The P/E ratio is used for valuing a company by calculating the company’s share price relative to the company’s per-share earnings. The PER is sometimes also referred to as the ‘earnings multiple’ or the ‘price multiple’.

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EBIT stands for ‘Earnings before Interest and Tax’; the figure essentially indicates a company’s profitability. It is calculated as a company’s revenue less its expenses, not including tax and interest.

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Liquid Ratio

Also known as the ‘cash reserve ration’, this is a bank regulation adhered to by most of the world’s banks. It means that there is a minimum amount of cash on hand that must be held physically by a commercial bank.

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Key Financial Figures

Key financial figures sometimes referred to as ‘financial statements’ or ‘financial reports’, are a record of a company’s, person’s or other entity’s financial activities and position. They are used as an indicator of a company’s financial health and to determine if a company is a good investment or not.

To be accessible to those with even only a little understanding of financial processes, financial figures need to be reported and presented in a structured way.
Key financial figures usually include a financial statement, along with management analyses and discussions. The financial statement should consist of at least the following four elements:

  • Balance sheet
  • Statement of Equity
  • Statement of Income
  • Statement of Cash flow

In order to gain a greater understanding, we will take a closer look at what each of these mean:

Balance sheet

The balance sheet is a snapshot or summary of a company’s financial condition. The balance sheet of a company comprises two parts: on one side there is ownership equity and the other side lists liabilities.

Assets (ownership equity) are usually listed first, followed by the liabilities. The difference between these is known as the ‘net assets’, also sometimes referred to as the company’s net worth, capital or equity.

Equity statement

The equity statement shows and explains any changes to a company’s share capital, retained earnings and accumulated reserves. This part of the key financial figures usually includes operational profits and losses, paid dividends, share redemptions and any revaluation of fixed assets.

Income statement

The income statement contains the ‘top line’ and the ‘bottom line’, otherwise known as the net profit. The top line includes any money received from selling services or products; the bottom line is the resulting net income after the deduction of expenses. The income statement essentially shows whether a company has made a profit or loss.

Cash flow statement

The cash flow statement covers in detail the cash, or its equivalent, that moves in or out of the business. The cash flow statement can be used by analysts to assess the short-term viability of the company – which boils down to whether or not it can pay its bills.

Using Key Financial Figures

Key financial figures can be used by a variety of people for a range of purposes.

  • Employees – employees can use information presented in the key financial figures when discussing promotions, compensation or labour disputes.
  • Owners and managers – owners and managers can use these figures for making important business and operational decisions; they offer an opportunity to understand the company’s finance in greater depth.
  • Financial institutions – financial institutions, such as lending companies and banks, can use the key financial figures to assess the risks of offering fresh working capital. They can also be used for making decisions on extending existing debts.
  • Prospective investors – financial investors can use the key financial figures to assess the viability of making investments in the business. Financial analysts may prepare reports based on these for providing investors a basis upon which to make an investment decision. Understanding key financial figures is a requirement to become a successful day trader.

The importance and usefulness of key financial figures necessitate that they be clear, accessible and well-structured.