If you are short of time when looking for investments, you need to know what to focus on. When assessing a private or publicly traded company’s earnings report to determine its financial success, it’s essential to focus on key metrics that provide a comprehensive view of the company’s financial health and performance. Here are five critical metrics to consider and why they are important:

1. Revenue (Sales):

   • Why: Revenue is the lifeblood of a company. It reflects the total sales generated by the company during a specific period. Increasing revenue is a sign of growth and customer demand. Declining or stagnating revenue can be a red flag, indicating potential issues with the company’s products, services, or market conditions. This is actually one of the most interesting metrics when looking at start-ups (especially private ones that might not even have their first official earnings report)

2. Net Income (Profit):

   • Why: Net income represents the company’s profit after all expenses, including taxes, interest, and operating costs, have been deducted. Positive net income is a fundamental indicator of financial success, as it demonstrates the company’s ability to generate profits. Consistent, growing net income is a positive sign. Makes you think about the perpetual cost-cutting in large, ineffective and degrading corporations.

3. Earnings Per Share (EPS):

   • Why: EPS is calculated by dividing the net income by the number of outstanding shares. It indicates how much profit is attributed to each share of the company’s stock. A consistent or growing EPS suggests the company is creating value for its shareholders. It’s a vital metric for investors and a sign of financial strength. Since number 1&2 above are not that comparable figures, the EPS is actually a handy number to quickly compare two companies in the same sector (for instance Coca-cola va PepsiCo).

4. Gross Margin:

   • Why: Gross margin is the percentage of revenue that remains after subtracting the cost of goods sold (COGS). A healthy gross margin demonstrates the company’s ability to maintain profitability at the core of its operations. It’s an important metric for assessing a company’s competitive advantage and cost management.

5. Free Cash Flow (FCF):

   • Why: FCF measures the cash a company generates from its operations after accounting for capital expenditures (capex). Positive FCF means the company has the financial flexibility to reinvest in the business, pay down debt, return money to shareholders, or pursue strategic initiatives. It’s a critical metric for assessing a company’s liquidity and sustainability. For private companies, it should be number 1.

These five metrics provide a well-rounded view of a company’s financial success. They cover the company’s top-line performance (revenue), bottom-line profitability (net income and EPS), operational efficiency (gross margin), and ability to generate cash for growth and shareholder value (FCF). However, it’s important to note that these metrics should be analyzed in the context of the company’s industry, business model, and growth stage. Additionally, you may want to consider other factors like debt levels, return on equity, and industry-specific metrics when conducting a more in-depth analysis.

What metrics do you use?