How well is the company performing financially?
The most reliable indicator on how well a company is doing is their financial performance. You can find this information by looking at their financial statements. In general, a financial statement will tell you how much money the company makes, how they spend it and how much debt they have. There are 3 key indicators to look at when assessing a company:
Revenue is how much money the company has made from selling its products or services. But revenue doesn’t include how much the company has spent to sell its products and services, which leads us to our second indicator.
Cost is how much the company has to spend to make its products and run its business on a day-to-day basis. Generally, you’d want to look for a company that tries to keep it’s costs down. Usually, costs can go up over the years as the company might be using funds for expansion, but that should eventually result in higher revenues and profits. Costs can also go up for reasons the company can’t control. So, make sure you find a company that manages its costs well.
- Profit = Revenue(i) – Costs(ii)
Profit is the amount of money the company gets to keep after paying off all its expenses. A company is profitable if it makes more money than it spends, and is loss-making if it spends more money than it makes.
Always look at these 3 things (revenue, cost and profit) together, to make sure you get a full picture of how the company is performing financially. You should also compare these numbers over a period of 3-5 years to give you a good idea of how well the company has been doing and how stable it is.
Here is a sample of profit and loss statement and how you can find Revenue, Cost and Profit: