stats are meaningless if the investor isn’t making any money. So this information is essential to you, the investor. Then, compare these margins to other leading companies in the industry. Again, higher margins mean more money for the investor.
On the other hand, low margins can mean a loss, so look for information where the company demonstrates its plan to improve these low margins and increase profitability.
As an investor, you want to know the cash flow of a company. Projections are great, but unless the company has enough cash to meet employee needs and expenses, even the best plan will fizzle out.
Cost of Acquiring Customers
The cost of acquiring customers tells you how much a company has to spend on getting a new customer. This information tells you how much a company spends on marketing and advertising to bring in a new customer.
This expense can be substantial for new businesses, but more stable companies have less marketing expense and repeat business through repeat sales.
Customer Loyalty Rate
Along with the cost of acquiring a customer, you also need information on customer loyalty rates. For example, can the company keep their customers? A return customer rate can compensate for a higher customer acquisition cost.
How Much Debt Does the Company Carry
Although debt often scares investors, it is common for a company to carry at least some debt. However, you want to know how much debt a company has incurred to make sure that they aren’t going to go under. Use the quick debt ratio to calculate debt against assets and sales.
The Accounts Receivable Reports
Learn about the accounts receivable turnovers for the company. This information refers to the amount of time it takes for the company to collect the money from customers. The information tells you two critical things.
First, it tells you that the company is willing to do what it takes to get paid. You want to make sure a company has proven processes that allow it to collect promptly. Second, it also tells you how stable the company is with customers.
You don’t want to work with a company that has a problem collecting money from its customers when a company has slow cash turnover. It indicates the company doesn’t have a financially sound operation and it adds risk to you as an investor.
What Is the Break-Even Status
While you may be able to accept short-term losses, you do want to see that the company has a profit and a return at some point. The break-even point tells you when the company has made all of its obligations and can start to see a profit.
More often than not, the company will list this information as a sales target for the quarter.
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I am Adeyemi Adetilewa, a media consultant, entrepreneur, husband, and father. Founder and Editor-In-Chief of Ideas Plus Business Magazine, online business resources for entrepreneurs. I help brands share unique and impactful stories through the use of public relations, advertising, and online marketing. My work has been featured on the Huffington Post, Thrive Global, Addicted2Success, Hackernoon, The Good Men Project, and other publications.