How to Evaluate a Company's Performance
Measuring a company’s performance allows you to find the general perception in the market and what the company is worth. Shareholders measure a company's performance to find out how their shares will perform. Similarly, investors will evaluate the company's performance to find out whether they should risk their money.
Calculate the ratios. There are quite a few ratios that determine in financial terms how a company is performing. The most commonly used ratio is earnings per share and diluted earnings per share. Earnings per share are the ratio of the net income generated by the company to the weighted average of the total number of shares. Another ratio that gives a good measure of how the company is performing is the price-earnings ratio. This ratio shows how the market perceives the company and shows the company's growth potential.
Two other statistics that are important are sales per revenue and fixed asset turnover. The ratio signifies how well the company is converting fixed assets, including plant, property and equipment, into net revenue. The sales per employee ratio, a ratio of the total revenue per workforce, also shows how well the company is doing.
Calculate the leverage of the company and the profitability of the company. The total debt to equity and debt to assets will signify the overall assets of the company, what the liabilities are, and the company’s ability to pay off the debt. Return on equity and return on assets are commonly used numbers that show the same thing. The higher the returns, the better the performance of the company. This also tells you that the company is more profitable.
Comparison with the sector. For a company that performs well, the absolute figures are not as important as the relative figures. The numbers might be decent, but if other companies in the same sector are doing much better, then the company is not doing too well. Similarly, if the sector is not doing too well and this company has made moderate profit, it means that it is doing very well. Therefore, to evaluate the success and performance of a company, you have to evaluate the industry and the markets.
Judge the overall perspective of the company and growth potential. This is very important, as the long-term plans and future of the company decide how the company will do. Profits and revenue will also depend on the growth of the company, and a large part of the company’s performance should be evaluated in terms of how well it is positioned for the future. Is the company preparing to roll out a new product line? Did it just fire its CEO? Take into consideration its operation strategy.