Reading a company’s financials before you buy

Every Finlaunch product page shows key statistics and three years of financials where available. Five minutes with those numbers is the best defence against overpaying.

Start with the P&L

• Revenue growth. Is the business growing, and is growth speeding up or slowing down? One great year is less convincing than three steady ones.
• EBITDA margin. Operating profitability before interest, tax and depreciation. Rising margins as revenue grows is a good sign of operating leverage.
• PAT margin. What is left for shareholders. Loss-making companies can still be good investments, but you are then paying for future profits.

Then the balance sheet

• Net worth. Assets minus liabilities. Divide by shares outstanding to get book value per share.
• Debt and cash. A company with more cash than debt can weather a bad year; a heavily indebted one may need to raise money at a lower valuation.

And cash flow

• Cash from operations should broadly track profit over time. Profit without cash is a warning sign.
• Capex shows how much is being reinvested. Free cash flow is roughly the difference.

The ratios on the page

• P/E (price to earnings). Price divided by earnings per share. We show "n/a" when earnings are zero or negative, because a P/E is not meaningful then.
• P/B (price to book). Price divided by book value per share. Asset-heavy businesses usually trade on lower P/B than software businesses.
• Market cap. Price multiplied by shares outstanding. Compare it with listed peers of similar size and growth.

Questions to ask

1. How does the P/E compare with listed companies in the same sector?
2. Are the latest numbers audited? Unaudited figures are marked on the page.
3. What does the shareholding pattern tell you? Strong institutional ownership can be reassuring.

Numbers never tell the whole story, but they are the right place to start.