Analyzing Financial Statements

Companies and their CEOs obsess over Profitability KPIs. But measuring Profit doesn’t drive Profit. Here’s the problem: Most leaders don't track the right metrics. They don't understand why they matter. They ignore stakeholder perspectives. If you don’t know and act on what the numbers are telling you - you’re not managing profitability. You’re just collecting data. Let’s fix that. Here are 16 Profitability KPIs every CEO and CFO needs to master—and how to extract the insights that drive smarter decisions: ■ Efficiency and Margins 1// Gross Profit Margin Ratio ↳ Why it matters: high margins signal strong pricing power or cost efficiency. 2// Contribution Margin ↳ Why it matters: critical for setting prices, understanding break-even points, and ensuring your products are profitable. 3// Operating Profit Margin Ratio ↳ Why it matters: reveals how well you’re managing core expenses 4// Net Profit Margin Ratio ↳ Why it matters: measures whether your business model scales profitably. 5// Return on Assets (ROA) ↳ Why it matters: shows how effectively your assets generate profit. 6// Return on Equity (ROE) ↳ Why it matters: measures investor return on their investment. 7// Return on Investment (ROI) ↳ Why it matters: helps prioritize high-ROI projects and avoid initiatives with weak returns. 8// Return on Capital Employed (ROCE) ↳ Why it matters: indicator for how well your business uses all available capital to drive profits. ■ Earnings and Market Performance 9// Earnings per Share (EPS) ↳ Why it matters: tells shareholders how much value each share represents. 10// Price-to-Earnings (P/E) Ratio ↳ Why it matters: gauges whether your stock is fairly priced based on earnings. 11// Dividend Yield Ratio ↳ Why it matters: income-focused investors seeking regular returns. 12// Dividend Payout Ratio ↳ Why it matters: balances reinvesting for growth with rewarding shareholders. ■ Cash Flow and Productivity 13// Operating Cash Flow Margin ↳ Why it matters: shows how well you convert revenue into cash. 14// Profit Per Employee ↳ Why it matters: tracks workforce productivity—a crucial metric for scaling efficiently. ■ Advanced Profitability Metrics 15// Economic Value Added (EVA) ↳ Why it matters: measures value above the company's cost of capital. 16// Break-even Revenue ↳ Why it matters: knowing your break-even helps you set realistic sales targets and avoid losses. The takeaway? Stop chasing KPIs for the sake of it. Start using them to lead smarter and grow faster. Want to join the 1% of CEOs who lead with financial intelligence? ▷▷▷ Join me tomorrow for a free webinar for CEOs, VPs, Managers, and leaders and start making 100% better business decisions: https://bit.ly/ceojan18 ▷▷▷ Transform your financial acumen in 6 weeks - live program, spots are limited, starts January 29: https://bit.ly/3ZCI0kr ♻️ Like, Comment, Repost if this was helpful. And follow Oana Labes, MBA, CPA for more

20 profit ratios that will transform how you analyze any business The numbers never lie, but you need to know how to read them 📊 Let me break down the most critical financial metrics you'll ever need 👇 ➡️ CORE PROFITABILITY RATIOS These ratios tell you exactly how well a business turns revenue into profit: 1️⃣ Gross Profit Margin The foundation of business profitability - what's left after direct costs. When this number drops, it's often the first sign of pricing pressure or rising material costs. 2️⃣ Operating Profit Margin This strips away the noise and shows pure operational performance. Want to know if a business is actually good at what it does? This ratio tells you. 3️⃣ Net Profit Margin The bottom line that matters. Shows exactly what you're left with after everything's paid. 4️⃣ EBITDA Margin Strips out accounting decisions to show true operational performance. Critical for comparing companies with different capital structures. ➡️ RETURN RATIOS - THE REAL PERFORMANCE INDICATORS 5️⃣ Return on Equity Your shareholders' report card. This number can make investors either jump for joy or run for the hills. 6️⃣ Return on Assets  Shows how well a company uses its assets to generate profits. This ratio becomes crucial when comparing asset-heavy industries. 7️⃣ Return on Capital Employed The heavyweight champion of performance metrics. It's like ROE and ROA had a super-smart baby. ➡️ EFFICIENCY RATIOS Now we're getting to the good stuff… 8️⃣ Asset Turnover Reveals how efficiently a company generates sales from its assets. Higher ratios usually mean better operational efficiency. Think of this as your business's speedometer. The faster it spins, the more efficient you are. 9️⃣ Inventory Turnover Critical for retail and manufacturing - shows how quickly inventory moves. Lower numbers might signal obsolete stock or poor purchasing decisions. 🔟 Accounts Receivable Turnover Measures how fast a company collects what it's owed. This ratio directly impacts cash flow - the lifeblood of any business. ➡️ MARKET PERSPECTIVE RATIOS 1️⃣1️⃣ P/E Ratio The market's expectation of growth packed into one number. But remember - high P/E isn't always better. It's about whether the company can meet those expectations. 1️⃣2️⃣ EPS Growth Shows the rate of earnings growth per share. This becomes powerful when tracked over multiple quarters. === Three principles I always follow when using these ratios: 1. Compare within industries - ratios mean different things in different sectors 2. Look for trends - a single number means nothing without context 3. Use multiple ratios - they work together to tell the complete story Which ratio do you find most valuable in your analysis? Share your thoughts in the comments below 👇

