Financial Performance

Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm's overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation.

There are many different ways to measure financial performance, but all measures should be taken in aggregation. Line items such as revenue from operations, operating income or cash flow from operations can be used, as well as total unit sales. Furthermore, the analyst or investor may wish to look deeper into financial statements and seek out margin growth rates or any declining debt.

There are many different stakeholders in a company, including trade creditors, bond holders, investors, employees and management. Each group has its own interest in tracking the financial performance of a company. Analysts learn about financial performance from data published by the company in Form 10K, also known as the annual report. The 10K is a required legal document that must be published by all public companies. The purpose of the report is to provide stakeholders with accurate and reliable financial statements that provide an overview of the company's financial performance. In addition, these statements are audited and signed by the leadership of the company along with a number of other disclosure documents. In this way, the 10K represents the most comprehensive source of information on financial performance made available for investors on an annual basis. Included within the 10K are three financial statements, the balance sheet, the income statement and the cash flow statement.

The balance sheet is a snapshot in time. It provides an overview of how well the company is managing assets and liabilities. Analysts can find information about long-term vs. short-term debt on the balance sheet. They can also find information about what kind of assets the company owns and what percentage of assets are financed with liabilities vs. stockholders' equity.

The income statement provides a summary of operations for the entire year. The income statement starts with sales or revenue and ends with net income. Also referred to as the profit and loss statement, the income statement provides the gross profit margin, the cost of goods sold, operating profit margin and net profit margin. It also provides an overview of the number of shares outstanding as well as a comparison against prior year performance.

The cash flow statement is a combination of both the income statement and the balance sheet. For some analysts, the cash flow statement is the most important financial statement because it provides a reconciliation between net income and cash flow. This is where analysts can see how much the company is spending on stock repurchases, dividends and capital expenditures. It also provides the source and uses of cash flow from operations, investing and financing.