What financial metrics do you use to evaluate performance?

Financial metrics are crucial for evaluating performance. Key indicators include revenue growth, which reflects the company's ability to increase sales over time, and profitability metrics such as net profit margin, indicating how efficiently a company converts revenue into profit. Return on investment measures the profitability of an investment relative to its cost. Liquidity ratios, such as the current ratio, assess a company's ability to meet short-term obligations. Additionally, debt metrics like the debt-to-equity ratio provide insights into a company's financial leverage and risk. These metrics collectively offer a comprehensive view of a company's financial health, aiding investors, analysts, and management in making proper decisions

When you analyze your numbers, don't forget to look at percentages and margins, and not just dollars $$'s. For example, set benchmarks for various revenue streams. To measure growth, compare various periods like Month-to-Date this year versus last year, and Year-to-Date this year versus last year.

Revenue and Revenue Growth are key financial metrics for assessing a company's performance: Revenue: This is the total income generated from the sale of goods or services and is indicative of the company's size and market reach. It's calculated by multiplying the quantity of products or services sold by their selling price. Revenue Growth: This metric measures the rate at which a company's revenue is increasing over a certain period, typically indicating the company's market demand and expansion pace. It's expressed as a percentage and calculated by comparing the revenue between two periods, showing the momentum and growth trajectory of the business.

Net profit can be misleading because it's an accounting metric, not necessarily how much cash is available to owners. For example, net profit doesn't take into consideration your principal payments on debits. Therefore, it's important to set a net profit margin percentage that is inclusive of the owner's total compensation, taxes, and debt payments.

Profit: The financial gain after subtracting expenses from revenue. Types: 1) Gross Profit: Revenue minus cost of goods sold (COGS). 2) Operating Profit: Earnings from core business minus operating expenses. Net Profit: Total earnings after subtracting all expenses, including taxes and interest. Importance: Indicates the overall financial health and sustainability of a company. Margin: The percentage difference between the selling price and the cost of production. Types: 1) Gross Margin: Gross profit as a percentage of revenue. 2) Operating Margin: Operating profit as a percentage of revenue. 3) Net Profit Margin: Net profit as a percentage of revenue. Importance: Reflects efficiency and profitability;

One easy way to measure your cash flow is to set a goal for equity on your balance sheet. When you run your balance sheet every month, did your equity increase?

Cash flow represents the net amount of cash moving in and out of a business, crucial for solvency, investment, and shareholder returns. It includes operating, investing, and financing flows, with free cash flow as a key profitability indicator. Liquidity, on the other hand, measures a company's ability to cover short-term obligations with its most liquid assets. Key metrics include the current ratio and quick ratio, reflecting creditworthiness and financial flexibility. While cash flow focuses on generating and using cash over time, liquidity emphasizes immediate cash availability. Together, they assess a firm's financial health and ability to sustain and grow operations.

The key ratio's I recommend are as follows: Balance Sheet Ratios: Current Ratio, A/R Turnover Ratio, Inventory Turnover Ratio, and Debt to Equity Ratio. The Key P&L Ratios are Gross Profit Margin, Net Profit Margin and 3-5 of your top expenses.

I tend to look at some working capital ratios such as debtor days, stock days and creditor days to help understand the cash flows and areas for potential improvement for a business, particularly for a small business who may not have debt but wants their cash to be working hard for them. These look at the balance sheet figures for debtors / stock / creditors versus the sales (debtors) or cost of sales (stock / creditors). You can then look at trends and compare against the credit terms you offer / are given and find opportunities to improve.

Earnings Per Share (EPS): EPS is calculated by dividing the company's net income by its number of outstanding shares. It's a measure of a company's profitability on a per-share basis and is used often in valuing companies. Price-to-Earnings (P/E) Ratio: This ratio compares a company's stock price to its EPS. A high P/E ratio could mean a company's stock is overvalued, or investors are expecting high growth rates in the future. Debt-to-Equity Ratio: This ratio compares a company's total debt to its shareholders' equity. It's a measure of the company's financial leverage and risk.

Apart from the financial metrics, it is important to consider the qualitative factors surrounding the performance through financial commentaries. This helps to align the actual performance with the underlying factors that contributed to it. There is a possibility that the good financial performance is just an outlier based on a one-off event e.g. many telcos and banks experienced profit spike during covid-19 because people depended on them more for data/airtime while they spent less on overheads. The years following covid did not show the same level of financial performance so comparing pre and post covid without looking at the non-financial indices can be misleading.