Smart investors always evaluate a company’s financial health before investing their money. After all, they need to be sure whether they’ll get good returns on their investment or not. To determine the investment eligibility of a business, investors go through some important metrics of the company by looking at the financial statements that gives an insight into its past performance, present condition, and future plans.
While every investor has their own set of criteria before lending money, here’s a list of four key metrics investors look for in the financial statements. So, if you are looking forward to raising capital from the market for your business growth plans, make sure you work on these metrics.
The most important thing for an investor to know about a company is whether it is making a profit or not. If the company is incurring losses, then they refrain from investing whereas if it making a profit, then they don’t hesitate in investing money. Investors commonly look at the profitability history of the company to asses the risks; therefore, net profit is a crucial aspect that is considered by the investors. It is calculated by subtracting the total business expenses from the revenue of the company. Get a clear understanding of your net profit in the income statement as it is major investment criteria.
Revenue growth indicates the growth and expansion potential of a company. It is calculated by subtracting the current period’s revenue by the revenue of the same period in the previous year. It can be an annual revenue or quarter revenue. Investors consider it an important criterion as it gives an idea of how much the company’s sales are increasing over time. If there is no scope of growth or expansion of the company, an investor likely won’t be interested in putting money into that business.
When it comes to business operations, cash is king. The company’s cash flow reflects its liquidity and the amount of money it has to pay its debt. Investors keenly observe the cash flow statement of the business because it shows how much actual cash the company has generated and whether it can deal with unexpected cash crunches or not. If the business has enough cash left after meeting all expenses, then it indicates the sustainable operation of the company. Focus on the stability of your cash flow statement to win over your potential investors.
Gross profit margin is the ratio of gross profit to revenue in which gross profit is the profit made after deducting the costs incurred in producing and selling the products (excluding other expenses). It is an important ratio for investors as it indicates the efficiency of a company in the production phase. It gives an understanding of the pricing power of a firm. If a company has a higher gross profit margin, it can set a high price for its goods and still retain the customers. It is a pivotal investment criterion because if the company has a high gross profit margin, it will be able to pay all the expenses and still maintain a good profit at the end which reduces the risk for the investors.
The above-mentioned metrics play a vital role in impressing the potential investors. They give an insight into the financial condition of the company and can make or break the chances of investment in your business. So, make sure that you improve them and convince the investors to put their money into your firm.
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