Revenue, profit and debt – understanding the relevance of each when investing in shares

When looking at companies to invest in on a sharemarket like the ASX in Australia, it is important to understand the relevancy of revenue, debt and profit. These three financial metrics can provide valuable insight into a company’s financial health and potential for growth.

Revenue is the amount of money a company brings in from its sales or services. It is a key indicator of a company’s overall performance and can indicate whether or not a company is growing or shrinking. A company with a consistently high revenue may be a good investment opportunity, as it suggests the company is performing well and has a strong customer base but assessing additional financial metrics will provide additional insight into the quality or cost of obtaining the revenue.?

Profit, also known as net income, is the amount of money a company earns after all expenses have been paid, including tax. It is a key indicator of a company’s profitability and can indicate whether or not a company is generating a return for its shareholders. A company with a consistently high profit may be a good investment opportunity, as it suggests the company is performing well and has a strong business model. Some companies may be profitable before tax (gross) but become unprofitable after tax (net).?

Debt is the amount of money a company owes to its creditors. A high level of debt can be a red flag for investors, as it suggests that the company may be struggling financially. However, it’s important to note that some level of debt is normal for companies and can be used to finance growth. However, when increases in debt outgrow increases in revenue, this can be a red flag for investors as it may signify a company needed to seek new capital from investors in order to get debt repayments under control.?

When evaluating a company for potential investment, it is important to consider all three of these financial metrics. A company with high revenue and profit but high debt may still be a good investment opportunity, depending on the company’s overall financial health and potential for growth.?

Where can I find an ASX-listed company’s revenue, debt and profit?

If an investor is looking to buy shares in a company, it is important to look at the company’s financial statements which are publicly available for all listed companies. These statements are available through the company’s announcements where audited financial statements are published every six months as Half Year and Full Year results. The Full Year results can also be found in the company’s Annual Report which must be made available to shareholders each financial year.?

Additional commentary can be sought from the company by talking to management, or attending the company’s Annual General Meeting where company representatives are required to provide investors with an opportunity to ask questions.?

On the ASX, growth companies which may not be profitable yet, but are working towards it, are required to release quarterly cash flow statements. These statements only include cash inflows and outflows and should not be confused with revenue and profit.?

The statements will also include information on how much cash the company has available to them, to give investors an indication on the sustainability of the company based on its current cash requirements.?

In conclusion, understanding the relevance of revenue, debt and profit when looking at companies to invest in is crucial to make informed decisions. These financial metrics can provide valuable insight into a company’s financial health and potential for growth. Therefore, it is necessary to conduct a thorough analysis of the company’s overall performance and potential before making any investment decisions.