What makes a strong credit assessment? Imagine sitting across the table from a business owner seeking a loan to grow their operations. You’re reviewing their financials, trying to answer the big question: Can they repay this loan comfortably? This is where credit metrics and lending ratios become your compass. As a commercial lender, these numbers tell the real story behind a company’s financial health. For instance, EBITDA margin and net margin give insights into profitability. Cash flow projections highlight liquidity, and conditional formatting in forecasts can flag risks like negative cash balances before they spiral out of control. Take the Debt Service Coverage Ratio (DSCR) it’s not just about how much money they’re making but whether their income comfortably covers debt payments. Or consider the current ratio a quick glance at their ability to handle short-term obligations. Add in leverage metrics like liabilities-to-equity and debt-to-EBITDA, and you’ve got a comprehensive picture of financial stability. Here’s why it matters: According to a recent study by S&P Global, businesses with a DSCR below 1.2 are five times more likely to default compared to those above that threshold. Similarly, Cash flow analysis has been shown to reduce lending risk by up to 30%, according to McKinsey & Co. These aren’t just numbers they’re lifelines for risk management. As lenders, understanding these metrics means we’re not just handing out loans; we’re supporting sustainable business growth. How do you approach credit metrics in your role? Do you prioritize specific ratios, or do you take a holistic approach? Let’s share insights and learn from each other in the comments. #Finance #CreditMetrics #LendingRatios #RiskManagement

I have reviewed the financial statements of over a thousand SaaS companies, and here are my red flags. 1.       A “mix” of cash and accrual accounting 2.       No bank reconciliations 3.       Inability to generate a connected income statement, balance sheet, and cash flow 4.       A disconnected MRR report The first point is obvious but nuanced. Cash accounting in SaaS makes revenue data noisy and calculating metrics difficult, but it’s manageable. If managers and investors have good monthly data to compare year over year, they can get what they need from cash accounting. However, companies using a “mix” of cash and accrual accounting are problematic. Mixing and matching, particularly for revenue, creates too much uncertainty. I recently had a client who deferred revenue on some deals but not others. They received three term sheets for new capital, but all the deals fell away as diligence became bogged down in trying to understand the financials. The second item, bank reconciliations, validates the integrity of the financial statements. Cash is king, and the bank knows how much you have. All your debits and credits eventually need to be tied to the amounts in your bank accounts. That is the beauty of double-entry accounting. Investors and CEOs should ask to see bank reconciliations (even if they don’t know what they are looking at.) I had two portfolio companies fall behind on reconciling cash, and the results were disastrous. The financials were restated both times, and the investments were lost. The third item, generating a complete set of all three financial statements, is also a sign of financial competence that adds integrity to the numbers. Income statements, balance sheets, and cash flow statements all fit together to tell a complete story. Companies using ad-hoc accounting methods often can’t generate all three reports, and the accuracy of the financials suffers. The cash flow statement is the most under-used financial report in SaaS. For companies with pay-in-advance contracts, seasonality, or debt, cash-flow statements are an invaluable tool for understanding the business. The last item, a separate MRR report not integrated into the accounting system, is also a financial hygiene issue. Recurring revenue is on the income statement, and that number is tied to cash and validated. Managers and investors should use MRR on the income statement to make decisions, not the numbers on a disconnected spreadsheet. Tools and systems help support accurate and timely financial statements but also require experienced people. Some of the worst financial reporting I have ever seen came from Net Suite systems because the finance people did not know what they were doing. As you scale a SaaS business, you don’t need to add a lot of bodies to finance; it is a function that scales well if you have a few experienced people and the right tools to support them. Read more here: https://lnkd.in/g2F3qv9y

