As everyone says, a company’s most valuable assets are its people, so how can you tell how good its people are? One way is to analyse the Financial Statements to assess the company’s financial performance over time.
Nowadays, it’s generally accepted that a company doesn’t exist to make money – that’s the outcome – but it’s the outcome of the people’s performance, which is managed by managers and directed by directors. Other things equal, well-managed and directed companies with good people do better financially over time than others. If there are problems these people fix them as quickly as possible.
So, what should you look at in the Financial Statements to assess the managers’ and directors’ performance? Profit springs readily to mind, including Gross Profit, EBITDA (Earnings before Interest, Tax, Depreciation & Amortisation), EBIT (Earnings Before Interest & Tax) and Net Profit After Tax.
Returns are important too, such as ROI (Return on Investment), measuring returns on both debt and equity capital combined, ROE (Return on Equity) and ROA (Return on Assets).
And Cash Flow is crucial, such as Operating Cash Flow and, especially, Free Cash Flow.
So, look at the Financial Statements to assess how good a company’s managers and directors are. It’s all there.