There are several key financial figures that you need to know when looking at the financial state of a company and terms you should know, in general, if you’re interested in business. Let’s take a look at some of the main key financial figures.
Sales – For most companies, this is pivotal to their success. This is what a company sells. Some companies sell one core product, although increasingly these days that’s rare. It’s so important because it’s related to revenue, the next term on our list.
Revenue – This is the income of a company, most of which will come from sales. Other revenue may come from sponsorship, for example.
Gross Income – This is a company’s income from all sources before expenses are taken away. This can help to determine what taxes a company needs to pay.
Gross Profit – This is the amount of money a company makes after costs related to making and selling its products have been taken away.
Net Profit – This is the amount of money a company makes after costs related to its operation, and other charges such as interest and taxes have been taken away.
Debt-to-equity ratio (D/E) – debt-to-equity ratio is an important key financial figure that will tell you how large debt the company has in relation to the equity. It tells you whether the company uses the share holders money or borrowed money to finance their operations. A high D/E can be a good or a bad thing depending on your investment profile. A higher D/E ratio allows the company to deliver a higher return on equity to the share holders but it also but the company at higher risk if it encounter hard times. I recommend that you visit this site and read about comporate credit if you want to learn more about how debt affect a company. Use Google translate to read it English. The original text is in Norwegian. I have sent an email an asked if i am allowed to publish an English version of the relevant text here but i have not heard back yet.
Cash Flow – The measurement of cash flowing into and out of a company. This can be a good indicator of a company’s financial health. If there is a positive cash outflow, i.e. more cash coming into a company than going out over a given period, then this is usually seen as a sign of good financial health.
Return On Equity And On Capital Employed – This measures the probability of a company being able to make a profit from its shareholders’ investments. As a ratio, it’s the amount of net income that has been generated in relation to the equity of the shareholders of the company.
Assets – This is everything the company owns. It could be cash, or something that can be converted into cash by selling it, for example, property, inventory, vehicles or equipment. How quickly these assets can be converted into cash is determined by their liquidity. If a company needs to sell off their assets quickly, it may be to avoid the liquidation or winding-up of the company.
Liability – An amount of cash owed by a company. If you owe money to someone else, you are a debtor; if they owe money to you, they are a debtor.
Net Assets – This is the total assets minus the total liabilities of a company.
Overheads – The operating costs of the company. This can include the rental cost of an office, employee salaries and administrative and utility costs.
The Profit Margin – This is seen as a measure of a company’s profitability. It is expressed as a percentage and is essentially how much money a company makes after all the costs have been taken away.
The Contribution Margin – This is a way of being able to work out how profitable the products of a company are. It can be worked out by taking away a company’s variable costs from their total sales revenue.