Financial statements present a wealth of information about a company's business operations, but among them are key indicators that investors, banks, and lenders always want to see before deciding to invest or lend to the company. Financial statements are like a detailed report on the company's financial "health," showing how well your business is performing.
Net profit – The first indicator investors want to read from financial statements.
Financial statements will present a company's net profit in the Income Statement. Net profit (also known as net earnings, net income, or net profit) is the profit remaining after deducting all expenses, including corporate income tax, from total revenue.
Profitability, even if inconsistent, can sometimes indicate poor business performance, while initial losses during expansion or early stages of operation can be a positive sign, suggesting your business is on the right track to future profitability. Therefore, this is one of the first indicators that readers of financial reports pay attention to.
Revenue from sales and services
When a business needs to raise capital, the presentations about your products or services may be excellent and appealing, but the real question investors care about is whether people are willing to spend money on or use them? This is reflected in sales revenue and service delivery figures. These figures generally show an upward or downward trend in the products or services the business offers.
To attract investors, businesses often prepare documentation tracking their sales fluctuations over at least three years. This documentation details the reasons for the fluctuations and the changes observed over different periods.
Gross profit margin
Gross profit margin is an indicator used to evaluate a company's business model and financial health, calculated by dividing gross profit by revenue. It allows analysts to compare business models against a quantifiable metric. Investors want to see your company's profit margin both overall and in detail for each individual product or service.
Businesses with higher gross profit margins than others demonstrate greater profitability and more effective cost control compared to their competitors. Furthermore, if a business's profit margin is higher than the industry average, it indicates excellent cost control, attracting investors and lenders. Higher profit margins generally lead to better returns for investors later on.
Cash flow
The cash flow statement is understood as a summary report of the movement of cash inflows and outflows (i.e., receipts and expenses) of a business. Maintaining a positive cash flow statement does not fully reflect the company's ability to pay its debts and does not satisfy readers of financial statements. The effectiveness and efficiency of a company's cash flow require careful examination of the detailed cash flow information presented within the statement; this is what readers of financial statements are interested in understanding.
Debts
Debt is frightening to investors for two reasons. First, simply put, if you cease operations or go bankrupt, creditors will get their money back before shareholders or investors. Second, and more importantly, debt payments will drain your business's cash reserves. Large debt payments, especially large short-term liabilities, significantly impact your ability to cover other expenses and cope with unexpected situations. Therefore, the debt ratio is also a concern for investors when reviewing financial statements to assess a company's business performance.
Accounts receivable turnover ratio
Accounts receivable turnover ratio This is an accounting calculation used to assess a company's efficiency in collecting accounts receivable and debts from customers. The ratio indicates how effectively a company extends credit to its customers and its ability to recover short-term debts.
This tells investors two important things. First, what is your business plan and what are you willing to do to ensure that you get the money? An investor looking for profit doesn't want to work with a business that isn't good at tracking customer payments. Second, how stable are your customers? Slow revenue growth combined with a high bad debt ratio suggests that many of your customers are not doing well or that your business is experiencing high capital tie-ups and lacks proper management. This adds risk to your business model, and investors and lenders will find it unattractive, forcing them to look for compensation in other indicators if they want to continue researching and considering investing.
In addition to the key indicators mentioned above, readers of financial reports, such as investors and lenders, also read and understand much other information before making their decisions. Within the scope of this article, EXPERTIS hopes to help businesses understand the importance of financial reports and how to present the information within them before sending them to readers. For any further questions or advice, please contact our Consulting Department for prompt assistance.