What Financial Metrics Do Potential Investors Want to See?

If you’re at the stage of your business where you’re starting to look for investors, you need to have a solid understanding of your business performance. Potential investors will look at several financial metrics to evaluate the health and performance of your business before investing in it.

While the specific metrics considered may vary depending on the industry and investment goals, here are some common financial metrics that investors often look at:

1. Revenue: Investors examine the company’s revenue growth over time to assess its ability to generate sales and drive top-line growth.
2. Gross Margin: The gross margin indicates the percentage of revenue remaining after deducting the cost of goods sold (COGS). A higher gross margin suggests better pricing power and cost management.
3. Operating Margin: This metric represents the profitability of a company’s core operations by measuring the percentage of revenue remaining after deducting operating expenses. It shows how efficiently a company is managing its costs.
4. Net Profit Margin: The net profit margin reveals the percentage of revenue that translates into net income after accounting for all expenses, including taxes and interest. A higher net profit margin indicates stronger profitability.
5. Return on Investment (ROI): Investors assess the return on investment to understand how effectively a company generates profits relative to its invested capital. ROI is typically calculated by dividing net profit by the total investment.
6. Return on Equity (ROE): ROE measures the profitability of a company relative to its shareholders’ equity. It indicates how well a company is utilizing shareholder investments to generate profits.
7. Earnings per Share (EPS): EPS calculates the portion of a company’s profit allocated to each outstanding share of common stock. Investors consider EPS as an indicator of a company’s profitability on a per-share basis.
8. Cash Flow: Investors analyze a company’s cash flow statement to understand its ability to generate and manage cash. They examine operating cash flow, investing cash flow, and financing cash flow to assess the company’s financial stability.
9. Debt-to-Equity Ratio: This ratio compares a company’s total debt to its shareholders’ equity, reflecting its leverage or indebtedness. Lower debt-to-equity ratios are generally preferable, indicating lower financial risk.
10. Current Ratio: The current ratio assesses a company’s short-term liquidity by comparing its current assets to its current liabilities. A higher current ratio suggests better ability to meet short-term obligations.
11. Quick Ratio: The quick ratio, also known as the acid-test ratio, is a more stringent measure of liquidity. It excludes inventory from current assets, focusing on the company’s ability to cover immediate liabilities with its most liquid assets.
12. Customer Acquisition Cost (CAC): CAC represents the average cost incurred to acquire a new customer. Investors analyze this metric to evaluate a company’s efficiency in acquiring and retaining customers.
13. Churn Rate: Churn rate measures the rate at which customers discontinue their relationship with a company. A lower churn rate indicates higher customer retention and stability.
14. Sales Growth: Investors examine the company’s historical and projected sales growth rates to assess its market position and potential for future expansion.
15. EBITA: The term “EBITA” stands for Earnings Before Interest, Taxes, and Amortization. It is a financial metric that measures a company’s operating performance by excluding interest expenses, income taxes, and amortization expenses from its earnings. EBITA is calculated by subtracting the cost of goods sold (COGS) and operating expenses (excluding interest, taxes, and amortization) from the revenue.EBITA is often used to evaluate a company’s profitability and operational efficiency without the influence of non-operational factors such as financing costs and accounting practices. It provides a clearer picture of a company’s core business operations by focusing solely on the earnings generated from its day-to-day activities.EBITA is different from EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as it excludes depreciation expenses, which account for the wear and tear of tangible assets. Both EBITA and EBITDA are commonly used in financial analysis to compare the performance of different companies within an industry or to assess the performance of a single company over time.

These financial metrics provide investors with insights into a company’s profitability, efficiency, financial position, and growth potential. However, this isn’t the only thing investors care about. There are other industry-specific metrics and qualitative factors they’ll evaluate too – like your vision, your goals, your background, and yes, your personality too. Despite what Mr. Wonderful may imply, it’s not only about the money.