EN Down
Hi, user_no_name
Live Chat
Businessman in an office sitting down doing an ok sign while holding a paper with bar graphs


Investing in stocks requires researching a company thoroughly to determine whether it is a sound investment. One of the most important things potential investors look at is the company's financial performance.

In this article, we will discuss financial performance and why it matters when picking stocks. You will learn to analyze financial statements and identify warning signals for poor financial performance.


What is Financial Performance?

A company's financial performance quantitatively measures its financial health and success. Strong financials indicate a company efficiently uses capital to produce rising profits and expand shareholder value.

Important financial performance indicators include:

Revenue growth shows how successful a company is at increasing sales and growing its customer base. Steady, high revenue growth suggests a company is gaining market share and product demand.

Profit margins gauge a company's efficiency in generating income from sales. High margins mean the business produces goods or services at low cost.

Earnings per share (EPS) demonstrate overall profitability on a per-share basis. Rising EPS over time indicates improved profitability and the ability to provide shareholder returns.

Return on equity measures the profit created from shareholder equity. A high ROE means management is efficiently leveraging capital to drive returns.


Check this article about: What are Financial Instruments?


How to Check Financial Performance


Two people discussing a summary report filled with various charts


Company financials are public information filed quarterly and annually with the Securities and Exchange Commission (SEC). Financial performance can be evaluated by looking at these three statements: Income Statement, Balance Sheet, and Cash Flow Statement.

The documents provide data on revenue, expenses, profits, assets, debts, cash flow, and more. Here are steps to check financial performance:

  1. Locate company filings - Use the SEC EDGAR database to find official filings. Company investor sites also publish financial reports. Look for 10-K annual and 10-Q quarterly reports.
  2. Study the income statement - This shows the company's profitability. Look for growing revenue and net income over time. Compare key line items to industry peers. Calculate margins and EPS.
  3. Examine the balance sheet - Review assets, liabilities, and shareholder equity. Check the debt-to-equity ratio. Look for signs of improving financial health over time.
  4. Check cash flow statement - This shows how cash moves through the business. Look for strong operating cash flow that covers capital expenditures and investments.
  5. Analyze key ratios - Compute ratios like ROE, profit margins, P/E, current ratio, and debt-to-equity. Compare to past performance, peers, and industry averages.
  6. Read management commentary - Management will analyze earnings calls and SEC filings performance. Note their strategic priorities and outlook.

Together, these steps will provide comprehensive insight into a company's financial position and performance. Focus on trends over the past 5-10 years rather than just the latest quarter.


Give this article a read: How to Evaluate an IPO


Comparing Performance to Peers

Checking financial performance in isolation has limits. For fuller context, compare metrics and ratios to industry peers. This relative analysis demonstrates if a company is an industry leader or laggard.

Peer Benchmarking in 8 Strategic Steps

  1. Use a stock screener to generate a peer group within the same subsector. Choose 3-5 direct competitors.
  2. Pull the peer group's income statements and balance sheets over five years.
  3. Calculate growth rates and margins for each company's revenue, EPS, net income, ROE, and other key metrics.
  4. Make a table to compare financial performance metrics across the peer group easily.
  5. Note companies that sustainably lead peers on revenue growth, margins, EPS growth, and ROE.
  6. Look for improving metrics over time. Favour companies with accelerating performance.
  7. Compute P/E, debt-to-equity, current ratio, and dividend payout for each company.
  8. Note outliers with high or low ratios relative to peers. This may signal undervaluation or overvaluation.

Comparison with direct peers provides essential context on strengths and weaknesses. Stocks leading their peer group demonstrate competitive advantages translating to financial outperformance.


Find insights in this article: Evaluating ASOS's Financial Performance


Warning Signs of Poor Financial Performance

Specific financial outcomes should raise investors' concerns and require further scrutiny of potential red flags:

Revenue Declining Over the Past 1-2 Years

If the company's revenue has been consistently decreasing over the past 1-2 years, this could indicate a variety of issues, such as a decrease in customer demand, losing out to competitors in the market, or ineffective management strategies.

EPS Declining or Volatile


A document packed with multiple numerical values, a calculator, and a pen


When a company's earnings per share (EPS) are declining or volatile, the business's profitability is unpredictable and inconsistent. This can cause concern among investors, who generally prefer to see a consistent pattern of earnings growth.

In contrast, sporadic EPS can be seen as a sign of irregular and unstable earnings, making it difficult for investors to assess the company's overall financial health and make informed investment decisions.

ROE below industry average

When a company's Return on Equity (ROE) falls below the industry average, it may indicate it is not utilizing its capital efficiently and profitably. This could suggest that the company needs to catch up to its competitors and reevaluate its strategies and investment decisions to improve its financial performance.

High and rising debt-to-equity ratio

A high and increasing debt-to-equity ratio can be concerning as it indicates that a company or an individual relies heavily on borrowed funds to finance their operations or personal expenses.

This can lead to financial instability and increase the risk of default on debt payments, putting the borrower in a vulnerable position. Maintaining a healthy debt-to-equity ratio is crucial to ensure a sustainable financial future.

One or two warning signs don't necessarily make a stock a bad bet. But investors should dig deeper when financials flash caution signals.


Gain knowledge by reading through this informative article: 10 Essential Tips to Trade Stocks


Closing Thoughts

Before investing your hard-earned money in any stock, thoroughly analyzing the company's financial health and performance is crucial. As this article outlines, investors should carefully study financial statements, calculate ratios, compare to industry peers, and watch for red flags.

Checking the fundamentals will help identify well-managed, financially sound companies poised for future growth.

With vigilance and rigorous research, traders can learn to invest wisely in stocks that align with their financial goals and risk tolerance. The effort put into evaluating financial performance will pay down the road.


Learn and trade with The ultimate trading community!

Start Trading Now


“When considering “CFDs” for trading and price predictions, remember that trading CFDs involves a significant risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”

Related Education Articles

How to trade on the commodity of crude oil

Tuesday, 16 April 2024


How Do You Trade in Crude Oil?

Gold Standard

Monday, 15 April 2024


The Gold Standard: A Historical and Its Modern Implications

How To Apply Proper Research On Stocks

Monday, 15 April 2024


How to apply proper research on Stocks

How to open a free demo account

Wednesday, 10 April 2024


How to open a free demo account

Live Chat