After 15 years of participating in board meetings in both public and private companies, here's my playbook for effective meetings. 1) Send the deck as a pre-read at least 3 days before the meeting and ask for questions in advance of the meeting. Pick 2 to 3 strategic items where you'd like the board's feedback and outline those in the email. 2) The first 30 minutes of the meeting is the CEO review, structured in a red, yellow, green format with just one or two slides. Keep it simple. Here's what's going well, here's what we are concerned about, and here's what we're doing about it. 3) Next up are the metrics that matter. Usually presented by the CEO/CFO and, for software companies, generally include ARR, GRR, NRR, NARR, Customer Value Metrics, and EPS/Burn. Show the quarter results, forecast for next quarter, and the year all relative to budget on 1 slide. 3) Next up is the functional overview. Again, 1 or 2 slides per function. Here's what's going well, here's what we are concerned about, and here's what we are doing about it. Ask the board if they have other portco's with similar concerns/problems, and if they have feedback on the "what we are doing about it" part. Use the board to help you. 4) Then have the strategic discussion about the pre-wired items. The board has a wide perview and can help the team see things from that broad perspective. 5) Wrap with a summary and rehash the feedback on the strategic items. 6) Break off for board business like stock option approvals, etc... 7) Detailed finance slides go in the appendix. But the high level overview is covered in the CFO functional section above. PS... The board meeting is not a QBR or functional operational review. PSS... If you have to create a bunch of net new slides and data for the board meeting and/or you have dry run pre meetings, it likely means that you don't execute against what's important baked into the operational rhythm of the business. PSSS... Don't read your slides (the board got a pre read) and don't treat the meeting like a report out--huge difference in value and effectiveness for everyone.

Figuring out how well your business is doing can seem hard, but it gets easier when you know how to look at a balance sheet. A balance sheet shows what your company owns and owes at a certain time. It's like a snapshot of your business's financial health. Here are simple Ways to Look at a Balance Sheet: [1] Horizontal Analysis: Compare financial data over multiple periods to identify trends and growth patterns. This approach helps in understanding how assets, liabilities, and equity are evolving over time. [2] Vertical Analysis: This technique involves taking each item on the balance sheet as a percentage of total assets or liabilities to understand the structure and composition of your finances better. [3] Ratio Analysis: Critical ratios like the current ratio, debt-to-equity ratio, and return on equity ratio offer insights into liquidity, financial leverage, and profitability. These ratios are instrumental in assessing the financial health and operational efficiency of your business. [4] Common Size Analysis: Convert each line item on the balance sheet into a percentage of total assets or total liabilities plus equity. This comparison allows for benchmarking against industry standards or competitors. [5] Benchmarking: Comparing your company's balance sheet with those of leading competitors or industry averages can highlight strengths and pinpoint areas for improvement. ▶️ Pros of Balance Sheet Analysis: -> Offers clear insights into the financial structure and health of your business. -> Empowers strategic decision-making based on financial stability and growth prospects. -> Identifies financial trends and potential red flags that warrant further investigation or action. ▶️ Cons of Balance Sheet Analysis: -> Thorough analysis requires time and diligence. -> For those unfamiliar with financial statements, balance sheet analysis can be daunting. -> A balance sheet is a snapshot at a specific point in time and may not reflect future potentials or risks accurately. Learning to read a balance sheet can give you valuable insights into your business's financial state. It's a straightforward tool that can help you make smart decisions for your business's future. How do you analyze the balance sheets? #balancesheet #financeandaccounting

Profit, not revenue, is the key to success. Here's a 5-step Margin Analysis framework to track profit vs revenue As a financial consultant, I've worked with businesses struggling with profitability due to a lack of in-depth margin analysis. Managing your margins can be a game-changer for your bottom line. I work with clients on shifting their mindset that margin analysis isn’t just a one-time strategy; it’s a continuous process. To help clients stay on top of their game, I put together a checklist of daily, monthly, and quarterly habits to be sure you’re always optimizing your margins. Daily Habits: 1) Review Sales and Cost Data: Do a quick check if daily sales are in line with your projections and monitor unusual changes in costs. 2) Track Key Performance Indicators (KPIs): Focus on daily KPIs such as gross margin percentage and average order value to identify issues. Monthly Habits: 1) Analyze Margin Trends: Compare your current month’s margins against previous months to spot trends or anomalies. 2) Update Financial Projections: Adjust forecasts based on actual performance and any market changes. 3) Review Profitability by Product/Service: Identify which products or services are underperforming and consider adjustments to pricing or cost structures. Quarterly Habits: 1) Conduct a Comprehensive Margin Analysis: Deep dive into your financial statements to assess the health of your margins. Look at (COGS), operating expenses, and net profit margins. 2) Reevaluate Pricing Strategies: Based on your margin analysis, adjust your pricing strategy to ensure optimal profitability. 3) Optimize Cost Structures: Review your cost management practices and look for opportunities for cost reductions or process improvements. Hope this simplifies the process, and helps to start building these habits. Also, I've attached a brief guide on How To Strategically Improve Profit Margins If you need help developing and executing a financial strategy DM me ___________________ Please share your thoughts in the comments Follow me, Beverly Davis for more finance insights

Here's how I prep for a leadership offsite with a $20M manufacturing company: Most consultants show up with fancy slides and generic frameworks. I show up with questions that make people uncomfortable. What I review: → Last 18 months of financial statements (not just the highlights) → Employee turnover by department and role → Customer complaint patterns and resolution times → Meeting notes from their last 3 leadership meetings → Actual production numbers vs. targets What I ignore: → Whatever consulting firm they hired last year → The industry "best practices" keeping them in a box → Their excuses for why things aren't working What I walk in ready to challenge: → Why their biggest customer is also their biggest risk → Which leader is the real bottleneck (hint: it's not who they think) → The sacred cow project that's bleeding money → Why their top performer might be destroying the team → Why we're spending 30% of revenue in Marketing (yes I've actually seen this before.) Here's the thing: They don't pay me to validate their assumptions. They pay me to find the problems they can't see. They pay me to ask the questions they won't ask. Most offsites are expensive team-building exercises. Mine are business autopsies. We dissect what's broken, why it's broken, and who's going to fix it. What would you add to the prep list? Founders, ops people: drop your must-do's before a strategy session. 👇

Confused about financial statements? Here’s why it’s a big problem.  Combining provisions and accruals is a common mistake, but it can cause serious damage to your financial reporting.  Stakeholders see confusing numbers, and as a result, decisions are delayed as trust erodes. Worse, auditors may flag errors, leading to fines.  Furthermore, it gets worse. Misstated financials scare investors and alarm creditors.  Meanwhile, internally, teams battle inaccurate cash flow and budgets. Your business deserves better than this confusion.  Here’s the fix: 1. Understand the Difference:  Provisions are for uncertain costs, while accruals are for definite obligations.    2. Use Separate Accounts:  Maintain distinct accounts for provisions and accruals.  3. Classify Correctly:  Identify if costs are likely (provisions) or known (accruals).  4. Record and Review:  Document assumptions, record separately, and update regularly.  5. Leverage Tools and Training:  Use accounting software and train your team for accurate handling.  Provisions show uncertain future costs, while accruals record exact liabilities. However, mixing them hides the truth and creates chaos. Therefore, by separating them, you ensure clear and accurate financial reports. Financial clarity isn’t just about numbers; it’s about trust and control. Separate provisions and accruals to take back control of your finances.  #provisions  #accrual  #finance